Tuesday 14 August 2018

Dan O'Brien: Four risks that deserve more attention - and four that could do with less

A cyberattack on the State’s critical infrastructure could shut down US firms based here
A cyberattack on the State’s critical infrastructure could shut down US firms based here
Dan O'Brien

Dan O'Brien

One of the lessons learnt from the crash of a decade ago was the need in the political-administrative system for more rigorous thinking about the risks the country faces. In recent years, an annual risk report has been drawn up by the government. This year's report is being prepared now. Here are four risks that are overstated and four that need more attention.

Political risk

There is a great deal of discussion and hand wringing about the rise of populism, increased political fragmentation and weak government. Ireland, along with Germany, the Netherlands, Spain and Belgium have all recently broken records for the length of time caretaker governments were in power.

Yet it is very hard to see political shocks and periods of instability and uncertainty showing up in economic data - in Ireland or elsewhere. It may be that economies in developed democracies have become more resilient to political developments, at least in the short-term.

Another property bubble

As of the end of last year Ireland had the highest house price inflation among the EU 28. Last week's figures for February showed accelerating double-digit price increases.

This is a very negative development - high inflation is bad for individuals and economies and it is very bad when it is taking hold for something as important as housing. However, these big increases do not mean that recent history is about to repeat itself.

Bubbles, which by definition burst and are followed by crashes, need excessive credit to inflate. That is exactly what happened in the years up to 2008. It is emphatically not what is happening now.

Lending to households for home purchases is a fraction of what it was a dozen years ago. Lending to builders and developers is next to non-existent. Price dynamics are being driven by too few homes to house a population that has grown by 400,000 over the past decade. There are many negative aspects to the current sharp increases in property prices, but another collapse is not on the cards.

An overheating economy

Consumer price inflation is usually the most obvious sign that an economy is overheating. It is dead in Ireland. Even when housing costs are included, Ireland's inflation rate is among the lowest in Europe.

While there are skills shortages emerging (a sign of potential overheating) it should be remembered that there are large numbers of people underemployed in Ireland. Half a million men and three quarters of a million women of working age are not in the labour force. These 'inactives', as they are known in economics jargon, do not include those who are in the labour force but who remain on unemployment benefit. Currently 133,000 men and 100,000 women are on the dole. The focus for policymakers should be on helping and incentivising more of those people to find work rather than fretting about overheating.

More workplace precariousness in the workplace

One of the worries of the age is that we will all end up delivering curries to each other as Deliveroo drivers and riders. Thankfully, as this column has argued before, it is very hard to find data to support the thesis that working is becoming more precarious.

In Ireland and across Europe there has been no significant change over the longer term in involuntary part-time work, self-employment rates or the numbers on temporary contracts relative to the numbers on permanent ones.

If these four concerns get too much attention, here are four that get too little.

A transatlantic trade war

The US has begun a trade war with China. It has temporarily held off on hitting Europe with unjustifiable tariffs. If US President Donald Trump does extend his protectionist measures to goods from the EU, Brussels has signalled clearly that there will be retaliation. Trump has said he will counter retaliate.

Ireland's biggest single trading partner is now the US. No other European country is as economically dependent on the US in relative terms. In 2016, Irish exports of goods and services to the US amounted to €25,000 per person employed in the economy. Significant new tariffs on those exports would push the Irish economy towards recession.

Financial crisis in the eurozone

It is almost six years since the existential crisis of the euro calmed. Over the past year the bloc's economy has done very well. But structural weaknesses remain. The eurozone's outsized financial sector is weak and vulnerable. Private sector debt levels are now higher than in the US. Public sector debt in some countries is at danger zone levels.

Italy, whose public debt levels are the same as Greece's in 2010, remains the weakest link. Along with disastrous public finances, it has a two-decade record of chronic economic under-performance, a teetering banking system and political capacity for reform that is dismal.

In recent years the ECB's bond-buying programme has provided a safety net. That net will be dismantled, starting later this year. A Greek-style panic about Italy is all too possible.

Brexit risks

The biggest threat to the talks on Britain's exit from the EU is the Irish border issue. The backstop proposal by the Irish and EU side, designed to keep Northern Ireland as a de facto member of the EU come what may, risks collapsing the talks. However undesirable any return to even a soft border would be, that may be the least bad option. Pushing too hard for no border all may lead to a very hard Brexit, and hence a very hard border.

Cyberattacks and new cold war

The greatest strategic miscalculation in the history of independent Ireland's foreign policy also involved Northern Ireland. Exactly 70 years ago Sean McBride believed he could use Irish Nato membership as a bargaining chip for reunification. That gamble failed.

Geography and the physical presence of Nato forces in our region meant that Ireland enjoyed the security benefits of membership without the costs. But in the digital era, when countries can plausibly deny cyberattacks, Ireland is more vulnerable. As a hub for American technology companies in Europe, a cyberattack on the State's critical infrastructure could shut those firms down. This could be an attractive option for a hostile state seeking to send a message to the world. It would have the added attraction of not risking the triggering of Nato's mutual defence clause.

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