Saturday 20 January 2018

The year drawing to a close will be remembered for the wrong reasons

EU Commissioner Margrethe Vestager gestures during a news conference on Ireland’s tax dealings with Apple at the EC in Brussels in August
EU Commissioner Margrethe Vestager gestures during a news conference on Ireland’s tax dealings with Apple at the EC in Brussels in August
Dan O'Brien

Dan O'Brien

This has been an historic year. Of that there can be little doubt. The international political context in which the Irish economy operates has changed more over the past year than in any single year since the end of World War II.

The Brexit vote in June and the election of Donald Trump as US President in November herald change in Ireland's relations with the two countries with which we have closest ties. It is hard to see much good coming from those changes. It is far easier to see less trade and investment with both economies, or at the very least less trade and investment than there would otherwise have been if something closer to the status quo was maintained in both countries. It is not difficult now to see some really damaging changes taking place, from the return of a border on this island to the loss of significant numbers of jobs in American companies located here.

All that is for the future. Today's column looks back to take stock of the past 12 months.

The year started with financial markets becoming increasingly fearful of a crash in China and a sharp slowdown in the world economy. While warning lights in China continue to flash owing to the scale of the huge economy's private debt levels, the financiers' concerns about the global economy looked overblown. Thankfully, that proved to be the case, even if world GDP growth will almost certainly turn out to be lower in 2016 than the long term average.

Along with the UK and US, the third international leg of the stool on which the Irish economy sits is continental Europe. The eurozone economies had a passable year in growth terms, at least in comparison with other years over the past decade. GDP growth for the full year is likely to be a little above 1.5pc for the single currency area, in line with last year's modest rate of expansion.

Differences across the bloc persisted in 2016, however. Among the big four economies, Spain almost certainly grew by 3pc (again); while Germany expanded at a rate a bit above the average for the bloc and France a bit below. As usual, Italy brings up the rear with growth very likely to be under 1pc.

And it is not only near-non existent growth that bedevils Italy. The resignation of the country's prime minister Matteo Renzi last week puts in place yet another condition for a perfect storm, both for Italy and the eurozone.

With almost no economic growth, a teetering banking sector and a massive and rising public debt, things were already looking dire before last Sunday. The departure of Renzi, who may have been the last chance for the moderate centre to deliver reform, has made political conditions worse. Italy has moved closer to going Greek in 2016.

Britain is facing uncertainty of a different kind. Almost six months on from the referendum, nobody is any clearer about what sort of relationship with the EU Theresa May's government wants, on everything from fisheries to financial services. Against this backdrop, her diplomats also have to assess what the other 27 EU members want and what position they will end up taking on the thousands of issues involved. As the year comes to a close, huge uncertainty remains for all concerned.

On the home front, the Irish economy had a generally good year overall, even if it was one of two halves, with strong growth up to the summer and a softening thereafter. Recent economic news has been mixed, but if the weakness of recent months persists, confidence could evaporate quickly. With fiscal consolidation having ground to a halt in 2016 and the state still running a budget deficit, there remains a great deal of fragility as the year ends.

That the industrial relations climate has steadily deteriorated over the course of the year has contributed to that fragility. The landmark moment was the decision of the Labour Court to land the taxpayer with the €50m bill next year, and every year thereafter, when it proposed a very generous settlement for Gardai after they threatened to strike.

Quite apart from undermining the Lansdowne Road agreement, the decision sets a worrying precedent. The Labour Court does not and should not have the power to set public sector pay and make rulings that have such huge implications for taxpayers.

Its decision in October raises very serious questions which will reverberate in 2017 and beyond.

The award was made despite the continued absence of inflation in 2016. This was more marked in Ireland then most other developed countries. Inflation across Europe remained at historically low levels despite almost two years of quantitative easing by the European Central Bank designed to push it out of the deflation danger zone.

The underlying picture shows little evidence of change. As of November the headline inflation rate across the Eurozone stood at an annualised 0.6pc, which is far from the targeted level of just under 2pc. In Ireland, the latest harmonised inflation figures show consumer prices were 0.4pc lower in October than in the same month last year. Of the 19 countries in the bloc, only Cyprus was deeper in deflation territory.

As the year draws to a close, there is no little uncertainty about the future of the ECB's unconventional policy measures.

What is much more certain is that 2016 did not bring a narrowing of views, with German central bankers continuing to express hostility to Frankfurt's experimentation.

But from an Irish perspective, the biggest decision of the year by a European institution was the Commission's ruling on the Apple tax case. That was reflected in the extraordinary comments of a Fine Gael Taoiseach three days after the decision in which he openly stated that the commission, traditionally seen as a friend and ally of small member states, had acted to please large member states.

Although Enda Kenny may have been unwise to say it, 2016 has seen a worrying continuation of a trend in European institutions which has seen larger member states becoming more dominant.

This trend, along with Brexit and the election of Trump, has created a great deal of uncertainty for a country that is so dependent on what happens elsewhere.

The consequences will be felt in 2017 and much further into the future.

Sunday Indo Business

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