Some very damaging economic policy decisions have been made in Ireland in recent years based on a misunderstanding of 'the markets'. This week I was in London and spoke with people working in these markets.
If their views are generally representative, then we still don't understand the world they work in. In fact, what they're hearing from the Government is exactly the opposite of what will convince them to start lending to us again.
The markets have taken on an almost religious context in Ireland in recent years. We don't quite know what they are or how they work, but they control powerful forces critical to our survival. It is important that they don't get 'spooked', and that the right kind of sacrifices are made to appease them.
Unfortunately, due to the historical cultures of our political establishment and civil service, we have not had senior politicians or officials who have had much experience in financial services.
The Government's Economic Council is a good example. Its four members -- the Taoiseach, Tanaiste, Minister for Finance and Minister for Public Expenditure and Reform -- are all are highly experienced politicians. They are smart, hard-working, well-educated and dedicated to Ireland's recovery. But between them they have been in the Dail for 116 years. None of them has ever worked in, or even near, 'the markets'.
The Civil Service also had a dearth of private sector or financial services expertise, operating a generalist model (in an increasingly specialised world) and hiring almost exclusively from within. One civil servant informed me that 'the private sector' was viewed as a rather grubby endeavour by some departments. This culture has led to a very dangerous blind spot in the corridors of power.
The payments to bondholders in 2009 and 2010 were the most damaging manifestation of this blind spot. We watched in horror as tens of billions of euro of public money was funnelled abroad to cover private sector losses, but were assured that it was necessary to appease the markets. Exactly the opposite was true -- we borrowed so much to pay other people's debts that we could no longer afford to pay our own. The markets stopped lending to us and the troika arrived.
The Government does not seem to have learned from this. I was sitting not 10 metres from the Taoiseach when he said the following in the Dail: "This Government has not looked for any write-off and is not looking for a write-off. We have paid our way and will pay our way."
When he and the Tanaiste say things like this, they are not talking to us. They are talking to the markets, and they are telling the markets what they think the markets want to hear.
No better example of this do we have than the discrepancies between the Taoiseach's pronouncements on who is to blame for the economic collapse. In his state of the nation address he was talking to the Irish people, and he assured us that this mess was not our fault. Fast forward a few weeks to Davos in Switzerland, where he was sitting in a conference room filled with the high priests of the markets. He assured them that this was indeed our fault, that we had gone mad borrowing in a system that spawned greed. Why did he say this? Because it's what he
thought 'the markets' needed to hear.
"We know we messed up, we're sorry, we're doing everything we can to get you your money back . . . please God would you just lend us some money and invest in our companies."
This week we hear it again. Now that government plans to avoid a referendum on the fiscal compact have been scuppered, we are told a Yes vote is needed to convince foreign investors to bring their money to our shores. Vote Yes, because the markets would approve. So, what do the markets actually think?
The conversations I have had in London this week suggest the following: The investors I spoke with didn't know what the fiscal compact was. They don't really mind whether we're in the euro or not -- they want to see promising, high-tech companies who they can bring their money and expertise to. The bond traders (who we need to lend to the State) are not fussed about the fiscal compact either, though they think it's a pretty dumb idea for Europe. They still don't know why we paid the bondholders and they couldn't care less whose fault the whole thing was.
However, they're pretty sure our national debt is unsustainable (depending on who you believe, a country's debt becomes unsustainable somewhere between 90 per cent of 120 per cent of GDP. Next year we're going to hit 120 per cent). They think Ireland should be looking very hard for a large write-down in our national debt, and are perplexed that this is the one thing the Government insists it won't do.
From the professional investors there was good news. They think we have some superb high-tech companies, and they have large sums of money ready to invest. One fund manager rated Enterprise Ireland as one of the best organisations of its type in the world. What these people want to see is at least one university pumping out world class graduates in science and engineering.
In fairness to the Government, they're clearly getting some things right. Yields on Irish government bonds have fallen considerably in the past year. Ten-year bonds peaked last July at over 15 per cent and are now trading at around seven per cent -- still too high for us to borrow from the markets, but definitely moving in the right direction. By comparison, Portuguese 10-year bonds are trading at over 16 per cent, up from around 12 per cent last July.
The best way to keep this momentum is to stop trying to second guess the markets and to start doing what's going to get our economy moving again.
The civil service has begun to hire a small number of people who have private sector and financial services experience for senior positions. The generalist model should be abandoned, and a constant flow of people should be encouraged between the public sector, private sector, social sector and academia.
The Government must start acknowledging that the total level of debt needs to be reduced significantly. It should acknowledge that the fiscal compact is a terrible deal for Ireland, but one which may need to be swallowed in order to access cheap money from the European Stability Mechanism.
It means doing whatever it takes to improve the quality of our graduates, particularly in the fields of science and engineering -- this needs more, not less, money, changes to working practices and to how research is funded.
The message from London was clear -- the markets do not care for our prayers. They will work with us again only when we regain control of our own destiny. That requires vision and some brave and creative policy decisions. Most importantly, it is all well within our capability.
Stephen Donnelly is an independent TD for Wicklow