PLUS CA CHANGE 1105 XXVII

PLUS CA CHANGE

The new government needs some luck, and, frankly, much of what is on the horizon appears bad. I have just returned from the south of Spain, where one could almost hear the shouts of outrage from Ireland over its announcement on recapitalising the banks. After reflection, best judgement was that, rather than “burn the bondholders”, another $30billion would be thrown at the banks. A Labour Minister promised that the government would act in the best interests of the country, echoing words of the former government. Déjà vu, anyone?

The howls came loudest from those who had switched to vote Labour, now swearing never again. In truth the government had little choice, just as it faces the fiscal future with very little room for manoeuvre. The honeymoon period, such as it was, is now over. The sniping from the left is likely to intensify, to the growing discomfiture of Labour. Fianna Fail remains, defeated but still dangerous; however, it is unlikely to recover until there is either a major government faux-pas or a further significant worsening in the economy brought about by some external force-majeure.

The public’s anger has now focussed on “Europe”, a term encompassing Germany, France, the ECB and the European Commission. All are deemed culpable in varying degrees, by: a) not controlling Ireland’s financial regulator and institutions, b) allowing their national banks to invest in the Celtic Tiger bonanza, c) refusing to countenance making the bondholders pay lest their banks suffer losses, d) refusing to cut a deal on our repayment terms, lest their electorates object to paying for us, and e) a general refusal to accept Ireland’s special case.

We have not yet reached the stage of calls that our involvement with Europe should be seen as some form of Faustian pact, i.e. we got all the goodies early on, but now Europe is costing us, is harming us and is inhibiting  our manifest destiny (whatever that may be). Yet there are already disturbing suggestions from the opposition and the public that we use our veto or threat of default to get our way (1% of the population of the European Union to determine what the other 99% does).

The phrase “eaten bread is soon forgotten” comes to mind. Ireland has benefitted enormously from Europe in terms of market access, huge financial transfers (the CAP, Regional and Structural Funds), a benign approach to our corporate tax regime, and much else. European social, environmental and human rights legislation has had a defining role in shaping contemporary Irish society. Furthermore, rightly or wrongly, Ireland chose a particular path in abandoning sterling 30 years ago and, later, in choosing to join the Euro, which we did with our eyes open, though much of our trade was outside the Eurozone.

There is some, but not much, justification for blaming “Europe” for not overseeing sufficiently closely Irish banks’ reckless lending (and borrowing!). The EU is not after all a fully integrated entity like the USA and the centre relies on national governments to micromanage policy. If there is a criticism to be levelled it is that, in instituting something as major as a new currency, there should have been greater care and attention to detail in advance as well as a stronger and more intrusive regulatory regime. Yet this is not the way the EU has worked to date.  And had Europe intervened, during the Years of the Tiger, there would have been a chorus of “hands off” and shouts about attacks on our sovereignty.

The two major quantum leaps taken by the EU this century, Enlargement and the Euro, were, above all, political, and were taken after some but not necessarily sufficient preparation. EU practice has been that institutions are tasked or shaped to give effect to political decisions made. If tweaking is needed there is tweaking. If heavy lifting is required there will be heavy lifting; but this takes time. Up to now the system has worked and Europe has muddled through various difficulties.

It is evident that the Eurozone is currently in a deep crisis and that Ireland is a component in that crisis. The scale and depth of the crisis were not anticipated with some commentators suggesting there is more and worse to come. Right now Europe is struggling to find a solution, for both the short and the long term. This is a process and could last for some time. Irish politicians, commentators and the public have been less than enthused about progress to date. But there is still some way to go. In the meantime the European Central Bank is keeping our economy afloat. We would do well to keep this in mind.

Domestically there are some indications that economic growth is back, with exports rising and surveys among business showing more optimism than pessimism. Indeed there is a functioning economy out there, with hundreds of thousands more employed than ten or fifteen years ago. Anyone who doubts this should compare the traffic flows now with the late 90s, and, despite all the doomsayers, consumer spending is around 2003 levels – which were far from bad.

However, little impact has been made on unemployment levels, the banking system is moribund (apart from bullying small and medium debtors), interest rates and energy prices are rising – inhibiting the rate of economic growth – and the sands of reckoning for personal and mortgage debt are fast running out. Throw in the rising cost of servicing our debts just to keep the country running and it is clear that the target of cutting the budget deficit to 3% in any reasonable timeframe is achievable only by drastic cuts in spending or increases in taxation or some combination of both. The dynamics of a left/right coalition suggest that anything too radical will fail.

And that is not the worst of it. The mortgage crisis is moving inexorably towards centre stage and seems set to concentrate the governments mind later in the year, particularly given that those affected are middle class, and thus more likely to create a fuss. The situation has worsened since I wrote several months ago about the prospect of 25,000 plus mortgage defaults and repossessions (i.e. evictions), with scheduled interest rises over the next year set to compound matters. Up to 10% of mortgages are reportedly either in arrears or the subject of temporary special arrangements. The last government sought to postpone the issue by kicking it down the road through palliatives (a moratorium on repossessions) or a sticking plaster solution (a code of conduct, etc.).  The problem cannot be ducked for much longer, with voices already querying how the banks, which “we” own, can be allowed to pursue mortgage holders.

May promises some relief, with visits by the Queen and Barrack Obama, both offering potential spin off in terms of publicity and tourism. The government is also scheduled to launch its job creation programme, though how exactly this is to be financed is not clear. That, plus some confidence building measures, is about all the government has in its locker. A move from Europe, however small, would be very welcome and would underline who our friends really are.

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