Month: September 2012

WHERE ARE WE AT, WHERE ARE WE GOING?

At least we
had a fine early summer. In July, however, the rains returned and combined with
doom and gloom in the media about our current travails to dampen the most
optimistic spirit. It is now apparent to all that there will be no quick
economic fix. The sands are running out for the Government and Fianna Fail
continues to languish at unprecedented lows in the polls.  The focus is now on
the next dose of pain – the December budget – with around $2 and a half billion
to be found from extra taxes or cuts in spending. It could be the Government’s
last.

Several recent economic reports, even those positive in tone, have
underlined just how fragile our economy remains and how much pain we have still
to endure. One or two outside commentators have been scathing about what has
been done and sceptical about any chance of a quick recovery. An exasperated
Taoiseach has complained about too much negative reporting which does no good
and could harm the recovery.

Certainly there are positive signs,
particularly regarding exports and in terms of a pick up in foreign direct
investment. The Government has bravely committed itself to a future capital
programme, which, even scaled down, contains the promise of future jobs.  Jobs
are being created, but jobs are being lost. Unemployment has begun to lurch
upwards again.

Fresh revelations about the misdeeds of the banks (and
bankers) continue, serving to drive home the  feeling that too much has been
done for them. All the signs, moreover, are that the banks, far from being
grateful, are, rather, turning the screw on customers whenever the opportunity
is presented. The end September sees the current state guarantee to the banks
expire; will there be a rethink for guarantee mark two?

There is a
reluctant general  acceptance among  all but the most obtuse that we cannot
continue to borrow at the current levels. It has dawned on the public that the
core issue is not to win an internal argument among ourselves about appropriate
welfare and tax levels but rather to convince outside lenders to continue to
advance us the money to fund our current living standards. No amount of outrage
over the huge sums sunk into the banks – particularly Anglo Irish – can obscure
the reality that we are borrowing a similar amount every 18 months or so just to
keep afloat.

The budget will not be easy politically; the Government,
relying on independents and some worried schismatic supporters,  may fall over
it. The result would be an election but out of that would have to come a
successor obliged, however reluctantly, to meet the same targets. Whenever the
next election occurs the new government will have its hands tied.There are
echoes of 1987 in all of this, but though  much groundwork has been done over
the past two years recovery still seems a distant prospect.

A number of
budget trial balloons have already been launched covering welfare cuts
(including one of the last sacred cows, the old age pension), extending income
tax to the lower paid (half of all workers pay no tax) and the modalities of
interim property and water taxes (the definitive versions will take longer to
formulate). In a sense this is the Government version of negative spin – a
softening up process to make the final package more palatable. The first result
has been to alert the lobbies.

So what will the budget
contain? Much of last year’s McCarthy Report remains to be implemented.
However,the Government, through the Croke Park Agreement with the public sector
unions, has tied its hands regarding further cuts in public sector pay or
levies. Some big spending Departments will be targeted. Mary Harney has already
signalled a draconian cut in the Health budget. This has been received
relatively quietly, though this will probably change as the details emerge. The
public is weary of a system  whose strengths and weaknesses are well known; any
cuts aimed at the top heavy bureaucracy will be welcomed; any cuts in services
will draw fire.

Education seems destined for further cuts but here most
of the soft options have already been targeted. One issue remains – that of the
reintroduction of third level fees at the state’s universities and colleges.
When the emotive smokescreens are stripped aside, the simple reality is that the
main beneficiaries of the abolition of fees have been the middle classes. Some
others have benefitted but not to the same extent. In practice, access is
limited overwhelmingly to the well off or those accepted by a third level
institution close to home. Whether this nettle will be grasped may ultimately be
decided on political grounds.

Small savings can be effected in most
other departments. To meet the target, however, will require additionally a
combination of revisiting the social welfare budget and extra taxation. Last
year’s cuts breached the taboo except for the old age pension. A change here was
floated some weeks ago, specifically in the context of “better-off” pensioners,
but given that these are taxed in any event, it is difficult to see where this
one is going. The emotive argument that the pension was earned through
contributions when working remains particularly potent.

Clear signals
have been given about “widening the tax net” to bring in some of the 50% not
paying any tax. This mainly means the lower paid and can be done easily by
lowering tax thresholds. This will also increase the amount paid by those
currently paying tax, which may forestall or postpone any property tax right
away. The glib alternative solution for raising revenue by a tax on property, or
assets, conveniently ignores the fact that those obliged to pay are likely to be
mainly those currently paying income tax – ie the middle classes – who can only
be squeezed so far.

