Saturday 14 December 2019

Brendan Keenan: Ditch the ideology for reality

Trying to make a €15bn correction in four years is economically and socially dangerous

AT THE beginning of the month, Germany paid the last of the reparations imposed on it by Britain and France -- mainly France -- after the First World War.

The news item to that effect came as a bit of a surprise. Somehow, one had thought the payments would have been forgotten after 1945. They were, after all, widely regarded as one of the causes of the second war. The legendary economist John Maynard Keynes warned of the dangers of the huge burden being placed on Germany in a famous book, The Economic Consequences of the Peace, but politics triumphed over economics.

Politics usually do. Nowhere more so than in the Europe successfully built out of the ruins of that second war. But there seems a bit more to it than that. Strange as it may seem, the Keynesian economics which would have been of so much benefit to Germany in 1918 never seemed to have gained much credence in Germany itself.

Certainly the consortium of German economic thinktanks which recently gave official advice to the government under the strange (to us) system of taking outside advice, were united in stressing that priority should be given to budget deficits.

It was, however, a Frenchman who struck the hardest note on the European issue last week. ECB President Jean-Claude Trichet took the unprecedented step of making his displeasure known about the decision by EU heads of government, which would have imposed automatic sanctions on countries with deficits. No ameliorating circumstances, unless agreed by a qualified majority of eurozone finance ministers. That was too much for Monsieur Sarkozy, and the proposal was watered down; which was too much for Monsieur Trichet.

This is, in other words, no time for Ireland to plead that the EU-approved programme for the deficit reduction will wreck the economy. Yet that was essentially the case made by the ESRI last week.

It expressed "grave concern" about the idea that budget corrections of €15bn -- starting perhaps with €5-6bn in this year's Budget -- would be implemented to get the deficit down to the 3 per cent of output (GDP) allowed under EU rules. It feared the deflationary effect of this could last for a decade.

One does not really blame Irish trade union leaders for saying, "I told you so". This is indeed what they have said -- but they said it in a different context. It was Keynes himself who observed: "When the facts change, I change my mind." In that sense, the ESRI was indeed Keynesian.

The brutal change in the facts is the halving of expected economic growth. The Government had been counting on a return to something like the pre-crash performance, so that the economy would average 4 per cent growth even during the €7.5bn budget corrections.

It should be a sobering thought for everyone -- however Keynesian -- that this package, which aroused so much opposition, depended on strong economic growth to achieve its objective of stabilising debt by 2014. That is a chilling reminder of the depth of the hole in which we find ourselves.

We have known for some months that those original growth forecasts would not be met. The ESRI put a "low growth" scenario through its model and came up with the conclusion that the €7.5bn would not be enough. The national debt would continue to grow faster than the economy, reaching 120 per cent of GDP by 2020, and still rising.

But their "low growth", at just over 3 per cent, was still higher than the latest medium-term forecasts for the Irish economy. Next year looks to be a bad one for the global economy, definitely a bad one for the UK economy and, therefore, not a good one for us.

This is where the €15bn comes from. But the only sane conclusion is that the debt burden cannot now be stabilised by 2014. On the ESRI figures, it will be very difficult to stabilise it even by 2020.

I still believe that the effort must be made. That means using models like the ESRI's to decide on the best balance between growth and getting to a situation where we pay for our public services with our own money, rather than someone else's.

The Irish Keynesians seem reluctant to give projections for future debt under their policies, but it is clear that, taken at face value, they could see the debt burden could reach 140 per cent of GDP over the next 10 years.

Even to say that shows the impossibility of it. The debate should therefore not be ideological, but practical. The evidence is overwhelming that trying to make a €15bn correction in four years is economically and socially dangerous. One early test will be Sinn Fein's standing in the next opinion poll.

It seems equally obvious that sticking with €7.5bn, which so many opposed vigorously, can lead only to the bailout chamber. Once in there, German rules apply. OK?

Sunday Independent

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