Wednesday 13 November 2019

We must succeed on economy – inside or outside the bailout

IT struck me as odd the first time. Now it has become one of the most commonly asked questions, and doesn't seem odd at all. "Why do we want to leave the bailout?" is the question.

Oddity has been replaced by difficulty. It is not easy to give a convincing answer. At the beginning the instinctive answer was that this was just the way things are done. Just like getting married, when I was in my twenties. It's not really a good enough answer.

The trouble with finding a simple answer is that there are several conceptual difficulties about countries and debt. Why do they bother to repay loans at all? Lenders cannot seize a sovereign's furniture.

The stock answer is (or was) that nobody would lend such a country any more money. That turned out not to be entirely true after past defaults. But even if lenders cannot be found, a country could write its own cheques.

Much to my amazement, as I wrote the other week, this is now a respectable policy for many serious analysts. If ever there were a sign of the gravity of the global crisis, it is the emergence of paper money as a cure for real ills.

Equally, the Bundesbank angst over the promissory notes demonstrates the German horror of going down this primrose path of government money. In its book, no crisis is so severe for that to be the solution. At least not yet.

None of this is much help in answering the question about Ireland. By joining the euro we gave up what then appeared to be the irrelevant sovereign power to create money.

However, surprisingly, it is relevant again and one would love to know what the old conservative, confused Central Bank would have done with the Irish pound as the Bank of England cranked up the printing press. Printed even faster, probably.

We will never know, but it is worth remembering that in any credibly conceivable system, such policies would always be decided outside Ireland. But only the euro could have given us something as elaborate, complex and political as the EU/IMF/ECB bailout programme.

Staying inside

Paradoxically, that may be why it strikes the questioners that staying inside the bailout is a safer bet. Of course, they want austerity to come to an end, and recognise that, if it is no longer needed, then the bailout is over.

The implicit suggestion is that deliberately missing a few targets and continuing with a bit of austerity to keep the bailout going might not be such a bad thing.

Put that to them explicitly and they tend to back off. The real question is why they might suggest such a thing at all – followed by the supplementary one of why the Government does not follow this course?

The first of several answers is that the money is guaranteed. Each time the National Treasury Management Agency touts for loans with a bond auction, it has to trawl market opinion to make sure the auction does not fall flat and scare everyone away.

With the troika, provided agreed conditions are met, the money will be forthcoming. Not only that, the rate charged is probably lower than Ireland will be able to obtain in the market, and the repayment dates may soon be extended beyond what the market would offer.

It might seem that getting rid of the conditions, with their demands for taxes, cuts, competition and privatisation, might be seen as a very good reason for baling out of the bailout. But it seems that the presence of such conditions is itself an attraction for some of the questioners.

If so, it is a deeply depressing phenomenon and should further depress government ministers already staring glumly at the opinion polls. It might even help explain those polls.

The thesis is that some proportion of the population does not trust the political system to manage the country's affairs properly without the discipline of external conditions which must be met.

Such an idea is made more plausible by the Government's determination to look unhappy about all of the conditions, to tarry over the ones which might discomfort commercial interests, and to squabble about all of them.

That kind of attitude makes it reasonable to think that the Government – any government – would simply not be up to the challenge and would quickly lose the confidence of the markets.

It would be back to the bailout – if indeed a bailout choice was still available by then. Perhaps we should just carry on as we are?

Even for those of us who think that is an extreme position, there is the unassailable fact that the quality of information, analysis – even political discussion – from the troika regime is superior to anything which any Irish administration has produced.

Government efforts are somewhat better than they were, and the Department of Public Expenditure and Reform deserves due credit. The quality of Central Bank work has also been transformed, although it has been unable to overcome its traditional horror of saying anything unpleasant; which is a bit of a fatal flaw in a central bank.

All of this is a response to the crisis, so the uncomfortable thought remains that, once the crisis ends, so will the improvements in governance, limited though they are.

There is a disturbing lesson from history. When the EU structural fund bonanza appeared in the 1980s, Ireland developed a system for assessing projects and controlling disbursements which was itself a "poster child" for such schemes, even if that irritating phrase had not yet been coined.

But when the funds faded away, so did the system. What was worth doing for Brussels bureaucrats was not worth doing for Irish citizens. It still isn't.

The difference between the two situations is that the fiscal pressures will not fade away. What matters about Budgets is not their size – whether an adjustment is €3bn or €500m, but whether the direction is plus or minus.


It is going to be minus for many years – not in actual cuts but in comparison with the inherent demands for more spending. There will also be conditions: from new fiscal arrangements already agreed and, initially at least, from the backup funds which Ireland will need as it finds its bearings in the markets.

Politicians may sometimes wonder if they would not be better off having the troika to blame, as well as helping with the technical stuff.

But they have made exit from bailout as the proof of the success of their policies. They have yet to persuade everyone that they are ready for life on the outside.

Irish Independent

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