Wednesday 13 November 2019

Economy struggling in the grip of doomsayers

Ireland is facing potential enemies on two fronts -- our European neighbours and the Irish Central Bank, warns Marc Coleman

A vampire squid sucking the face off our economy and a tapeworm draining its life from within. On two fronts our economic future is up against formidable foes. Facing misinformed French and German voters -- who think we are getting €85bn for free -- Nicolas Sarkozy and Angela Merkel are trying to take from us one of the few tools we have left to fight this crisis: if it wasn't tragic, it would be hilarious.

If our corporation tax regime is emaciated our recovery and the eurozone's stability will be even more difficult to secure. But showing the same short-sightedness they demonstrated when they let their predecessors Jacques Chirac and Gerhard Schroeder tear up the Stability Pact -- Europe's leaders are now blaming Ireland not just for its own mistakes (which is fair) but for Europe's as well.

Weeks ago, in a speech to the National Forum, Ray MacSharry reminded us of the truth: Europe's institutions contributed to this crisis greatly. The point was repeated by John Bruton days later (unfortunately without giving due credit to Ray).

At the EU summit next Thursday the new Government will have to face down what is nothing more than a politicised smash and grab on Ireland's future. Its reputation as a new Government depends on holding firm.

In the meantime the internal battle is becoming just as urgent. Now the Irish Central Bank is no fifth column and Dr Patrick Honohan is as patriotic as they come. But the Central Bank's actions this past week -- together with aspects of the ECB's approach -- threaten the recovery.

Last Wednesday as part of its so-called macroeconomic stress testing of the banks, it told us that house prices "could fall 13.4 per cent". Together with two other huge mistakes, this could scupper recovery in our banking system and by extension our economy and nation. The other two mistakes are the reckless pressure being placed on our banks to dispose of core long-term assets, assets that -- unless we are hit by a tsunami -- will recover in time and are therefore essential to the long-term stability of our banks.

This is being done, incidentally, to achieve recapitalisation targets that are excessively restrictive and counter-productive. From one extreme of lax guidelines, our regulatory system is imposing an equally wrong stringency where what we need is balance.

The second mistake relates to the way in which advice from experienced and good bankers -- those who had no hand act or part in the crisis -- is being ignored due to political pressure to tar all bankers as bad. This latter mistake is leading to chronically stupid decisions in relation to Nama's pricing policy.

By blowing big holes in the equity of homeowners and the balance sheets of our banks, official banking policy -- or what passes for it -- confidence in our future, purchasing power in our economy and the ability of banks to lend are all being undermined in what could soon become a self-fulfilling vicious circle. (The sense of a vicious circle also exists in fiscal policy where the anticipation of tax increases in the last budget was a major factor in the huge fall in employment).

The new Government must urgently establish and -- this is essential -- cogently communicate an integrated policy on housing, property, Nama and banking. And housing policy is central to this. Of course the housing market must never again drive the economy. But it must function normally if our banking system is to get back on its feet.

As the ESRI's suspension of its monthly house price index proves, this is not the case. The near-abolition of stamp duty is a useful first step.

And if employment levels remain back at 2005 levels and if interest rates and gross incomes are also broadly close to these levels, then the house price levels the Central Bank is talking about are simply an opposite extreme of boom-time peaks.

Distressingly the Government to date has had no understanding of how its own gross policy errors have -- together with overly negative comment -- made a bad situation worse. The distress of the banking sector has, of course, been a factor. But as the EBS's performance in the first-time buyers' market shows, the future promises a resumption in strong healthy demographic-based growth provided of course that all corners of the policy triangle can be solved. Fiscal policies must stop reducing take-home pay of low and middle-income earners. Instead it must curb pay and pensions at the middle and top of the public sector, privatise semi-state companies, means-test welfare payments and scrap a whole plethora of quangos and local authorities.

Last week's employment data showed the bitter legacy of the last Budget -- which did exactly the opposite of what it should have, caving into vested interests by protecting vast public sector salaries, ludicrous welfare payments to high-earners and a wasteful architecture of redundant state and semi-state bodies.

The very anticipation of tax increases that built up in the autumn was devastating to employment in November and December. A small mercy is that employment still remains at the levels prevailing in early 2005. So are interest rates and gross incomes, ball park.

If our banks are properly recapitalised, if government fiscal policy starts curbing waste instead of raising taxes and if commentators -- this includes the Central Bank -- do nothing to undermine confidence then a stabilisation of house prices at or close to 2004 levels can be sustainable. And as Dr James Wickham said last week, the impact of emigration on our economy and housing market is being overstated to sell newspapers. We can only get out of this crisis by focussing on and harnessing our long-term potential.

Unfortunately doing that means dealing with another problem Ray MacSharry addressed in his speech to the National Forum: the huge disconnect between Nama, the Department of Finance, the NTMA, the Financial Regulator and the Central Bank must end as a matter of urgency.

Addressing the forum Mr MacSharry warned how compared to his day, there were now over 10 agencies with which Michael Noonan has to deal with. Unless a drastic change happens, Nama could become little more than a rack-rent bailiff evicting emigrating tenants from boarded-up properties, forcing banks to crystallise losses that would not need to occur if a longer term, more strategic and more co-ordinated approach were taken by government. Instead we have a self-fulfilling dynamic of doom: the Central Bank's view of a 13.4 per cent drop in house prices has already spread around the market and is a depressing sentiment at a time when the near abolition of stamp duty ought to be giving it a lift.

The model on which this forecast was based is also wrong: a hangover from Alan Ahearne's assertion that because house prices in the US fell 50 per cent, this must happen here. But there are no sub-prime mortgages in Ireland. Nor can Irish home-owners throw the keys of the house in the door of the estate agent and walk away from their obligations. But because Alan is celebrated by the media, it is assumed by the media that everything he says is right and because the market takes this as gospel, it becomes a self-fulfilling reality.

Real-world indicators -- the EBS DKM affordability index -- show, however, that first-time buyers are now spending little more than one 10th of their disposable income on servicing their mortgages. Hardly a sign that prices are overvalued in the long term. By failing to use real world, rather than academic, methods, the Central Bank is skewing our view of the market and selling our future short.

While one wants to congratulate Alan on his appointment as Central Bank Commissioner, one would also like to suggest that returning to NUI Galway on a six-figure salary and seven-figure pension -- for which the rest of us now pay higher taxes than before -- would have been a sufficient reward for his input into the last Budget.

Sunday Independent

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