While some form of property tax, which would broaden
and make more sustainable the tax base, seems bound to come, when and in what
form is another matter. There remains in Ireland, almost uniquely in the first
world, a general reluctance to take on board the principle that ownership or
beneficial use of a piece of property should carry with it a cost. The
Government has hinted at the need for further study, and, fearful of a further
political backlash, may settle for the moment for a low uniform levy, with
another one on water.

Any taxation of the lower paid runs the risk of
adding to the existing poverty traps which can make it more advantageous to
remain on welfare rather than work. To maintain relativities and avoid a
worsening of the situation the Government may be tempted to cut unemployment
assistance again in a package that in equity should also include a hefty cut in
child benefit, currently paid indiscriminately to all. There is surely fat in
the latter and this could give scope for some rowback on cuts already made for
certain particularly vulnerable groups like carers, special needs assistants and
the blind. Even lacking money, the Government could and should do something to
protect those most vulnerable.

THE HOME FRONT

Ireland is now well on the way towards the next general
election. Many observers doubt the ability of the coalition to last beyond this
year, let alone run to full term in mid 2012. Even though it could be argued
that the economy is now in a state of fragile equilibrium (revenue more or less
on target, unemployment more or less static) there is a weary public acceptance
that things will not get easier, that several tough budgets lie ahead and that
the Celtic Tiger chickens are coming home with a vengeance.

Opinion
polls indicate that, whatever about  recognizing that any alternative government
would have to pursue fiscal policies and tough measures broadly similar to those
the government has taken since2008, the electorate seems determined to hold
Fianna Fail in particular (in power since 1997) responsible for bringing the
crash about. Public ire has been compounded in recent weeks by growing awareness
of the human cost of the crash and the necessary remedies, set against the
amounts committed to bailing out the banks. Stealth cuts affecting carers for
the mentally and physically disabled have brought people onto the streets while
public attention has now also begun to focus on the housing and mortgage time
bomb.

For better or worse the government has pursued a particular policy
towards the banks and the developers, including a wide ranging guarantee
covering the banks and their investors.  No one has answered satisfactorily what
the immediate consequences for the economy of not issuing the guarantee in September 2008 would have been.  Yet the issue has
clearly left a sour taste when combined with the money sunk into buying the
banks’ doubtful loans, leaving only a bare cupboard for everyone else. There is
no money to stimulate the economy and little beyond words to offer succour to
those in financial straits, including, for the first time, significant numbers
from the politically important middle class.

Given the Irish attitude to
property ownership, the housing and mortgage situation may prove perhaps the
bitterest legacy of the Celtic Tiger. The economy going belly-up is seen as a
problem for society, or the EU. The debt of the individual is very much a
personal problem. Factor in property and many raw nerves are exposed. The
spending spree on property during the boom touched a great many people.
Properties were remortgaged; equity was drawn down, often for frivolous consumer
spending. But most went into the property boom, fuelling it. Credit, cheaper
than ever before, was widely available. Nearly everyone who could, borrowed.
Young people, first time buyers, scrambled to get on the property ladder while
they still could. And now …the party feeling has been replaced by a
hangover.

Currently the housing market is stagnant. Property prices have
crashed, by between 33% and 50% depending on location. Virtually all new units
bought since 2003 or 2004 (the level to which prices have now fallen) are in
negative equity, and prices have yet to bottom out definitively. Demand has all
but disappeared. Compounding this, the banks, so recently profligate with
lending, have now rediscovered prudence, prompted by a new and tough financial
regulator, and will only lend small multiples of income and no more than 80% of
the cost, further discouraging new and first time buyers. There is no trading up
as those already in at the bottom are crippled by negative equity. Very few new
houses are being built and much of visible construction consists of project
completion on behalf of creditors.  There is no prospect of improvement in the
short term.

The country is sprinkled with “ghost estates”, located mainly
(but by no means entirely) in rural areas. These date from just before the crash
and include partially completed houses, as well as estates and apartment
complexes all but finished but with few or no buyers or occupants. Estimates of
the numbers of unoccupied or unfinished dwellings vary widely but the number is
considerably in excess of 100,000. Many, particularly in the west, are unlikely
ever to be viable. Some form of triage approach appears most likely with some
estates destined to be abandoned or demolished, others earmarked for fire sales
(any fire sales in desirable areas are likely to depress the market
further).

