Saturday 21 September 2019

Why Ireland looks a bit like the best port in a storm

TOP OF THE CLASS: Journalist Martin Wolf is a neutral with no interest in talking up
Ireland’s economic recovery
TOP OF THE CLASS: Journalist Martin Wolf is a neutral with no interest in talking up Ireland’s economic recovery
Richard Curran

Richard Curran

Here is a recent quote: "If I am going to bet on any country or economy to do well in the post-crisis environment, I think Ireland is the one."

Those words are among the most bullish statements to emerge about the potential of the Irish economy. They weren't uttered by Enda Kenny, Richard Bruton, a property developer or even somebody from a vulture fund who has already punted billions on the Irish recovery.

No, they were said last weekend by Martin Wolf, chief economics correspondent with the Financial Times for the last two decades. The pace at which our GDP is recovering, tax receipts are rising and unemployment is falling, has surprised many people.

Those with a vested interest in talking up the Irish recovery story have made some pretty positive pronouncements. But Wolf is very much a neutral. His comments were all the more surprising given they were said during an interview with him on his new book, The Shifts and the Shocks: What we have learned - and have still to learn- from the Financial Crisis.

Wolf believes that while the international financial system that spawned the global crisis in 2007 has become more closely regulated and somewhat improved, the real underlying causes of the crash have not really been resolved.

For Wolf, another crisis in the global financial system is highly likely in the future. He also believes that despite the appearance of being out of the emergency ward, big problems still exist in many important world economies. The Eurozone is barely growing. Unemployment is too high in some countries. Productivity growth is lower than it was before the crash, and greater inequality is still a major worry.

He singles out countries like the UK (which seems to be doing fine), France, Italy and Japan as still lagging behind where they were before. What is it about Ireland that makes us such a good bet? And is Wolf right? Well, the first caveat is that Wolf believes Ireland is in a good position to do well provided the world economy improves or at least stops getting worse. If it all goes wrong elsewhere, Wolf's bet might be off.

For Wolf the big Irish positives are: a small country, with a highly competitive export sector, and we have already done a lot of fiscal adjustment that perhaps others have not faced up to.

Not so sure how being a small economy helps us, other than we can change policies and adapt to a change in circumstances a little more quickly. We are export-driven and have the advantage of exporting large quantities to the UK, the US and the rest of the EU, as opposed to relying too heavily on our Eurozone partners as export markets.

A European Commission report placed Ireland in the first rank of EU countries for competitiveness, alongside the Netherlands, Germany and Denmark.

The report came a week after the World Economic Forum Global Competitiveness Report, placed Ireland at 25th in the world - our best ranking in this series since 2009. These are all very positive developments and reflect genuine improvements in the economy.

Finally, Wolf is right that Ireland has taken a lot of financial pain and got on with it. However, the net result is a massive national debt overhang that is costing us over €8bn a year to service. That interest bill works out as roughly the income tax paid every year by 850,000 workers.

Wolf rightly argues that Ireland was forced to take too much debt on board when it was prevented by the ECB and our European partners from defaulting on some senior bank debt. He believes it was wrong. He said Ireland paid a higher price than was reasonable but Europe played "hard ball" in the crisis. But that is all water under the bridge now and the debt remains.

That debt remains one of our biggest economic vulnerabilities. If Wolf believes that another financial crisis could erupt then surely the best place to look is the bond market. The last crash was created by an availability of money in the financial system for developed economies over and above what they needed for investment.

As the US and UK quantitative easing measures are joined by a €500bn stimulus package for the Eurozone, there is already evidence that a flood of cash in the system is finding a home in sovereign debt markets. Ireland's cost of borrowing has fallen below that of the US, the UK and many other major global economies.

Of course there may be less of a "Paddy" factor in this and more of a "Patsy" factor. After paying off everybody who invested in bust banks, including over €25bn on Anglo, there may be a view in the market that the Irish will always pay up on their debts even if it kills them.

Whatever the reasoning, such incredibly low rates are good news for Ireland in the short term, but there is an element of unreality about it. Ireland's €200bn national debt will have to be refinanced over the next ten to 20 years. A crisis in the bond market could see us caught with massive debt servicing payments. This is a good reason for the NTMA to refinance what it can now at these incredibly low rates, but over the longer term we may be at the mercy of the international bond market.

Even if the internal dynamics of the Irish economy or exchequer do not lead to danger, an international crisis sparked elsewhere just might.

This is where Wolf's wider analysis comes in. He believes that many countries could enter a new crisis in a much worse state than they entered the last because of massive public and private debt. That could make it more difficult for them to put in place the kind of short term solutions they did last time round.

That is why Wolf is advocating a more sweeping set of longer-term solutions. These include a new global reserve currency, some kind of burden sharing Eurobond system for the Eurozone and greater flexibility for the ECB to intervene in the case of Europe. Few of his recommendations have any chance of being implemented.

Before getting too worried about any impending doom we have to bear in mind that even if Wolf is right, such a scenario could be ten or even 20 years away. Perhaps he even has it wrong and another financial crisis won't happen again.

He sees an international financial crisis as where there "seem to be exceptional circumstances that justify optimism about an asset or asset class, which justify more lending and leveraging up of the economy so that it makes people feel richer."

When he puts it like that, another bang seems inevitable as human nature doesn't change.

We can do very little about the threats posed by global money movements or wider inertia across Europe. Sometimes these things will play in our favour. For example the ECB decision to lower rates will also drive down the currency. That is not good if you are planning a holiday in the UK, US or Switzerland. But it could give an extra boost to an already strong export sector, along with visiting tourist numbers.

The government must try to consolidate our gains and keep our own house in order.

As for now, we should hope that Wolf is right about Ireland and wrong about everybody else.

Sunday Indo Business

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