Saturday 24 March 2018

Emmet Oliver: The `smart economy' gimmicks start to wear thin

First it was the 'smart economy', then it was the 'innovation island', then it was the global Irish economic forum at Farmleigh, then it was the 'green IFSC', now it is Ireland as a hub for 'international education'.

The Government continues to cast around for a silver bullet that will cure our endemic unemployment problem and speed up growth, but so far many of the initiatives have leaned towards gimmickry. (For example it is almost a year since the Farmleigh gathering, what tangible employment pay-off did that meeting produce?)

Since the onset of the crisis lots of ideas to end the slump and generate net new employment have entered the public domain, only to disappear shortly afterwards without leaving much of an impression on the labour market.

The reason they have left no trace is buried deep within the Central Statistics Office (CSO) report on the recent live register.

That survey asks those on the register to disclose what sector they had their last job in. Almost 120,000 of those on the live register (almost 26pc) said the construction industry and related craft trades.

Another 71,686 said their last job was as a factory operative and/or machine operator, bringing the total of ex-construction workers and factory workers on the live register to over 190,000, or 41pc of all those on the live register. This is the core problem.

Of course the swelling ranks of the unemployed are now being joined by sales reps, secretaries, clerks, junior managers, architects, engineers, students, lab technicians and so on, but the biggest concentration of unemloyment remains at the level of male ex-construction and ex-factory workers.

Even if the smart economy initiatives work, unemployment will not come down to what are regarded as "acceptable'' levels unless policy is directed towards finding some way to create employment for the almost 200,000 people previously engaged by construction and light manufacturing sectors.

Competitiveness gains are going to help somewhat and the government has created some momentum in this area by forcing homes to become more energy efficient, providing some level of work for ex-construction workers. But bigger and better ideas are needed.

A strong export recovery will only go so far. Companies are making huge productivity gains in Ireland, as those not laid off work longer and more efficiently. For example the productivity of Irish workers is about one third higher than the EU average, the CSO calculated last week. On top of the productivity gains, there is plenty of spare capacity around and idle factories dot the landscape. In that context creating additional employment, beyond just mopping up each years new entrants coming from third level, is going to be acutely difficult.

Orientating everything towards 'smart economy' and 'green economy' solutions will leave a huge chunk of the labour force facing into structural unemployment for years. Time for new thinking and less of the gimmicks.

Somers not involved in any grand conspiracy on Anglo

We in this profession are slower than most to shoot down a promising conspiracy theory, but sometimes a sense of reason and proportion must prevail.

This is definitely the case in relation to suggestions that former NTMA boss Dr Michael Somers should have 'warned', 'notified', 'alerted' Brian Cowen in 2007 that Anglo Irish Bank had a dangerous exposure to property loans and something needed to be done.

Somers has revealingly told this newspaper that while he deposited €100m in AIB and Bank of Ireland in 2007, he left a smaller amount, €40m, with Anglo, citing concerns about their narrow range of depositors, their property dependence and runaway growth rates.

Somers said he took this view of Anglo based on their financial statements, available to all. Actual action against the bank would have had to be taken by the Central Bank, Somers points out.

While, for some, this is bureaucratic pass the parcel, one central question arises. Even if Somers had told Cowen his unvarnished views of Anglo in 2007 and managed to get Cowen to "do something'', what would or should the authorities have done?

The assets on the Anglo Irish balance sheet by year end 2007 stood just shy of an astonishing €100bn, more than half the entire GDP of Ireland today. About €66bn of these were customer loans, many of them to developer clients. Lending after this was relatively modest, in other words the damage had been done.

Anglo was going to need truck loads of capital once these assets reduced in value in line with the property market downswing, which started in the first quarter of 2007.

A monumental rights issue wouldn't have been enough. No outside company was going to come up with the kind of capital needed to mop up the write-downs on a loan book of that size and fragility.

So the question is not why didn't Michael Somers say the right thing over tea and biscuits in 2007, the real question remains why didn't Cowen and the regulators do something far earlier, in the earlier part of the decade, when the runaway train that was Anglo could still have been controlled.

EBS numbers show the folly of charging for the state guarantee

The September 2008 blanket guarantee and its various successors always made perfect banking sense, but not a lot of economic sense.

Take exhibit A, EBS Building Society. Its chief executive Fergus Murphy revealed this week that its net interest margin (the difference between interest coming in and going out) has fallen to a paltry 0.5pc in the first six months.

The reasons for this are varied -- the society is being forced to pay out more for deposits and also for wholesale funding. But another significant reason is the cost of paying for the benefit of using the various government guarantees, which are set to become even more expensive.

EBS plans to rebuild its margins to offset not just the higher funding costs, but also the higher costs of using the guarantees.

That means raising rates on thousands of its captive variable mortgage customers. What does this do? It dampens down consumption even further and erodes consumer confidence, making the government's budgetary position even more precarious.

While of course there should be a charge for allowing the banks to shelter under the state's umbrella, that cost will always find its way back into the economy somehow, arguably wiping out the benefit of charging the banks in the first place.

Irish Independent

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