Mortgaged properties in negative equity can be broadly divided
into two – those where the owner is coping and those where the owner is under
pressure on the mortgage (job gone or income reduced or with a short term loan
falling due). The first group face no immediate problem and collectively will
aim to hunker down in the expectation that prices will rise again in the medium
term as the economy recovers.

The pressing problem lies with the second
group and this is now fast becoming a political issue. Many are young or first
time buyers who got mortgages of up to 100%, sometimes more, for amounts of
$250,000 or up. Many are currently in negative equity of at least a third. Where
jobs have been lost there is simply no way the mortgage can be met. The bald
figures are that, at the beginning of July, one in twenty five residential
mortgages (32,321) were three months or more in arrears, a figure expected to
increase rapidly as temporary moratoriums on repayments expire and as interest
rates inevitably rise above the current historic lows. There is no risk sharing
with Irish mortgages. The keys cannot be handed back. The borrower remains
liable for the full amount of the loan – a financial albatross which threatens
to retard the pace and strength of any economic recovery.

The government
has, up to now, approached the issue warily. The lending institutions were
prevailed upon initially to delay taking action over arrears and so far this has
worked in most cases. This is probably due as much to the weakness of the
institutions (what would they do with a surfeit of repossessed properties in a
falling market in any event?) as to the government’s entreaties. In early July a
government-sponsored expert group suggested a negotiating process for borrowers
in difficulties but left open the option for the banks to repossess failing all
else. Time will tell how successful this approach will be. The last thing the
government wants is a flood of repossessions and /or bankruptcies affecting
ordinary people.

The group’s next report, due in September, is to deal
with the elephant in the room – negative equity – and is expected also to
consider the hot potato of possible debt forgiveness. The debate on this has
already begun, focussing on possible percentage write downs by the lenders, and
/or the state assuming part of the loans. Among the arguments against are that
writing down would further weaken the banks and that the state has no money to
intervene. A further point has been made that to bail out those in trouble
would invite “moral hazard”, i.e. the delinquents – or others – would do it all
again given the chance. I cannot recall morality being invoked when the banks
and developers were being rescued! And if the banks merited help for the benefit
of society, who is to say that people do not? This one will run.

“BIG BOYS GAMES, BIG
BOYS RULES”

A process of change has begun which seems destined to alter
fundamentally the Eurozone. Precisely where this will end is not clear, but
there have been  mutterings from the German Chancellor that the entire European
project could be at risk unless firm remedial action is taken. The cumbersome EU
decision making machinery is now beginning to grapple with the
task.

Recent weeks have not been good. The sticking plaster solution
designed to bail out Greece and forestall bankruptcy failed from the off to
inspire international confidence. With fears growing of  potential threats to
Portugal and Spain it became necessary to revisit the situation . A much larger
rescue plan was hammered out involving agreement on a bailout fund of a trillion
dollars to be financed  partly by the IMF and reluctant agreement by the
European Central Bank to buy government bonds from the weaker Eurozone
economies.

The brave face  put on the plan was that it would forestall
speculation and thus might never have to be activated. The omens are not good.
Overall deficits (i.e. more borrowing) continue to mount, there is evident
resistance in the weaker economies to the spending cutbacks and extra taxation
being demanded and clear differences between and within countries on the best
approach to follow. The plan’s call for increased monitoring from the centre on
individual annual budgets of member states has had a mixed reception.

Economic comment has been that Europe has bought time – the suggestion
being three years – but in a globalised economy this may prove over optimistic.
Market reaction has seen the value of the Euro drift down against the Dollar and
Sterling, shares fall and worry that the international economy may be
precipitated into the much feared “double dip” recession. This last would, of
course, cancel all bets for the short term, but assuming it does not there is
little doubt that the Euro saga has some way to run.
.
The nuclear
reform option would be full or decisive fiscal control from the centre over
individual countries’ budgets. This is feared, particularly in Ireland, as
opening the door for eventual central control over national taxation,
threatening our advantageous – and vital – rate of company taxation and with it
our attractiveness to foreign investors. The anti-Lisbon lobby has now
re-emerged to shout “hands off”, citing threats to our sovereignty. The
government has uttered reassurances that no change to our fiscal independence
within the EU is on the cards and pointed to our continued power of veto over
taxation issues.

