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The question now is not who to hang, but what to do

LAST week topped a rotten few weeks for the taxpayer and a mixed time for the economy. But, believe it or not, it hasn't been such a bad week for Nama. Of course, you wouldn't think anything good was happening, judging by most media coverage of the economy these past few weeks .

Wednesday saw a festival of fury over Anglo Irish Bank. Friday saw a sideshow over alleged insolvency at the Quinn group. But, having risen by 20,000 in March last year, last month's estimated rise of fewer than 1,000 in unemployment is a relief. Having held steady for three months -- at the 13.4 per cent rate at which the Central Bank forecast it to peak -- after two years of relentlessly rising, it looks like the worst is over.

And, although still strong, the rate of annual decline in output continues to ease. In 2009, GDP and GNP settled back to levels slightly above and below, respectively, 2005 levels. If we stop taxing and talking it to death, this is where the economy should stabilise, global recovery permitting.

The festival of hatred does nothing to help. Sure, punishment of top bankers is warranted. But allowing Jerry Springer to run our economic narrative isn't. The Government's treatment of the Quinn group is a worrying sign that state policy is being directed by tabloid headlines -- a sure route to disaster. Shoot Sean FitzPatrick or Michael Fingleton if it gives you any pleasure. Perhaps they deserve it. But doing down a leading Irish entrepreneur while pumping billions into a failed bank? As the Russians say: if you want revenge, dig many graves.

In 1958, 1983 and 2009 -- almost 25 years apart -- we had chronic crises in this country. Each time the personalities were different, but the root causes were the same: bad monetary or fiscal policies, vested interests driving up prices and destroying competitiveness through protectionism and unfair regulation of industry, reckless financial regulation, lax land laws, crazy land prices, potty planning laws and politicians piling on public spending to get re-elected.

It's never the visible part of an iceberg that sinks a ship, but the nine-tenths below the water. If we want to stop the 2035 crisis from happening, we're going to have to stop being hypnotised by what we see above the water line, and look into the deep.

The real question is not who to hang, but what to do. Should we invest €20bn-plus in Anglo Irish Bank? Should we give up on Nama? In my view, respectively: a possible No, and a definite No.

In September 2008, many argued that Anglo Irish Bank was never a "systemic" bank and that it could be allowed to go under without dragging the rest of the economy with it. Were Ireland a large country with a more diversified economy they would have been right, but it isn't and they weren't.

In the brutal panic of that month, international bond markets had neither the time nor inclination to differentiate between one Irish bank and another. As I know from participating in a mission to restore Ireland's reputation in Germany, international comment has -- due to megaphone and self-promoting tactics of a few Nama queens -- tarred our whole economy with the Anglo Irish brush. Thanks to painstaking work by the Government and others, not to mention a global recovery that is gathering pace, there are signs that our reputation is greatly improving. Last month the spread between the yields on Irish bonds and German Bunds -- used as a benchmark -- fell to a 14-month low. Provided we stick to a path of fiscal correction, by the end of this year we'll be paying little more than half a per cent of interest on our debt more than the Germans. This is not just relief for us -- it saves us tens of millions of euro. It is also a sign that we are slowly getting back on track.

And that is why it might be time to revisit the issue of Anglo Irish Bank. In September 2008, there wasn't time to establish with certainty that Anglo was not a bank of systemic importance. With panicked lenders -- on whom we depend -- worried that burning Anglo bond holders would create a precedent for them, it was right to include Anglo in the guarantee.

But that was then, and this is now: the gradual normalisation of our bond spreads shows that those lenders are now calmer and less panicked. More able, therefore, to differentiate between the good, the bad and the ugly. Alan Ahearne's justification of Anglo's inclusion in the scheme at the time convinced many. But with bond markets now more able to accept default on some bonds, and with up to €20bn possibly about to be sunk into Anglo, this justification needs renewal. The full spectrum of bond holders, and each segment of them, needs to be identified, along with a clear justification of why they are being given their money back, or -- if the Government so decides -- not.

As for Nama, instead of an originally planned €54bn for bad loans, we'll be paying just over €40bn to the banks. That means we have to put €13.5bn into recapitalising banks other than Anglo. But, as the surge in Bank of Ireland shares last week shows, these bank shares could recover their value within a few years, if not sooner. And, compared to the €180bn sunk into the National Development Plan (NDP) in 2007, this money has a much greater chance of giving us a return.

Nama is, of course, a first step in getting lending going. The new state credit committee is a welcome way of improving bank lending practices, another requirement. But most important of all is restoring competitiveness. Some deal with low-paid public workers was warranted last week. But ruling out further cuts in public pay at higher levels will keep public pay higher than private sector pay levels, harming external competitiveness and making businesses less viable for lending. This is because private sector workers in Ireland earn more than their foreign counterparts but will be unwilling to take pay cuts as long as public workers earn even more.

Nama's success also depends on our property market. Here the advice of Ictu, the Taxation Institute, Isme, Ibec, the Commission on Taxation, the Labour Party, Fine Gael, and the National Economic and Social Council needs to be taken: residential stamp duty must be abolished. Alan Ahearne and Fianna Fail may find themselves isolated on this one.

Sunday Independent