Sunday 18 March 2018

Time for second thoughts on austerity

Former IMF official Ashoka Mody's questioning of deep cuts has caused the Coalition to spit out its cornflakes

SPEAKING OUT: Prof Mody was part of the IMF team
SPEAKING OUT: Prof Mody was part of the IMF team
Dan White

Dan White

DESPITE having been apparently disowned by his previous employers, the former head of the IMF's mission to Ireland Ashoka Mody was merely stating publicly what most of those still in the organisation believe privately when he criticised the austerity regime imposed on Ireland by the Troika as being "self-defeating".

Coming just as they were packing the buckets and spades for their nine-week summer holiday, Professor Mody's remarks were timed to cause maximum annoyance in government circles.

With the October budget set to take a further €3.1bn out of the economy, the last thing the Government needed was Prof Mody questioning the entire basis of its fiscal strategy.

Even more annoying from a government point of view was the fact that Prof Mody chose to make his comments at the beginning of a week which saw some rare good news for the Irish economy.

On Tuesday the CSO said that average house prices had risen by 1.2 per cent in the year to June, the first annual increase since January 2008.

At a European level there was also some good news with the ECB revealing that eurozone banks had relaxed their consumer lending criteria for the first time since late 2007 while the monthly survey of European Purchasing Managers conducted by London-based Markit Economics crept into positive territory for the first time since January 2012.

While hardly cause for jubilation, this week's news certainly provided support for those who argue that the economic glass is half full rather than half empty.

So is Professor Mody, to quote DCU economics lecturer Tony Foley, talking "nonsense" or should we be listening to what he has to say?

The first thing to bear in mind about Prof Mody's comments is that in essence he is saying nothing that the IMF itself hasn't already stated publicly. In both its October 2012 World Economic Outlook and in a January 2013 paper co-authored by its chief economist Olivier Blanchard, the IMF admitted that the previous multiplier it had employed when designing fiscal austerity plans, including Ireland's, was inaccurate.

Until the eurozone crisis the rule of thumb used by the IMF was that for every €1 by which either public spending was cut or taxes were raised, the value of economic activity would fall by 50c.

The experience of the eurozone periphery has shown that this multiplier was way, way too low.

The IMF now reckons that for every €1 of fiscal tightening on the eurozone periphery, the value of economic activity fell by somewhere between 90c and €1.70. In other words, far from helping matters, austerity has made matters even worse on the eurozone periphery.

There must be many in Spain (unemployment rate of 26.3 per cent), Greece (26.8 per cent) and Portugal (17.8 per cent) who are inclined to agree with Prof Mody and the IMF.

So why, if he was saying nothing that the organisation itself hadn't said previously, did the IMF feel the need to apparently disown Prof Mody's comments?

Look again.

According to an IMF spokesperson: "Mr Mody has retired from the IMF and his views do not represent the Fund's position".

Which, with the rest of the Troika and the Irish Government breathing down its neck, was about the absolute minimum which the IMF could have got away with saying on the matter.

Reading between the lines of these remarks it's difficult to resist the suspicion that the IMF was taking Prof Mody to task not for what he said but for the blunt, uncompromising manner in which he said it.

So with the Troika apparently at sixes and sevens, what conclusions if any can we draw from last week's events?

On the domestic front, with the banks effectively not lending and only tiny transaction volumes, it might not be a good idea to read too much into the housing "recovery".

At a European level the good news on consumer lending standards and manufacturing confidence was cancelled by the announcement that eurozone private sector credit shrank by a much-worse-than-expected 1.6 per cent in the year to June. With the exception of the Germanic core, most of the eurozone is mired in deep recession.

In several peripheral eurozone countries, not least Ireland, it's much worse than that. According to the CSO, real Irish GNP is down by over 8 per cent from its 2007 peak. In fact, when the distortion caused by foreign-owned companies reregistering as "Irish" is filtered out the effective fall is more like 12 per cent.

However, in a period of falling prices the key measure is nominal GNP. This is down by a staggering 18 per cent – or by almost 22 per cent when the reregistration phenomenon is taken into account – since 2007.

That isn't a standard-issue post-war economic downturn, more like a Thirties-style depression.

Confronted by such truly awful numbers is it really any surprise that Prof Mody and his former colleagues in the IMF appear to be having second thoughts on austerity?

Sunday Independent

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