On December 6, the day after Brian Cowen delivered his latest Budget, the members of the European Central Bank's governing council gathered together to discuss their response to the continuing crisis in the world's financial markets.
Would it finally cut its interest rates, which had been held steady at 4 per cent since June despite the turmoil? No chance. The ECB has been prepared to pump hundreds of billions of euros into the money markets to ease fears of an end-of-year credit crunch, but it has refused to follow the rate-cutting lead of the US Federal Reserve and the Bank of England. Jean Claude Trichet, the ECB's governor, and his colleagues remain obsessed by inflation, which stands at a six-year high of 3.1 per cent for the eurozone.
In an interview with the Financial Times, published last weekend, Trichet said that a number of his colleagues on the ECB council had argued for an increase, not a cut, in interest rates at that December 6 meeting. And if there are any signs that the current 'surge' in the rate of inflation is spreading deeper into Europe's economies -- through higher wage settlements in 2008 -- then Trichet will raise rates to cool things down.
At best, the ECB's focus on inflation means that interest rates will remain steady next year, but the risk of an increase will be ever present. It means, too, that any prospects of a swift recovery in Ireland's stagnant housing market can be written off.
The market in new homes has effectively died. Thousands of houses and apartments across the country are unsold, with few potential buyers in sight. Prices have fallen, but not dramatically enough to stoke demand.
The rising stock of unsold homes -- agents and builders estimate that there is a year's supply of houses available for sale -- means that construction of new homes will tumble this year, and may fall well below the most conservative estimates of the Construction Industry Federation. Confidence has been shattered, and it will take a long time to return.
The problem is that no one can predict how long. Potential buyers will hesitate for as long as they fear that the home they buy today may be worth less in six months. Developers will not build new homes
while last year's stock remains unsold, while the investors who drove up prices over the past five years have fled the market. The real state of the market is impossible to gauge.
Developers are divided between those who have made fortunes during the boom years and the newer entrants who hoped to cash in on the boom, but are now caught in a vice. The lucky ones are those who built up their land banks before the price of development land went sky high, and who can afford to sit out the slump without slashing prices. They have made their millions and can wait for the market to recover, choosing to rent out new homes rather than sell them at depressed prices.
The newer, less fortunate, developers are sitting on a pile of expensive homes, built on extravagantly priced land. Their margins are tight, their borrowings high and their banks edgy: if they cut their prices, they risk selling at a loss. They hope they can weather the storm, but the longer it lasts, the grimmer the outlook. They hope, too, that their banks will calculate that it is not worth their while foreclosing on a developer, because then the bank would be left with a clutch of houses that it could not sell.
It is, for the moment, a grand stand-off, but it cannot last forever. The market has to adjust sharply if buyers are to be tempted back and those developers who hope to sit out the current decline are making it worse. Supply and demand are out of line, and the disappearance of the investors, who will never return in the same numbers, ensures that oversupply of new homes will continue to depress the market throughout the year and quite possibly into 2009.
With the solitary exception of cutting prices until they find a market, there is nothing that developers can do to stimulate sales. And there nothing that Cowen can now do to save the market from its current stagnation. He chose to ignore all the warning signals and refused to reform the punitive Stamp Duty regime at a time when reform might have made a difference to a cooling market.
His stubbornness was matched by the public expectation of reform, a combination that was guaranteed to kill the market. Cowen's subsequent grudging reforms, first after the election and then in December's budget, were both too little and too late to make a difference.
Stamp Duty was not the defining issue in the market's fall, but it was a critical factor in the collapse of consumer confidence. Cowen introduced a layer of political uncertainty into a market that was already fragile, and it was that extra layer of uncertainty that helped speed its demise. Critically, the failure to introduce speedy reform made remote the possibility of gentle slowdown.
The impact of the housing market's decline is being felt across the whole economy, even if some of the slack is picked up by the continued investment in roads and in office buildings. Forecasts for Ireland's economic growth next year have fallen month on month and now stand at less than 3 per cent -- still a strong performance by European standards, but a fall so sharp that it may feel like a recession.
Consumer spending is expected to halve, unemployment is forecast to rise and job creation will tumble from the recent highs.
Economists argue that the move away from dependency on the construction sector is positive for the economy, and will allow Ireland's growth to become more 'sustainable' -- the political buzzword of choice. That is undoubtedly true, but the move will place enormous pressure on the rest of the economy to rediscover the competitiveness that gave it so much impetus in the early years of the Celtic Tiger.
Since those heady days in the Nineties, Ireland's costs and wages have risen exponentially, with each national wage agreement setting a floor, not a ceiling, for pay increases. That process has to be reversed, and the lead must come from Government. Since Bertie Ahern was first elected Taoiseach in 1997 his Governments have consistently failed to bring any rigour, competitiveness or productivity to the public sector.
Ahern and his ministers have chosen to spend the taxpayers' money without any regard for value, and they have measured their own performances by how much they have spent, and not by how much they have delivered.
Listen to any Government minister over the past decade and you will hear the same refrain: we have trebled spending on this, quadrupled it on that, spent billions on roads and schools and hospitals. As they spend, the numbers employed in the public sector rise each year -- particularly in election years. It is not all wasted money, but the spending has not been monitored adequately and has not been measured against performance.
That cannot continue. Cowen has already announced a review of public service spending, and his deadline is fast approaching. By March 1, all Government departments will have provided him with their plans for saving money in the coming year and it must be seen as the start of a new regime of efficient Government.
A lean, efficient and productive public sector is essential if Ireland is to regain its competitiveness and maintain its economic progress, and it becomes even more essential now that the economic impetus from the housing sector has stalled. Cowen has often talked about value for money, productivity and efficiency, but he has never delivered. This latest plan is his chance to show that he is serious, and we cannot afford for him to flunk it.
The only certainty for 2008 is that it will be a tough year. Property prices will continue to slide, with no way of knowing when the bottom has been reached. Consumer confidence will remain low, while internationally, both the US and the UK remain vulnerable to recession. The crisis in the world's financial markets, which grew out of the problems in the US mortgage market, has not yet abated and although its impact in Ireland has been muted so far, it still poses an unquantifiable threat. And all the while, Trichet and the ECB will remain firmly set against any interest rate reductions, obsessing instead about bringing the Eurozone rate of inflation down to 2 per cent.
Uncharted waters for this Government and for the current generation who have know nothing but boom and rising house prices. Both are at an end.