This is true in respect of the EU. Whether and for how
long it will apply within the context of membership of the Eurozone is another
matter. Ireland continues to borrow $450 million per week just to run the state
– including  generous provisions for unemployment benefits and (untaxed)
children’s allowances. Our continued ability to borrow rests ultimately on the
confidence of lenders. If there is no confidence there will be no money. This
was about to happen with Greece. Hence the rescues. Hence also the need to
address the emerging weaknesses in the Euro.

Crucial to this confidence
is the attitude of Germany and what happens to the Euro. There is a big picture
here, one that is not immediately apparent and is often overlooked. The last 40
years have seen the slow emergence of a European superpower built primarily
around Germany and her economy. This emerging power is within but not synonymous
with either the European Union or NATO. At times its progress has been slow or
stagnant. At times it has made quantum leaps, which have then had to be digested
and accommodated. Its institutions and borders are incomplete or ill defined yet
their general shape is emerging.

Veteran observers of the Brussels scene
will be familiar with the landmarks in this process. In the 1970s the
transformation institutionally of the EC with the creation of the European
Council structure and the groundwork for a common EU foreign policy (now  a
common foreign and security policy). Next the establishment of regional and
cohesion funds to assist poorer areas, the first groping towards a system of
economic and monetary union and the launch of the Single European Market in
1992, aimed at eliminating internal national  barriers to trade.

In
foreign relations there was the opening of serious dialogue with the communist
bloc, through the CSCE, which, at a non-military level acted as a stimulus to
dissent and fragmentation of the bloc. When communism collapsed there came
German reunification.
The EU then moved swiftly to begin a process which
led, in just over a decade (2004) to a major expansion incorporating most of the
former communist states of Central Europe, with the promise of more to follow.
Under the Schengen Agreement most continental EU members, including the
newcomers, as well as Iceland and Switzerland, have relaxed or eliminated border
controls (one visa fits all). Britain and Ireland have remained outside.

There was also, most importantly, the launch of the Euro, with Euro
currency circulating from 2002 in (now)16 of the 27 EU states. One major player,
Britain, has stayed outside, and most of the 2004 accession states are not yet
ready to join. Here’s the rub. The original rules for the Euro, including fiscal
prudence, have proved inadequate, hence the current crisis. Germany, which gave
up its beloved Deutschemark for the Euro, and prompted by an increasingly
impatient electorate, is pressing for greater controls over national budgets
with enforceable sanctions for laggards.

There is a clear division
within the Eurozone, with the PIGS plus Italy, the major offenders, with yawning
budget deficits and heavy national debt. In recent negotiations the carrot
option seems to be out; the stick remains, with modalities to be worked on in
the coming months. There are emerging public differences between the German
Chancellor and the President of the EU Commission on the need and desirability
of revising the Lisbon Treaty. Given the way Europe normally disposes of
problems, in the short run a compromise solution seems likely. It may prove
unpalatable, but one that can be lived with, for now.

But if the Euro is
to survive, more radical measures will eventually be called for. At a certain
point in this process, possibly sooner rather than later, all cards are likely
to be on the table. The Eurozone is a major plank in the world’s financial
structure with four of the world’s ten largest economies in it. Ireland is a
minnow. The German and French economies are  roughly 15 and 11 times the size of
Ireland’s. It would be naïve to assume that our sensitivities will count for
much if the very future of the common currency, fundamental to the European
project, is at stake.

It should not be forgotten that  our existing
favourable company tax rate itself has evolved from zero, under pressure and
after negotiation. Europe has been good to Ireland, and we have been lucky,
partly because we are small. At present our budgetary strategy has found favour.
We cannot go it alone. We should be wary of declaring  anything unacceptable
from the outset.”

