| 11.1°C Dublin

We must pay heed to the strange cloud on horizon

ON catching their first ever glimpse of Conquistador ships, Mayan warriors -- so legend says -- told their king there was nothing to worry about: they had merely seen "a strange cloud". This fatal mistake brought a final apocalypse down on their culture. We are now faced with a financial apocalypse that could alter our civilisation. Drastic action is needed, but will we act in time?

They may not succeed, but at least European leaders are confronting this challenge on Thursday. Will our leaders do likewise next Tuesday?

On July 17, 2006 -- after the ESRI had warned of a possible global recession -- I asked Micheal Martin and Brian Cowen if they would plan for the contingency the ESRI was warning about. "No," came the reply. Fianna Fail has since gone the same way as the Mayan civilisation.

Now this Government is being tested by dire warnings. On Thursday Joe Durkan, myself and Rossa White took questions from German journalists. Our mission -- to convince them Ireland was drastically different from Italy, Greece Spain and Portugal -- was a success.

We were less confident about the eurozone. Repeating the stark warning made in his ESRI forecast of a day before, Mr Durkan told our guests, "Unless there is intervention very soon," we face "Thirties- style recession".

Ironically, it was Mr Martin who told the Taoiseach last week that we need a contingency plan. His previous failure doesn't negate his point. We do.

The Medium-Term Fiscal Strategy is, unfortunately, not it. Its peak debt/GDP forecast of 117 per cent is based on growth forecasts that are over half a per cent higher than the ESRI's latest forecast. Applying that difference out to 2015 brings our debt/GDP ratio perilously close to the crucial 120 per cent barrier. And that's before factoring in global recession. With each percentage fall in global growth cutting our growth by 1.5 per cent, even a mild recession pushes us over that barrier.

Then there are contingent liabilities of Government. Not counted in our national debt, these relate to Nama and bank recapitalisation. In a recovery, they should balance out or even turn a profit. In a global recession scenario, all bets are off.

So, on two fronts, very radical reaction is needed.

First, before signing any new fiscal regime for Europe, our Government should negotiate a reduction -- big enough to make a budgetary difference and modest enough not to frighten horses -- on the outstanding portion of the €30.8bn promissory notes to Anglo Irish Bank (as was) and Irish Nationwide Building Society. If presented with new fiscal rules next weekend, and that is likely as I believe ECB willingness to support some form of eurobond, news of a modest haircut for Ireland shouldn't bother markets that much.

Second, protecting 70 per cent of current spending from any cuts with a global recession looming is -- economically, socially and politically -- inadvisable.

The Government can't save the euro. But it can choose between success and failure on the budgetary front. By cutting current spending and avoiding tax hikes, the December 2009 Budget led to three months of declining unemployment and by November 2010, GNP was growing by 4.8 per cent and the tax take was half a billion euro ahead of target. By effectively putting tax rises back on the table, the Croke Park deal forced employers and consumers to adjust expectations.

Since that deal -- and the December 2010 budget it made necessary -- 30,000 have lost their jobs and GNP growth slowed to just 1.1 per cent by the summer. Even before a possible global recession, GNP growth is possibly now negative.

On the Friday of last weekend Olli Rehn told us we have until Sunday to save the euro. On Wednesday Germany's finance minister Wolfgang Schauble told us the European Financial Stability Facility (EFSF) wasn't up to doing that job. With deposits draining from the very banks the EFSF was supposed to shore up, action -- hopefully successful -- is now in the pipeline.

Comment by ECB chief Mario Draghi on Thursday sounded like a rejection of the solution everyone is calling for: eurobonds. But his call for a "fiscal compact" -- and his reference to "other elements" that "might follow" -- have a much more hopeful interpretation: the ECB refused to shore up a euro while three incompetent governments remained in office in Athens, Rome and Madrid. And it was right.

Those governments have now been replaced. But something is still missing: to reassure (mainly) Germans, who will fund any wider role for the ECB -- and to ensure fiscal disaster never happens again -- we need new fiscal rules. The ECB can't save the euro alone. But if by next weekend euro member states agree to play their part with legally binding rules, it won't be alone.

The ECB has never been found waiting to do what it can within the rules -- last week it and other central banks acted swiftly to shore up liquidity in the banking system -- and once those rules are expanded, so will its role.

Finally, in one of its grizzlier scenes, the film Apocalypto depicts the dying days of a sick Mayan culture when men, women and children are led up a pyramid for ritual human sacrifice as high priests chant religious mantras to their gods.

If welfare benefits are cut instead of being means tested, if stealth taxes are raised instead of achieving savings via a fair, sensitive benchmarking of public pay and pensions, and if a household charge is levied while continuing the annual waste of hundreds of millions of euro by local government, then the financial equivalent of this will be happening: the sacrifice of our children's financial future on Ponzi pyramids of public pay and pensions and subordinated debt.

The highly paid high priests may chant their mantra of "industrial peace". But a political culture that threatens to destroy an entire economy with strikes to preserve unfair pay is one that deserves to perish.

Marc Coleman presents 'Coleman at Large' every Tuesday and Wednesday from 10pm on Newstalk 106-108fm

Sunday Independent