July 25, 2004

Charlie the Unready knew he couldn't fight the tides

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In 989 AD, Ethelred the Unready, the Anglo-Saxon King of England, introduced a deeply unpopular tax called Dangeld (`Danish gold’).

These were coins that Ethelred minted from the tax.

Then, he waded into the Wash off the Norfolk coast and proceeded to throw the money into the sea.

This bizarre ritual was an effort to persuade the tides not to come in. If he could somehow bribe the sea, the impending Norse invasion might not happen. He would then live in peace and prosperity, safe from the ferocious Danish longships.

Ultimately, of course, the tides came in, the Vikings raped and pillaged, and the Anglo-Saxons were routed.

I am reminded of Ethelred when I hear eulogies to domestic finance ministers in this age of globalisation.

Today’s finance ministers are as powerless as Ethelred in the face of the global economic forces that shape our world. In this sense, McCreevy was an impressive finance minister, because he understood this better than most.

And what of his legacy? Unfortunately, much of the immediate discussion has fractured along right/left lines suggesting that he had real power and he somehow made the right or the wrong choices. This is hard to understand.

The language of Marx and Reagan is unable to communicate what is happening in the economy, or our society, for that matter – it is redundant. At best, it answers the wrong questions, and at worst, it replaces hard thinking with sloganeering.

The first point to establish is the relative powerlessness of the Minister for Finance in the modern economy. It has been clear for some years now that Ireland’s economy, over which McCreevy purportedly governed, has long since broken free of the state.

The big influence on people’s lives these days comes from outside. Globalisation emasculates domestic politics and politicians to such an extent that McCreevy was simply managing the decline of the state. To his credit, he understood this.

The globalisation point is an incredibly important one, so let’s flesh it out a bit.

One of the most important events in Irish economic history took place on January 1 1993,when exchange and capital controls were lifted.

This was the beginning of the end for domestic politics, for if politicians cannot control the amount of money in the society, what can they do? On that day, Ireland plugged itself into the world economic grid and began to rock. Money flowed into the country at an unprecedented rate.

But why did this cash flow in here quicker than, say, a country like Portugal?

Because we wanted it more. By the time, McCreevy had become the boss in Merrion Street, Ireland’s metamorphosis into a mini-Connecticut was almost complete.

To explain this, we have to understand the central role that the Anglo-American world plays in our prosperity. Despite all our European ties, the EU remains a remote third in terms of who we trade with.

In fact, trade with the EU as a proportion of our total has stalled. Britain and the US remain our key markets.

Of those, the US is growing quickest.

This is a function of language, old trade links, new investment, emigration (and, more recently, immigration), familiarity and, of course, the fact that the Anglo-American world has experienced a phenomenal period of economic vibrancy that can be traced back to the early 1990s.

Globalisation contributed significantly to this process. There is compelling evidence to suggest that globalisation is jaundiced towards the Anglo-American power bloc. As `freed’ money sloshed around the globe (due to the free movement of capital), those countries with a higher propensity to borrow experienced a credit boom.

Ireland, Britain and the US have very peculiar borrowing patterns. They borrow at short-term interest rates to finance long-term assets such as houses.

Therefore, because the free movement of capital affects short-term interest rates more than long-term ones, it has an amplified effect on borrowing. So the Anglo-American economies simply borrowed the surplus saving of the EU and Japan, and spent other people’s savings on houses.

The second fad that directly resulted from the free movement of capital is that the banks now need to lend more money, because they have to compete more aggressively for market share.

This is because globalisation allows large cross- border takeovers of banks. Therefore, Irish banks are now benchmarked against the average performance in the European banking sector.

If the profitability of Irish banks falls below this level, they will become susceptible to takeovers, and management will be threatened with redundancy. So banks must compete to achieve a comparable margin of the most profitable banks elsewhere.

This leads to banks trying to get more business from each customer, resulting in excessive leverage extended against all classes of assets, including property in particular.

The impact of this has been to drive spending in the English-speaking world, and also to link all the English-speaking economies together, via the international financial markets.

The most significant outward manifestation of this wall of other people’s money circulating around the English-speaking world has been an unprecedented property boom in Ireland, Britain, the US, Australia and, to a lesser extent, Canada and South Africa.

If we want to assess McCreevy’s legacy, just think of bricks and mortar. The distorting impact of our ridiculous property boom explains all subsequent policies.

When left unchecked, the outcome of a credit-driven boom is that those with most access to credit get very rich, very quickly. The difference between the haves and have-nots is whether they can borrow or not. Therefore, two issues become crucial. The first is the ability to borrow. The second is bankable collateral.

Against this background, landowners have made out like bandits under McCreevy, with the value and potency of their collateral increasing dramatically.

There has been an enormous transfer of wealth, from workers to landlords and from the young to the old.

This outcome, determined by external and interlinked forces, left McCreevy with only modest powers. Any subsequent policy initiatives were mostly futile efforts to rebalance this outcome, undertaken for the sake of electoral optics.

So-called `big issues’, like tax cuts, benchmarking, the SSIAs and the gap between the measured standard of living and the perceived quality of life/cost of living, should all be seen in this light.

Take benchmarking. This would not have happened had house prices not risen. Public servants felt left behind because the property boom devalued the money in their pockets compared to the wealth of landowners.

In the past seven years, if you depended exclusively on the national wage agreement for your income, you would have become relatively poorer.

If your wages are rising by 4 per cent per year, but house prices are rising by 10 per cent, you are seeing your wealth opportunities shrinking on a monthly basis.

This realisation has led to misguided policies such as benchmarking, which is just an effort by the public sector unions to redress the simple fact that public sector workers are falling down the social pecking order.

Other workers are in exactly the same boat, but are less well organised. SSIAs can be viewed similarly, as can many other moves associated with McCreevy.

But his true epitaph is not right or left, good or bad, but that, unlike Ethelred, he knew the tides were not for turning.


  1. Bertie

    Maybe .. just maybe … if they give him the job of
    harmonising corporation tax … then we will all be able
    to sleep easy at night …

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