Business Irish

Saturday 21 April 2018

It's time to embrace troika-style discipline once more

As we face the group's return to Dublin for a routine check, we must not give in to temptation and ease off on the measures that were so successful for us

Ajai Chopra of the IMF.
Ajai Chopra of the IMF.

Dermot O'Leary

DECEMBER 2010 will be long remembered for the arrival to Irish shores of the newly formed troika of the ECB, the European Commission and the IMF. This week, the officials from those three organisations make a return visit, albeit in very different circumstances.

In 2010, Ireland was effectively backed into a corner by the markets, and, some might say, by official policymakers too. The air of crisis was palpable at the time, as was the unfamiliarity of the situation between the three external institutions and the Irish Government.

Although there was some experience garnered in the fledgling programme in Greece, it was with limited success. Indeed, the response to the crisis seemed haphazard and on the hoof.

The situation was to worsen for a number of months after the troika first arrived, with the Irish 10-year yield rising to a peak of 14pc in the summer of 2011. Bank deposits were continuing to flow out of the banking system.

A stress-testing exercise was about to reveal a large recapitalisation requirement that would put further pressure on the State's debt sustainability. Unemployment was still rising from already high levels and only reached a peak a year later. The budget deficit just hit 31pc of GDP, a world record, due to the capital injections into Anglo Irish Bank. The economy was in freefall. These were worrying times.

Compare this with the situation the country faces today. Bond yields have fallen to record lows. Economic growth has returned and the Government can now be accused of erring on the conservative side in terms of its forecasts. Deposits in the banking system have been stable for two years. Irish banks are among the best capitalised in the euro area and look to be well positioned for the upcoming Comprehensive Assessment to be carried out by the ECB.

The budget deficit looks well on course to fall for the fifth consecutive year in 2014, while fiscal consolidation is almost at an end.

Given these realities, the inclination might be for the Government to take the foot off the pedal and start to row back on some of the unpopular policies of recent years. Governments get elected to govern, but the policies of the first three years of the current administration were largely dictated by the Troika Memorandum of Understanding. With a general election just two years away, it may make political sense to become more populist.

There are some early signs that the Government is giving in to the temptation to ease off on the discipline that it so successfully displayed over the programme period.

For example, it seemed that tax cuts were put on the table by some government ministers on the day after the programme officially ended. Secondly, the Medium-Term Economic Strategy (MTES), while containing laudable goals and aspirations, and some welcome targets, was nothing like the "troika-style" document that it was billed to be.

The troika era, while being a hit to national pride originally, must, in hindsight, be seen as an important turning point in Irish economic fortunes. Of course, we do not know what decisions would have been made in the absence of external supervision, but the benefits of this period are clear.

Most notably, the quarterly targets set out under a number of headings provided a set timeframe for sometimes painful but, more often than not, correct policies to be implemented. The stick for the Government was the threat of a public dressing-down by the troika or, worse, the holding back of official funding.

Those sticks, along with the troika, are no longer providing the incentive for the Government to implement sensible policy. This was a key reason for us advocating that Ireland should have applied for a precautionary programme at the end of last year.

It is true to say that the risks that existed at the end of 2010 are not the same as today. At that time, macro-economic risks abounded – financial sector, fiscal, macro imbalances.

Some of these risks still exist, most notably the very large public debt burden that gives little margin for error should another external shock come about, possibly by way of a long period of low inflation or even deflation in the euro area.

There are also a number of micro-economic issues to resolve – the legal sector, long-term unemployment, the cost of healthcare, education policy, loan arrears, to name but a few. These are not trivial issues. They are crucial to the medium-term development of the Irish economy. However, the risks of not implementing the correct policies are not likely to be visible in the short-term, thus providing the incentive for delaying tactics.

With the return of the troika, the Government should try to recreate the urgency that existed during the troika period by making clear and specific commitments to reform under the headings of the MTES that are achievable but suitably ambitious.

The Action Plan for Jobs received favourable critique from the OECD last week for the way in which it has been able to achieve all-of-government buy-in and has been subject to "rigorous quarterly monitoring".

Employing these principles for the wider medium-term economic strategy would help to reduce the risks of reform fatigue.

Dermot O'Leary is chief economist with Goodbody

Irish Independent

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