THE PIGS WON’T LIKE IT
Several
years ago a story briefly did the rounds of the European media. It  was to the
effect that  concerns in Germany  regarding  the stability of the EURO were
prompting some customers to  demand “German” Euros from their banks while
rejecting Euros from other EU states, particularly those from southern Europe.
Euro notes and coins have identifiable national markings which made such an
exercise possible. The inference was that, in the event of a meltdown in the
Euro, Germany could withdraw from it and recognise only its “own” currency. The
story was quickly rubbished as totally unfounded and far-fetched.
The Euro,
in circulation since 2002, is now in use in 16 of the 27 EU members including
four of the world’s ten largest national economies. More importantly, it
replaced one of the four major world currencies, and the pivotal European one,
the German Deutschmark. German participation was an act of faith in the new
currency. This core reality is often overlooked. The Euro, from the beginning,
was invested with the strength, stability and reputation of the Deutschmark.

Anyone familiar with the development and launch of the US Dollar two
centuries ago will know how difficult it was to merge and replace the currencies
of thirteen disparate pre-industrial economies. How much greater the challenge,
then, of attempting the integration of most of the major currencies of Europe
(Britain remained outside), bearing with them their fiscal and budgetary
baggage. There were reservations at the time about the adequacy of the Euro’s
control mechanisms, including the 3% ceiling on budget deficits. These were
brushed aside in the euphoria of the occasion.
It has since become apparent
in the Euro era that, without political union, the scope for imposing budgetary
discipline among errant Euro members is limited. This is hardly surprising,
given that the countries concerned are functioning parliamentary democracies,
with regular elections and electorates increasingly impatient with politicians.
The path to re-election is one of making promises; keeping them costs money. The
path to defeat is to seek to raise that money by higher taxes. The end result,
across Europe, has been steady increases in borrowing by governments over
decades to pay for promises made. In an era of growth and low interest rates,
debt could be handled, or fudged.
Who, after all, would lie awake worrying
that the national debt was 50, 70 or even 100% of GDP? And who took seriously
complaints and warnings from the European Central Bank if a country’s borrowing
exceeded slightly the permitted annual ceiling? The excess could be corrected in
the next year, or be postponed further if an election loomed. 3% became
aspirational rather than mandatory. The Germans might grumble, some fines might
be imposed, but, as long as the Euro prospered, problems could be seen off.
Sticking plasters rather than radical treatment became the order of the
day.
The last year has seen reality dawn and the flaws and fault lines in the
Euro zone exposed. First came Ireland, as the air escaped at pace from the
Celtic Tiger. A country running substantial budget surpluses collapsed into
deficit – and how! It will take four years to sweat down Ireland’s current
double digit borrowing requirement to 3%. Ireland was lucky; overall government
debt had been low after the good years, so some massive borrowing was possible.
Ireland was also amenable to good advice once its leaders grasped how serious
the situation was; spending, including public sector pay, was slashed. Ireland,
so far, has taken her medicine.
Greece came next, and, on a Richter scale of
calamity, the Greek situation scored higher than the Irish one. A small economy,
with almost $400 billion in debts, no tax base to speak of and a feather-bedded
public sector and welfare state, held its hand up late last year and revealed
that the last government had lied about the extent of its economic mess. As the
weeks went by it became clear that Greece had no hope of tackling its debt
crisis unaided, and, critically, was unlikely to be able even to roll over the
portion of the debt due in 2010. Moreover, any default by Greece would expose
two other dominoes, the remaining PIGS, Portugal and Spain, both with serious
financial and fiscal problems. Were Spain, the ninth economic power in the
world, to go belly-up, the results would be catastrophic, certainly for the
Eurozone, possibly for the global economy
Saving Greece, therefore, has
become a combination of damage limitation and self preservation for the rest of
the Eurozone. A three year rescue plan was agreed in early May under which
Greece will be loaned up to $150 billion by other Eurozone countries and the
IMF. Inter alia, Ireland, currently borrowing $500 million per week just to keep
going, will borrow $1.7 billion more to lend to Greece, as her share! It remains
to be seen whether this plan will work, how the markets will react in the coming
months and in particular whether the Greek public will accept the severe
measures imposed as Greece’s part of the bargain.
Politicians and Eurocrats
are currently scrabbling to find more lasting solutions within the existing
rules. However, it is difficult to see the Euro survive unless the current
arrangements are overhauled. At the very least a new system of control over
national budget deficits will have to be worked out. The stakes are high.
Individual national sovereignties are at stake. A special Intergovernmental
Conference would be necessary, with treaty revisions to follow. Given how
jealously countries such as Ireland have defended their control over national
taxation there must be considerable doubt that this method of reform would
succeed, hence the sticking plaster approach. The issue is further complicated
by the fact that one major EU country and currency remains outside the Euro –
Britain and Sterling. All in all, an appalling vista.

