Our economic plight…

Two interesting pieces in the New Statesman, both written after the EU/IMF package. One by former Bank of England Monetary Policy Committee member David Blanchflower, the other by Alex Preston who writes a financial column for the NS. The latter used to visit Dublin on a weekly basis in the 2005/2006 period while working for a UK based hedge-fund.

He suggests that:

Ireland now embodies much of what went wrong with the world in the first years of this century: a bloated financial-services system, a hyper-inflated property bubble in both commercial and residential markets, banks that were under-regulated and far too reliant on short-term funding, high levels of consumer debt and a government that took a number of poor decisions in the early days of the crash. Greece was in many ways an exceptional European crisis – much more like an emerging-market sovereign default. The Irish model will be the example for future busts.

He notes that:

The markets haven’t been impressed by the bailout. After a brief rally, the euro gave up most of its gains as details of the joint EU/IMF rescue plan emerged on 22 November. Shares across the world fell as analysts predicted that Ireland would not be the last European sovereign to go cap in hand to the EU. The Irish stock market sank almost 1.5 per cent. Moody’s stated that it would likely downgrade Ireland’s current Aa2 rating by several notches. Credit default swap (CDS) spreads on both the sovereign and the leading banks all widened as speculators gambled that the package would not be enough to save the nation’s bankrupt financial system. To insure €1m (£850,000) of Allied Irish Bank bonds with a CDS contract currently costs a staggering €550,000, up from €80,000 in August. Rumours circulated that the banks would be merged, or broken up and sold off; whichever, it was clear that Irish banks would be smaller and humbler than before the crash.

And he also notes that:

Even if, as seems to be the case, Ireland maintains the lowest corporate tax rate in Europe – 12.5 per cent – companies are likely to pull out of an economy on the brink of meltdown. Some estimates of the final cost of the bailout have now topped €200bn – and this is in addition to the €50-70bn the Irish government has already spent propping up its beleaguered banks. W B Yeats has been quoted by every financial hack trying to lend gravitas to their analysis of the Irish crisis. You can see why – things are falling apart. But I’ll call on a less apocalyptic voice, Seamus Heaney, who urged us to: “Believe in miracles/and cures and healing wells.” God knows, Ireland needs them.

Blanchflower is no more optimistic. And he makes the basic point that the measures adopted to date have not worked.

Meanwhile, the European Union and International Monetary Fund brokered a £77bn bail­out package for Ireland’s failing banks, a condition of which was the adoption of further austerity measures. The forthcoming emergency budget in Ireland is expected to contain severe cuts in the minimum wage, social-welfare spending and public-sector jobs, as well as a new property tax and higher income taxes.

This is consistent with the recommendations set out in a paper published by the IMF, which argued that Ireland should gradually lower unemployment benefits and cut the level of its minimum wage to boost employment. The austerity measures previously announced in Ireland did not reassure the bond markets, which turned against the Irish as economic growth slowed once again. Having experienced positive GDP growth in the first quarter of 2010, Ireland saw growth turn negative in the second quarter.

And he asks the central question:

“We don’t have a position on the domestic democratic politics of Ireland, but it is essential that the budget will be adopted in time and we will be able to conclude the negotiations on the EU/IMF programme in time,” said the European monetary affairs commissioner, Olli Rehn. His statement implies that they do have a position – that ordinary citizens must suffer for the profligacy of the bankers. Seems rather unfair, wouldn’t you say?

It remains unclear why those who didn’t cause the crisis are paying such a heavy price and why they should go along with such an awful deal.

He also makes a very important point, that far too many now leading the charge on austerity were the first to seek to emulate the Irish ‘model’.

In the Times on 23 February 2006, the then shadow chancellor, George Osborne, wrote an opinion column entitled “Look and learn from across the Irish Sea”, which he must now regret. “The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed,” he wrote. “In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn.”

And if that is carping about the distant past, well, Blanchflower makes a basic point about the present.

What has happened suggests that the stress tests that were conducted on European banks a while ago were of no value, because all the Irish banks passed. It seems likely, too, that other banks are more stressed than we thought.

And those who declared all was well, only a short time ago, are now arguing the opposite for the Irish case and as we saw yesterday are demanding that the Budget be passed.

The memorandum gives quarter-by-quarter targets that will have to be met by the Government in order for funds to be released.

Among the key elements of the document are that the the release of the first instalments of the package will be conditional on the upcoming budget being adopted and implemented.

The Government will also have to consider “appropriate adjustment” to the public sector wage bill if the Croke Park agreement is not delivering by the third quarter of next year.

It says Budget 2012 must achieve adjustments of €3.6 billion, with further cuts and savings of €3.1 billion in Budget 2013.

You’ve got to wonder what the state of our public provision is going to be by 2013.

I mentioned yesterday how the response to the package has been, in terms of public reaction, uniformly negative, but you can be certain that the government will try to lead with aspects of it, particularly – one suspects – the threat of renegotiating Croke Park.

By the way, any further adjustment to the public sector wage bill would, naturally, have significant deflationary effects (and in broad terms that would be my primary reason for not doing cutting them, although I wouldn’t weep if higher paid PS/CS employees took cuts). Interesting to see if ideology trumps economic sense on that one if and when the day comes. But then you know, to ask the question there is to answer it.

As for the apologia now emerging, well, it’s all about ‘responsible’ governance…

In a statement to the Dáil this afternoon, Mr Lenihan said the aid package was vital for the Government. “Without this Programme, our ability to fund the payments to social welfare recipients, the salaries of our nurses, our doctors, our teachers, our gardaí would have been extraordinarily limited and highly uncertain,” he said.

“In those circumstances, the only responsible course of action for any government was to accept the EU-IMF financial assistance fund.”

Indeed. So how then does he explain the entirely irresponsible course of action pursued by his Government across the last decade?