November 4, 2007
In a single week, the government has been faced with crises in many areas of Irish life.
The news last week from the Central Bank, Waterford Crystal and the World Economic Forum captured an economy in transition.
In just seven days, we got a snapshot of the housing market, the state of Irish manufacturing, the immigrant surge, the pre-eminence of the multinationals and the appalling job the state is doing with its infrastructure.
Let’s deal with each set of data in turn. The Central Bank revealed that mortgage lending was 30 per cent down last month vis-a’ -vis the same month last year. This is unambiguously positive.
It is not patriotic to talk up the housing market; the best thing that has happened to the economy this year is that the financial nihilism of rising house prices has come to an end at a pace that many thought impossible. This is not a crisis, but a boon.
The pinnacle of our economic development cannot be to condemn a generation of workers to paying 15 times their annual salary for a shoebox in the commuter belt. This is a sign of economic failure, not economic success, and the sooner it unravels the better.
Now that the mystique of rising prices has been punctured, prices will go the way of mortgage borrowing – downwards. People, seeing that house prices are falling, will just stand back and allow the market to do its thing. This is what the economy needs.
In the recent past, there has been such a cacophony regarding the housing market. Those who believe that it was all a bubble have been, bizarrely, branded as unpatriotic.
What nonsense! The main problem with the debate is that the discussion on the Irish economy has been hijacked by the housing lobby and its agents. So the economic debate is jaundiced.
The central myth propagated by the housing lobby is that the housing market and the economy are one and the same thing. They are not, and for the economy to breathe, the stranglehold of the housing mania needs to be loosened.
To see why this is the case, just look at the second major piece of news this week. In Waterford, one of Ireland’s best known brands -Waterford Crystal – is laying off close to half its workforce. The reason is that Ireland is far too expensive, and one of the reasons for this is the cost of housing, which workers need to put into their considerations when they are looking for higher wages.
This means that Ireland is pricing itself out of the market when compared to other parts of the world that have not allowed the housing market to get out of control. It is now likely that Waterford will follow many other European manufacturing companies. It will split the world into three: the production will be done in Asia, the branding and heritage aspects of the product will be bolstered in Europe, and the selling will be done in America.
This geographical split highlights another issue which has remained un-debated in Ireland in any real sense, and this is the wisdom of EMU for us. We still do far more trade with the US and Britain than we do with Europe, so, from a trade flow perspective, EMU is totally inappropriate for Ireland. Yet our political elite is so wedded to Europe that even raising this topic is seen as dangerous.
However, Sweden and Britain are members of the European Union without the added complication of a currency union. In fact, Sweden and Britain are the fourth and ninth most competitive countries in the world, according to the World Economic Forum. They are 18 and 13 places above us.
We also share a similar immigration policy with Sweden and Britain. Only three countries – Ireland, Sweden and Britain – allowed the free movement of central European workers after accession. In Ireland, this new immigration policy has resulted in an estimate this week by the Chambers of Commerce that 17 per cent of our workforce are immigrants.
This is a truly enormous figure of close to 400,000 people. Many readers will know this already, and anecdotal evidence might suggest a higher figure. The immigrants have two overall macroeconomic impacts on the economy.
While immigration makes the overall growth rate go up because you are adding more potential to the economy with every new immigrant, this GDP figure really tells you nothing. Yes, every time a Romanian sells a copy of the Big Issue, GDP goes up, but what does that tell you about the overall impact of immigration?
From a winner-and-loser perspective, immigrants also push wages lower than they would otherwise be in the absence of immigration, and they push up rents and house prices higher than they would be. This has the impact of reducing the wages of people in direct competition with immigrants, while at the same time pushing up their housing costs.
The positivity or otherwise of immigration will depend on where you stand. If you are a worker competing in the jobs or the housing market, you will have a very different view from that of a landlord, builder or company owner.
The one area where Ireland is doing very well is in the proportion of foreign owned companies here. For this, we have to thank previous public planners, who saw that we could offer an attractive package of tax breaks, graduates, links to Europe and a light regulatory touch which allowed them to flourish.
In the event, the majority of American multinational production is re-exported back to the US, but the European angle is positive for both cherry-picking smart EU graduates to bolster Irish capacity and for tax reasons.
This is an area in which Ireland needs to focus all its attention simply to stand still, because when you are number one, the only place to go is downwards.
The World Economic Forum highlighted appalling infrastructure as our biggest problem. At least we know what to do. Our ports, railways and roads are Third World, so let’s just get on with it and build them up.
If the problem is the planning system, then fast-track it. If it is competence, then give the contract to the best people in the world and do it. This is what government is supposed to do – so stop acting the maggot and get on with the job.
We are now at a dangerous period for the economy: the fallout from the faltering housing market will be magnified in personal consumption, as people realise that they have to tighten their belts. For Ireland to make a smooth transition, the state has to step up to the plate and accelerate the public works schemes. All we need is leadership.
The worst thing the state could do now is lose its nerve and retrench. We need infrastructure, so just build it! The taxpayer will get better value in a downturn rather than a boom, so now is the ideal time.
Also, if there are too many immigrants here and it is concluded that a quota system would work better, then decide what it is and implement it. The French have the expression ‘‘to govern is to choose’’. The time has come to make that choice.