In the short term the
Euro will probably stagger on. Critical is the attitude of Germany. German
public opinion is already seething at bailing out the Greeks ( the arguments are
along the lines of why should hard working thrifty Germans bail out a country
where people can retire on pension in their mid-50s) but the German government
is seized by the argument that it’s better to hang together than separately.
They may also calculate that a weak Euro will give a much needed boost to
Eurozone (and German, and indeed Irish) exports, aiding overall economic
recovery. They probably also shrink from the formidable task of reforming the
Euro.
What else could happen? Orthodoxy asserts that no country can be
expelled from the Euro, that no country could leave the Euro and that a two-tier
Euro (the Northern states and the PIGS, with Ireland and Italy disputing the
“I”) is unworkable. In short, there is a fixation with the status quo, if only
because of the appalling vista scenario and an unwillingness to think the
unthinkable. If the Euro goes down in flames there will be massive direct and
collateral damage. The coming months could be interesting times. Some at least
will start checking their Euro notes for the serial letter X – the code for
Germany.

LIES, DAMN
LIES….
…AND STATISTICS.
.

Here are a few to reflect on:

YEAR                      GDP                       GDP per HEAD                   NATIONAL DEBT                    DEBT AS % TAGE

1987               €25,724 billion                 €7213                              €30,085 billion                            115%

2000                 €104,553 billion           €23,503                               €39,490 billion                                 38%

2007                €189,751billion         €45,000                           €38,000 billion                                        25%

2009                 €171,000(est)           €42,000                            €75,000 billion                             64% est.

The Economy returned to centre
stage with a bang in the run up to Easter, with the launching of NAMA and the
revelations of the cost of bailing out the Irish banks. The fallout continues as
I write, with public outrage and shock at the amounts involved and media
commentators and politicians shouting about fiscal and financial Armageddon and
a debt burden that will continue for several generations.

The facts seem
stark. The building and developing boom collapsed in 2008, throwing the banks
which had financed it into financial crisis. These included the two major
systemically important Irish banks, Allied Irish and the Bank of Ireland, which
cater mainly for the retail market, but also Anglo Irish Bank, a non retail bank
which had specialised in loaning to developers, and a savings and loan type
institution, Irish Nationwide Building Society. With the spectre of a major bank
default looming (just weeks after Lehman Brothers) the Government, at the end of
September 2008, issued a blanket guarantee for bank
loans, deposits and bonds. The last 18 months have seen the Government grappling
to come to terms with the banking crisis as its extent has slowly become clear.
This has included taking over Anglo Irish Bank, which has effectively ceased to
function.  During this period bank credit has virtually dried up, with serious
knock on effects for the economy.

The main instrument for cutting what
has become in effect a financial Gordian knot has been the setting up of NAMA –
the National Asset Management Agency – to relieve the banks of their major
development loans (bad, doubtful or otherwise). NAMA has begun “buying” the
loans by issuing, in effect, IOUs which the banks can redeem from the European
Central Bank, and thus start lending again. NAMA’s notes are issued at a
discount on the banks’ valuations of the loans (euphemistically referred to as a
“haircut”) and, in theory, when the property market recovers (in say, 8-10
years), the properties can be sold by NAMA to recoup some or all of the state’s
investment (a similar smaller-scale scheme in Sweden in the 90s actually netted
a profit for the state).

While the cost will be spread over a number of
years and there is the prospect of getting at least some of it back as assets
are sold, what has outraged public opinion has been the scale of the rescue
required, with a figure of roughly $45 billion being bandied about, and the
distribution of the potential losses between the institutions concerned.
Anglo-Irish Bank alone is set to cost roughly $30 billion, with the threat of
another $14 billion to come; the Irish Nationwide a further $4 billion. The two
main banks – used by most of the public – account for $11 billion. As if this
were not enough, the discounts extracted by NAMA will have the effect of
reducing the capital bases of both the Bank of Ireland and Allied Irish Banks,
thus reducing their lending capacity and ensuring that credit will continue to
be in short supply for some time, unless fresh capital is injected by the
taxpayer.

