Thursday 14 November 2019

Brendan Keenan: Demands can only be made if we march in step with Europe

Brendan Keenan

Brendan Keenan

ENDA Kenny and his new finance minister will march off to Brussels with a version of the old protesters' slogan. "What do we want? Re-negotiation? When do we want it? Now."

Just like those old protesters, they may find that the second demand is more difficult to achieve than the first.

So far as the first demand goes, it appears to have two components. The timetable for the deal should be lengthened, which has been a Labour Party campaign cause, and the interest rate should be lower, which is just about everyone's cause.

It may not be essential that either of these should be granted "now".

Clearly, there is no need to rush into extending the deadline for the achievement of EU fiscal probity before the Budget for next year is being constructed -- unless part of the idea is to ease up on the austerity for this year.

Which it may well be. It would certainly get the new Government off to a nice start, and allow some of the election promises to be met without the need for compensating revenues or savings somewhere else.

Fraught with difficulty

Yet it is a demand fraught with difficulty for the lenders -- and, indeed, for that other encumbered borrower, Greece. The unpalatable fact is that while Ireland has had an enormous fiscal correction already since 2008, the one agreed with the EU and IMF has not really begun. Giving up before the start would hardly be acceptable.

But, said the parties when in opposition, it is a bad deal which should never have been signed.

In reality, Brian Cowen had little choice but to sign whatever was put before him.

A more intriguing question is why the EU and/or the IMF would present a bad deal to Ireland.

There are indeed lots of reasons why they might, with the emphasis on the EU rather than the IMF.

The first reason is that all of this was made up on the hoof -- a process which is unlikely to produce optimal results.

European leaders and officials were reluctant to accept that some banks might be insolvent and that some countries -- notably Greece -- were heading that way.

Then, when it was no longer possible to ignore the solvency dangers, fear of "contagion" took over; where a failure to honour debts, either by banks or governments, was seen as threatening the solvency of other banks and governments.

The politics also went wrong. German Chancellor Angela Merkel was the most forthright in espousing the first position -- that countries like Greece and Ireland were merely slacking and looking for soft options.

By the time she came round to the view that something more serious was afoot, the German public -- greatly encouraged by the popular German media -- had bought into the slacker theory and were in no mood to make life easy for them.

Thus we get the bailout deal, with its interest rates which now top 6pc, and its demand for immediate, brutal dismantling of the banks' balance sheets, and of the banks themselves.

The interest rate mirrors the advice of the 19th century British economist Walter Bagehot, who said banks which were short of liquidity -- ie, ready cash -- should receive all the loans they need, "but at penal rates".

That would force an illiquid bank to sort itself out pronto. But an insolvent bank cannot sort itself out and an insolvent country, or one close to insolvency, cannot do so either. In those circumstances, such a policy can indeed only make matters worse.

The harmful effect of higher borrowing costs is a slow one, but the demands for the forced sale of Irish bank loans and other assets threatens an immediate crisis, both financial and political.

Under this pressure, the banks are doing the sensible thing -- from their point of view -- and trying even harder to call in loans and collect the money.

That is not sensible from a national point of view. It tightens the credit squeeze and frightens depositors. Monday's figures from the Central Bank made grim reading.

Politically, having to cover "fire sale" losses with another €10bn-€20bn of taxpayer capital will deal a body blow to the new Government before it has even begun, and is far from the best use to which such money could be put.

These are the kinds of arguments which Mr Kenny and his team must make in Europe next month.

But a specific deal for Ireland, as implied in the manifestos, is not only most unlikely, it is not the best option, either for us or Europe.

There can be an orderly solution to the Irish crisis only in the context of a comprehensive new eurozone system to deal with the wider one. Ireland must support those proposals -- not all of which will be popular -- and argue for the postponement of the more damaging proposals until they can be fitted into such a wider resolution mechanism.

We must also be brutally honest and admit there is some truth in the accusations levelled against us.

Greece may have more eye-catching characteristics, such as early retirement ages, short working hours and a remarkable facility for not paying taxes.

But many of the actual pension and working arrangements in the Irish public sector would give the Greeks a run for their money.

As for taxes, we did away with the need to evade them by making it legally possible not to pay them if you had enough money and just a little initiative and, at the other end, exempting a third of the workforce.

And no one can match the salaries of Irish politicians, senior officials and the top reaches of the private professions. It will not have escaped attention abroad that there is little sign that the newly-elected parties intend doing anything very much about this.

I suspect this is the sort of thing Ms Merkel had in mind when she made the enigmatic comment about low corporation tax rates contributing to the Irish crisis.

Property tax revenues may have been the main instrument used to inflict the damage, but it is fair to include volatile and insecure corporate revenues as well.

Perhaps an Irish offer to set aside a certain amount of these revenues for debt reduction might head off demands for an increase in the corporation tax rate?

At any rate, marching and demanding are not a realistic stance for any Irish government. "What would we both like, when the time is right?" may be the best, if less-inspiring slogan to bring to Europe.

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