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Brendan Keenan: Sentenced to carry a fiscal ball and chain for next decade

FIANNA Fail left another toxic legacy for the incoming coalition. Their numbers were right.

Of all the quite remarkable amount of nonsense the new ministers have managed to spout in their short careers to date, saying things were worse than they thought before the election must rank top of the pile.

This was to justify their not keeping their election promises in full. One might have thought that, if they were going to tell porkies, they might have decided to get the maximum benefit by not keeping the promises at all.

Bad and all as things were, they were not worse than was thought. Given the scale of the collapse in output between the onset of the crisis and the election, this was quite a feat of government accounting. And they have been right ever since.

This is not the same thing as missing targets. Last year's targets were missed by about €1bn. However, the slippage was spotted and monitored as the year progressed. There may have been disappointment, but there was no surprise.

It is not so everywhere. On the contrary, the sight of new ministers reeling into the press room to explain the horrors they have found after taking office, seems to be quite the norm in southern Europe. The sort of thing that has just happened in Spain.

There, the new centre-right government discovered that the deficit was a full two percentage points higher than had been thought. At 8pc of GDP, that is a difference of 33pc in the actual deficit. They are still counting, and the final estimate may be even higher.

The response of Spain's economy minister Luis de Guindos was interesting. He pledged to make up all the lost ground this year, and then achieve the original target, so that the 2012 deficit ends up at 4.4pc of GDP.

Such a cut of almost four percentage points compares with the 1.3 percentage points adjustment which the Irish Government is planning for 2012.

But Mr Guindos does not have to add the 2pc of GDP which the Irish Exchequer must carry to fund the 'promissory note' capital for the banks.

Looked at that way, the two adjustments are not that different.

Yet few analysts believe that Mr Guindos can meet that €15bn adjustment this year. The Irish Government must do something similar for the next 10 years. No wonder the final deficit is improving so slowly. It is difficult to believe that the markets have fully absorbed the consequences of this enormous fiscal ball and chain.

Speculation about a second bailout may be premature, but there are few signs that Irish yields can get below the prohibitive 8pc at which they now sit. Apart from anything else, the €30bn liability over the next decade is too much of a risk.

The interesting thing about the Spanish announcement is that bond yields fell below 6pc after the shocking new figures appeared. One reason seems to be that the new government stressed "structural reform", as well as budgetary correction.

Everyone accepts that the planned adjustments in all the stressed economies are impossible without better growth. Ireland is held to have intrinsic growth potential, Greece and Portugal to have little, while Italy and Spain have the potential for higher growth -- with Spain more likely to achieve it.

The potential exists because the existing arrangements in these countries are so perverse. With the exception of the construction-fuelled 2000s, Spain's unemployment has remained above 20pc ever since the old coal and steel industries shrank in the 1980s.

At the core of the systems in these countries is the spread into large sections of private enterprise of pay, conditions and job security of a kind normally found only in government employment; making much of that enterprise uncompetitive and stifling growth elsewhere.

So the theory goes, anyway. Recent research from the Bruegel think tank in Brussels claims to have found strong evidence that excessive regulation in some aspects of services does indeed hurt growth -- by as much as 1pc of GDP.

Such research requires careful analysis, but there is one incontrovertible fact. Of the countries studied, the one with the most deregulated services sector was Sweden, and the one with the least was Greece.

This is a pattern which is repeated over and over, but which rarely makes it into the debates about the nature of regulation and social protection.

The best governed and most socially cohesive countries, ie the Nordics, are often the ones which led the way in de-regulation of services and labour markets.

Denmark, which is just about the most highly taxed economy in the world, ranks as just about the lightest regulator of business in global surveys.

They have understood the distinction between regulation -- which should prevent dishonesty and damage to health and the environment -- and protection of the privileges of incumbent firms, their managers and employees, which it should not.

Social protection is the business of the state, and the Nordics do that better than anyone too.

No one can pretend that the Irish system makes that distinction. Nor is there any sign that it is going to. The recent proposals for tendering for state legal services were a classic of their kind.

The Department of Justice draft legislation ignored the key proposal in the report it had commissioned, that law firms should compete on price for such work.

There is no commitment to actually apply the other recommendations to increase competition.

New government, same way of doing things. The Bruegel finding that restrictive regulation of professional services and energy provision, "has particularly strong negative growth effects", could have been written for us.

There are worrying signs that the troika is beginning to give up on structural reform in Ireland.

Nothing appears to be happening, even on the detailed assessment of the energy sector, which was part of the bailout agreement.

Ireland is not Greece -- just a pale imitation of it. The troika view seems to be that the political trouble from serious reform might threaten the austerity programme, bank costs included, which would be a bad outcome from its point of view.

The growing ranks of the unemployed might well take a different view.

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