While all this is painful, it could have been borne with
public resignation, like the other economic steps the government has taken.
However, the realisation that Anglo Irish Bank is in effect a zombie bank,
casting doubt on whether there will be any return for the $30 billion, could
prove the last straw.  A debate on whether it would be cheaper to close the bank
forthwith is underway with the government saying it would cost much more and
that the state cannot default on its debts but being tight-lipped about giving
details. Opposition politicians and some commentators are demanding
clarification and more information. The public mood has not been helped by the
spectacle of the principal architects behind the Anglo fiasco walking around
with impunity.

Current projections for government borrowing – which,
remember, continues at $400 million plus per week just to keep the country
running – envisage it peaking at 85-90% of GDP in 2014.  These are admittedly
before factoring in the cost of funding the bank bailouts and are based on
continued adherence to the strict programme of control and fiscal rectitude on
which the government embarked in 2009 and on a sustained global economic
recovery. Granting these two conditions Ireland’s peak borrowing would have been
no worse than many other Euro zone countries, as well as Britain. Adding on the
additional burden of bank debt, whatever that proves to be over the next four
years, will obviously affect these calculations, for even if the debt itself can
be rolled over (the way all Western style governments deal with debt), the
annual cost of servicing the total debt will have to be met through further cuts
or higher taxes.

There is no doubt therefore that the bank bailout will
add considerably to the government’s woes and also to Ireland’s national debt!
However, as can be seen from the rough figures at the top of this article we
have a long way to fall to reach the depths (and debts) of 1987. Back then the
country really was broke, with a generalised recession, double digit inflation,
unemployment at record levels (17% at a very conservative estimate), a
spiralling national debt almost one fifth greater than GDP, together with
historically high interest rates (I unearthed recently a letter of that era from
my bank manager giving me the good news that my mortgage interest rate was being
cut to 16 %!).  In the 20 years that followed, GDP grew by almost 700%, the
workforce doubled and the whole (rising) population benefitted from higher
incomes, better benefits, services and infrastructure, as well as lower taxes.
Even with the “hits” we have taken in the last two years, comparisons with 1987
are risible. It is worth noting that the story that dominated the media in March
before the bank bailout related to queues at the Passport Office and the backlog
of 40,000 applications (1% of the population). Those waiting were overwhelmingly
heading for Spring holidays. Recession? What recession?

This is not to
deny there are huge problems with the Irish economy. There are, and one is
coming steadily down the rails, for the most part ignored, as public attention
focuses on the latest high visibility story. For while states can roll over
debt, individuals cannot. The level of private debt is awesome, much of it in
the form of mortgages (over $200 billion), many in respect of properties in
negative equity, others to finance the autos and second homes that marked the
Tiger years. This was certainly not the case in 1987. With interest rates set to
rise over the next year this slow squeeze may well prove more damaging than
anything a bank rescue can inflict. There is no sign of a NAMA Mark
Two.

—
6ytyt

IRELAND OF THE WELCOMES

“It’s Not Cricket!” proclaimed the headline reporting on a recent Dublin
Court Case. The case caused some amusement here but had a serious dimension to
it. It concerned a Pakistani national who had come to Ireland as a member of a
cricket team in 2008 and stayed on. He was scheduled to marry a Latvian teenager
here when the Gardai stepped in as part of an investigation into the large
number of marriages taking place in Ireland between men from outside the EU and
young women from EU member states in Eastern Europe. The increasing numbers of
such unions ( 544 in 2008, 1100 in 2009) suggest a racket with the prize for the
male a ticket to residence in Ireland (and the EU) and for the female a sizeable
cash sum. The investigation continues.
This saga is but the latest semi-humorous incident involving immigrants. Several years ago a band from
Eastern Europe with 50 members was admitted to take part in a fictitious music
festival; the members promptly disappeared. A moment of black humor occurred at
a Dublin port before 2004 when a heavily pregnant Nigerian woman was refused
admission after an on-the-spot examination revealed that birth was not imminent.
A young Nigerian, deported back, was readmitted to complete his school
graduation; he later became father of an Irish citizen.
Recent months have also featured media stories about third country nationals seeking either to
remain in or to gain entry to Ireland. Several court cases are in train
involving African women and girls seeking to stay in Ireland following rejection
of their applications for political asylum. Some of the cases made have cited
the threat of female circumcision if they are returned whence they came
(Nigeria). Other cases have involved men in relationships/marriages here with
other non-EU nationals who have pleaded that deportation would impact
unfavourably by splitting families up. Media attention in January focussed on a
young Eritrean girl whose DNA test proved that she was an Irish citizen, giving
her, inter alia, the right to enter and live in Ireland.

