September 15, 2010
Government's dithering is strangling recovery hopesPosted in Irish Economy · 183 comments ·
Strolling through Hyde Park in the sun this morning, it is difficult not to get the sense that Ireland is the land that time forgot. The rest of the globe is moving on gradually from the great crash of 2007/08.
Our major trading partner is growing again, its industrial output is expanding and there is a feeling that the worst has passed. The UK is doing just fine, the unemployment rate is 7.8pc, and the economy added an extra 184,000 jobs between March and June of 2010 (the highest rate since 1989).
Even house prices have staged a bit of a recovery with the Halifax house price index showing growth of 4.6pc to the year ending in August. Business confidence in the UK, though still under pressure, is rising.
We, on the other hand, are mired by the worst economic decision-making in any developed country since the fall of the Berlin Wall.
In fact, it is not unreasonable to go further and claim that if you could wreck an economy it would be difficult to go about it in a more effective fashion than this Government and the previous Ahern government have done.
Ireland 2000-2010 will become a textbook case of how not to do it. In economics courses of the future, the Irish disaster will symbolise pathetic and corrupt economic management.
Those who run our country recklessly fuelled the boom with disastrous consequences and now, in the bust, they are making things considerably worse. The problem for us is that the very people who didn’t see the bust coming and cheer-led the country over a cliff are the same people in power now.
Those who warned of the dangerous bubble had to listen to these charlatans sneering in the boom and now that they have destroyed the place, I turn on the radio and they are still there, droning on incomprehensively about things they just can’t understand, because they just don’t have the knowledge.
Thank God the rest of the world is now realising this. I am not just talking about prominent politicians but about the “insiders” — the top civil servants, the top bankers and their professional supporters who tried to rubbish anyone who said their boom was a charade and continue to try to undermine anyone who now is “telling it like it is” to the public.
Monday’s ‘Financial Times’ editorial strongly criticised our Government for its strategy on Anglo and went on to recommend — as this column has been doing for over a year now — that making the bondholders pay is the way out of this mess. The respected economic commentator Wolfgang Munchau declared (also in the ‘Financial Times’) that Ireland is bust and faces a potential Greek-style crisis.
While these comments are not new or in any way unique, they do confirm the growing realisation everywhere that this Government’s banking policy is inept. The reason the ‘Financial Times’ is important is because when it says things or when a Nobel Laureate says things, it gives the Irish economic establishment the “permission” to think the unthinkable. It allows them to peek out of their intellectual straightjacket and begin to do some serious analysis.
We in Ireland seem unable to entertain what some of our own economists have been saying for years, and only when an outside expert suggests something do we feel that we are “allowed” to think for ourselves.
It was the same in the boom. When a local commentator warned that the whole boom was a scam, he was vilified. Then eventually when a foreigner makes the point belatedly, he is listened to intently. There are many reasons for this deeply insecure intellectual position, but let us leave them for another day.
At this stage, we should just note that by the time the ‘Financial Times’ makes its judgment it is already too late. It was the same in the boom: by the time it and other “reputable” publications were writing about the Irish miracle, we were already in bubble territory!
Hopefully the bust will change our obsequious attitude to our neighbours and what they might think of us. We have got to learn to trust ourselves and make economic judgments for ourselves, rather than wait for someone else to twig what is going on here.
Apart from the gradual realisation that we will default, the most interesting, and in terms of contrast, the most stark piece of news to come out of the City of London this week, is that banks have never been borrowing more in the market in order to lend out. This implies that a substantial part of the banking world is back in something like rude health. It also means that for all intents and purposes the credit crunch is over almost everywhere except here.
But not the Irish banks, oh no, the banks here are bankrupt, having to raise capital — now multiples of their total market value — just to stay afloat until Christmas. The Government’s dithering is strangling us.
Now let’s move from the banks and London to the continent where the EU Commission has just upgraded its growth forecast again for Europe. This is good news for the EU but bad news for Ireland.
The reason is simple. We are in a currency union that we have no economic right to be in. By this I mean that we trade less with the euro countries than we do with the UK and the US. This is because growth means a rise in interest rates and the negative impact of higher interest rates far outweighs the positive impact of higher trade opportunities.
Furthermore, you could make the broader point which is that as we have become politically more European, we have become economically more Anglo-Saxon. So we are left with an Anglo-Saxon reality of huge personal debts but the European aspiration of the euro.
The main reason the UK might be getting out of the recession faster is that it dropped its currency to offset the impact of the domestic recession and the budget cuts the government is about to make. We on the other hand are trapped in the euro — a strong currency in a weak country. In the history of economics there are few certainties but one is that a strong currency makes a weak economy weaker.
The most damning statistic of our entire euro venture is that from 1990-2000 when we had our own currency and we devalued in 1993 to get competitive, Irish exports grew by 360pc. Between 2000 and 2009 with our overvalued new euro currency, Irish exports grew by 0.3pc. That says it all really and yes, that figure is 0.3pc, not 30pc!
So when European interest rates rise to reflect the new growth in Europe, Ireland will still be in the doldrums and any rise in rates will prompt a series of mortgage defaults which will clobber the banks.
Turning the corner? Snap out of it.