July 26, 2006
Quite how the world’s fastest growing economy can slow down rapidly without any collateral damage is beyond me.
Yet that appears to be the Panglossian conclusion of yesterday’s ESRI report. The report – from the generally accurate institute – predicts the end of the thirteen year economic cycle which has transformed our society. If it is right, the ramifications of the ESRI’s musings are profound and will reverberate throughout our political system and beyond.
In the first place, it is extremely rare for economies to change gear so quickly. When you go from a hi-octane fifth gear down to first, the engine, suspension and carburettor tend to hurt. Everything rattles. We have economic examples from Europe, the US and Asia and the one unifying thread in all these instances was that the political status quo did not survive the impact of the slowdown. In most instances, to quote Yeats, “the centre cannot hold”.
In our case, we will be dealing with a debt hangover of monumental proportions in the face of rising interest rates. We will also be coming to terms with a profoundly different country, where ten per cent of the population overall and a much higher percentage of the work force, will be foreign. We will also be challenged by higher energy prices and we will be net, and probably significant, contributors to the EU.
What will we have to show for thirteen years of plenty? Amazingly, we will still not have a motorway between our two main cities! Nor any link road down the west coast of the country. It will still be impossible to go from Cork to Galway – our second and third cities – by train! I could go on, but you get the point. It will be difficult not to look back and conclude that many opportunities were missed.
When the economy slows, the first thing to give is the government’s finances. Given the sloppy management of the receipts of the boom, few would argue against the suggestion that our budget deficit could explode as a weak government balks at cutting spending. This means higher taxes in the next few years. Obvious and significant tax hikes are something that we have not experienced for close to a generation.
Unemployment will also rise. This again is something we have not seen since the late 1980s. If other countries’ experience and economic history are repeated here, this will lead to a clash between Irish workers and the new immigrants. The new immigrants are likely to accept lower wages to preserve their jobs which would lead to Irish ferries style displacement. This will happen all over the country in shops, bars, truck cabs, building sites, hotels and anywhere that the jobs are manual. The history of immigration is the history of displacement and the next few years could see this happening on a large scale in Ireland.
The impact will be different for different generations. The older generation – the Jagger Generation- who built up huge equity in their houses during the boom years, might feasibly have a sufficient cushion to ride the downturn. In contrast, the under thirty fives – the Pope’s Children – will be in trouble because not only will the inflated prices of their recently bought houses be falling but the rise in unemployment will affect them most. In addition, they are the ones who are carrying the huge debts following years of conspicuous consumption trying to keep up with the Smurfits.
What about the Bebo Generation – our under twenties and the teenagers leaving school now? There is little doubt that the boom has given these younger people inflated expectations and beyond that which a faltering economy can deliver. When inflated expectations get punctured by a fragile economy, entire generations suffer. If you doubt this, examine the strange metamorphosis in Japanese youth who, over the past decade, lived through their slump following the bursting of their property bubble.
Typically, when a society goes through such convulsions, people look for someone to blame. The two most likely targets will be outsiders. First, immigrants are likely to be the scapegoats, particularly if we continue with an immigration policy that many people see as an open door.
However, an equally significant target is likely to be the remote institution of the EU. Our European commitment has always been skin-deep, based more on economic opportunism rather than some common tragic history which has had a searing effect on the collective memory. We are much closer to the Anglo-American world in terms of language, culture and influences. Our European infatuation was maintained by the free lunch of structural funds and the early years of the CAP. Over time and coincident with the money running out, we have proved in referendum after referendum to be lukewarm Europeans.
Now imagine the following scenario. Ireland’s house prices are falling in tandem with the forecast slowing economy. We need lower interest rates. But the European Central Bank is putting interest rates up. Every half point rate hike tightens the noose further on Ireland’s indebted middle class. Equally, the advent of Romania and Bulgaria into the Union leads to a second large-scale influx of immigrants chasing the same Irish Dream that prompted the Poles, Lithuanians and Latvians to move here in the past five years. In addition, as these poor countries join, rich Ireland has to give more cash to the EU budget to pay for Romanian farmers’ produce that nobody wants.
It is not difficult to see how an anti-European politician could emerge who might just fan these embers putting himself forward as a saviour of the “real Irish” in the face of threats from Brussels. He could offer short-term fixes like pulling out of the EU or Euro, stop immigration and get tough on illegal aliens. This could be plausible. And when distressed people want a politician to be seen to “do something”, nationalism, scapegoats and chauvinism are never far away. The EU would be such an easy target because it is remote, its champions appear to come from a rarified, educated elite that can quote Balzac but can’t tell you who the Duffer plays for. They talk the language of post-1945 solidarity which means nothing to an Irish generation who, apart from owning a worthless apartment in Bulgaria, have little to do with Europe.
The evidence from recent votes on Europe suggests that even at the height of the boom, our love affair with Europe was beginning to go sour. Think about how easy it would be for a nationalist politician to point the finger at Brussels and Frankfurt in the event of the type of slowdown the ESRI is forecasting or worse.
If the past thirteen years of the boom have taught us anything, it is that anything can happen. And we should always be prepared to think the unthinkable; not to do so leaves us vulnerable to nasty surprises, and no one likes them, do they?