The message is clear. It is not about whether or not a person meets the criteria as a political
refugee or whether or not someone has discovered true love far away from home.
What unite these stories and others like them are the lengths to which desperate
people from the developing world (or poorer countries on the fringe of Europe)
will go to stay in a first world country. Ireland has now graduated to becoming
a fully paid-up member of the top table, the small number of affluent states
which have become magnets for the less well off. The parallels with 19th century
Irish emigration to the USA are clear, even if the world has moved on since.
Ireland now has its own domestic undocumented issue. We are not unique; the
pattern is replicated across the EU. What is new is that it is the first time
Ireland, for so long a country marked by emigration, has experienced significant
immigration, with all that it entails.
Ireland has experienced two waves of immigration since the mid 90’s, essentially different in nature and scale though
there was some overlapping. The influx which has attracted most attention came
post 2004, following the entry into the EU of the countries of Central Europe.
Ireland, hungry for jobs to fuel the booming economy, welcomed entrants from the
Ten without restriction. The result has been an influx of around 500,000 in five
years (most from Poland, Lithuania, Latvia and Slovakia) and even if some have
drifted on as the economic bubble has burst, enough have stayed to register
significantly in the ethnic make- up of the country. As EU citizens they are, of
course, entitled to enter live and work in Ireland, as Irish citizens can
throughout the EU.

The other, smaller, inflow began earlier, around 1996, and continues. It represents immigration from poorer countries, some
initially from Central and Eastern Europe, but considerable numbers from
countries in Africa, Asia and the Middle East. The story of this immigration is
not easy to piece together. Irish author Roddy Doyle remarked, whimsically, that
he went to bed in one country and woke up in a different one. It took a bit
longer than that. Many presented as asylum seekers. Ireland has no land border
with a poorer neighbour, and indeed, until very recently, no direct air links
with countries outside Western Europe and North America. Despite this, and
despite also a 1996 EU agreement (ironically, the “Dublin Convention”) under
which persons seeking political asylum in an EU country  must do so in the EU
state in which they first arrive, the number of applications for asylum in
Ireland took off sharply from 1996 onwards. 424 in 1995 grew to 1179 in 1996 and
to almost 11,000 by 2000. People arrived on planes, walked into police stations,
got off ferries from Britain or France, or were found smuggled in containers
arriving at Irish ports (some, tragically, discovered dead on arrival). To these
should be added thousands who arrived for short visits or to take up work or to
study and who stayed.

Once on the map as a possible destination,
Ireland’s attractions were fairly obvious. An EU member  state (with promise of
unrestricted travel), relatively prosperous and with an expanding economy as
well as a fairly relaxed and liberal attitude towards new arrivals at a time
when other European countries were tightening entry requirements.  A major extra
attraction was that until 2004 Irish citizenship applied to everyone born in
Ireland (with some inconsequential exceptions) – not the norm in Europe.
Predictably there was a surge in the numbers of births to non-nationals as the
century turned. A logjam of applications for asylum meant long delays in
processing, with consequent family and humanitarian considerations coming into
play as months became years.  Most non-Irish parents of Irish born children were
permitted to remain. By the time of the 2006 census quarter of a million Irish
residents had been born outside Ireland, Britain or the USA, a far cry from
1991, when the figure was 40,341. Though this figure included 120,000 from the
new EU countries, 35,000 gave their nationality as African, 47,000 as Asian. The
100,000 or so non-EU/non-US present in 2006 (and their families) represented
roughly 2% of the population.

Though the annual asylum applications have
dropped to below 4000 in recent years, the welcome has been wearing thin here. A
gradual tightening and harmonisation of entry controls throughout the EU has
been reflected in Irish immigration procedures. New arrivals claiming asylum are
now housed in hostels and not permitted to work. A referendum in 2004 ended
automatic citizenship for those born in Ireland, while citizenship through
marriage has also been restricted. Freedom of access for the new EU nationals
has mopped up job opportunities, particularly as the recession bites. Impending
legislation threatens to speed up the processing of new arrivals and increase
the pace of deportations. Yet given where they come from, is it any wonder that
they still try to come?