Tuesday 15 October 2019

A failure of Croke Park II risks insolvency and a longer bailout

'ANGELA Merkel thinks it's working," was one colleague's take on the famous football flag – the "it" being the Irish austerity programme.

Probably the wily chancellor knows as much about whether it's working as any of us; in which case she ought to be concerned about recent developments.

It is not so much that the failure of the Croke Park Agreement threatens the return to national solvency and the end of the bailout. It does do that, but the reasons for the failure, rather than the failure itself, are what should concern Dr Merkel and everyone else.

First, though, despite the popularity of the idiotic slogan, the fact is that "austerity" was working. The purpose of the programme was not to create jobs, or help the economy grow, or maintain incomes – even of the lower paid – or protect public services. The purpose was, pure and simple, to reduce government borrowing.

Deficits

And it has done so. The deficits are actually a year ahead of target. It is perfectly legitimate to argue that this was the wrong approach: to say that we should have defaulted on debt instead or . . . well, actually, I can't think of anything else.

As for default, the arguments seem likely to go on forever as to whether the banks should have been allowed default on their bonds and, perhaps, the State on its own debts.

That is an historical argument now – although the issue of default is far from dead – which left only the how, and how fast, of austerity.

It is the latter point – the speed of adjustment – that is the touchstone for the present crisis.

The plan is for another €5.5bn of adjustments over the next two years, of which €1bn will come out of the public sector payroll (although that doesn't mean the bill itself will fall very much). The trouble is that this was not where it was meant to come from when the plan was conceived.

The overall figures have not changed, but the background is not as expected. Growth has let the Government down and left the rest of us in a mess.

A comprehensive policy explanation published by the Department of Finance in 2010 forecast real growth of 3pc this year, following a 2.5pc expansion in 2012.

Add inflation of 2pc and "nominal" growth in money terms – which is what matters for public finances – would have been almost 10pc over the two years.

We can already be pretty sure that actual growth over the two years is unlikely even to beat the original forecast for 2012 itself. That, as they say, changes everything.

It calls into question the ability to complete the programme, and reduce government deficits below 3pc of GDP, even though the target seems tantalisingly close.

Too much of the spending adjustments will have to come from services and payroll costs, rather than the hoped-for reductions in unemployment costs: too much of the revenue increases will have to come from extra taxation, rather than extra activity. Although the underlying deficit is almost in balance, and the deficit before interest payments almost closed, the political and financial well is almost dry.

Disposable

Most, if not all, of the available disposable income has been sucked up in taxation. Asking staff to take further cuts, on top of the tax rises they still face, was never likely to succeed.

This has been the danger all along; highlighted by both the IMF and the Irish fiscal advisory council. It is a danger that should not be under-estimated.

If growth was to continue at around just 1pc a year, their analyses show the debt burden reaching an "unsustainable" level of almost 140pc of GDP by 2021. This is apart from the added threat to the banks from such low growth.

This week, the Taoiseach met the Spanish prime minister. Officially, they talked about trade and the EU budget under the auspices of the Irish presidency.

One would be very surprised if they did not also talk about what to do in this impasse of trying to stabilise debt against the background of apparently endless eurozone stagnation.

Spain has already acted, with a plan to follow "a more gradual consolidation" and has received warm support from no less than the IMF head Christine Lagarde.

"Looking forward to slower consolidation" is indeed a dramatic change of tune, although one that Ms Lagarde has been whistling for some time.

This is essentially a European problem. The over-indebted countries cannot be expected to turn their finances around while overall growth is so weak. Ireland has been held to be an exception, but it may well be merely the one which fails by the narrowest margin. Such a failure, though, could re-ignite the entire crisis.

Most measures to increase growth, such as improving education or productivity, take a long time to deliver results. The eurozone does not have a long time.

Even some senior officials have been heard to say that results will have to come through in the next five years.

A report by the Bruegel think tank suggested accelerated EU payments to countries in deep recession, as well as much more ambitious investment programmes funded by the European Investment Bank.

Most important of all is to restore confidence, and credit, by establishing the banking supervision and re-organisation systems and vigorously tackling the stricken eurozone banking system.

Attention should switch to longer-term public finances, such as reform of pension systems, rather than present deficits.

Arguments

At a national level, the same arguments apply to the Irish Government. The failure to deal with bank losses on property loans and mortgages, because of fears of what it would mean for public debt, may well have the perverse effect of making the debt situation more intractable, because of the damage to credit and growth.

The €5bn correction may not be achievable over the next two years, but the unions may be glad to settle for reforms which provide savings in the longer term.

In particular, their disastrous demands for a reversal of pay cuts for new entrants and limits on outsourcing should be swept off the table in return for major concessions on the €300m savings plan.

It is a pity that eurozone bungling has brought us to this, but there is no point in carrying on as if it hasn't.

Irish Independent

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