Irish Economy: The 2001 economic consensus that paved the road to economic ruin
By Michael Hennigan, Founder and Editor of Finfacts
May 19, 2009 - 5:45 AM

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Charlie McCreevy speaking as EU Internal Markets Commissioner

Irish Economy: In recent weeks, former Finance Minister Charlie McCreevy has called for a political consensus to tackle the current economic crisis. In 2001, he was the beneficiary of an economic consensus that paved the road to economic ruin.

A survey by Finance Magazine before the 2001 Budget, of the leading economists working in Ireland's financial institutions, showed a substantial majority providing broad encouragement for the Government's economic policy approach, with approval given to continued cuts in income taxes.

Economists such as Jim O’Leary, Dan McLaughlin, Eoin Fahy, and Alan McQuaid all called for cuts in both the top rate of tax and the standard rate, with ABN AMRO’s Dan McLaughlin pointing out that the old target rates for income tax of 40% and 20% should be replaced with new medium term targets of 30% and 10% respectively.

The dissenting voice amongst the nine economists was Jim Power, chief economist of the Bank of Ireland, who rejected the supply side consensus. "Cutting taxes further will not increase the supply of labour," he said."It is fine to make headlines about the need to attract foreign workers into the country, but the reality is that we are not in a position to house these workers."

Goodbody’s Colin Hunt, who later joined McCreevy's successor Brian Cowen as a special adviser said:"Minister, don’t let the doomsayers get you down. Economic policy is on the correct course and should not be altered because of the recent deterioration in inflation readings. Rather than tightening fiscal policy, you should continue with the supply-side approach of recent years with an emphasis on using both taxation changes to enhance the efficiency of the labour market."

Dan McLaughlin who joined Bank of Ireland in early 2001 and provided the intellectual underpinning to the property interests with his unremitting rosy scenarios, had remarked to the US magazine BusinessWeek in 2000, that "Ireland's open economy already makes it exceptionally sensitive to outside economic events. If the US hit a recession, American companies might well pull back on Irish investment, which would hit the property and labor markets hard. Also, Ireland imports 75% of what it consumes, and most of those products come from the U.S. and Britain."

Even economist Austin Hughes, who was in the supporting cast of boom cheerleaders, had also urged caution in 2000: ''We have to make sure the economy doesn't fall victim to its own success.''

In the 2001 Budget, Charlie McCreevy further reduced income tax rates to 42% and 20% and the European Commission issued a reprimand in February of that year, saying the Budget was too expansionary.  Speaking in Frankfurt after a meeting of the ECB's governing council, the then president Wim Duisenberg, said that cuts in taxes and increase in spending were out of line with Dublin's previous commitments.

While the US tech bust had resulted in a slowing of the economy, later in 2001, the reaction in Ireland to the Commission's comments on Irish fiscal policy, was instructive.

McCreevy insisted that his policies were the best for Ireland and that he had no intention of revising the tax cuts and spending plans outlined in his fourth budget. The Minister accused the Commission of behaving in a disproportionate manner towards Ireland. Taoiseach Bertie Ahern, said that he totally agreed.

Tánaiste Mary Harney, the PD leader who was the biggest cheerleader for tax cuts in the Cabinet, claimed that other countries would regard the Commission's censure as "bizarre.”

The Director-General of the employers' organisation IBEC, Turlough O'Sullivan, described the censure as "alarmist", while the trade unions' congress, ICTU, said that it appeared to be based on a misunderstanding of the level of development in Ireland.

ICTU General Secretary, Peter Cassells, said that the Commission's view appeared based on a misunderstanding of the level of development of the Irish economy, with investment on housing, transport and childcare still essential.

Crucially, an MRBI opinion poll in the Irish Times showed that more than seven out of ten voters believed the 2001 Budget was good for the country.

The poll, the first since the Budget, showed a significant increase in the popularity of the Government and a big rise in satisfaction with the coalition leaders. Some 58% were satisfied with the Government's performance, up 15 points since September 2000.

The benchmarking body was working hard to produce the Ahern/McCreevy promised gift to themselves and the public service trade unions, of a special pay award and one year from a general election, the political leadership had an economic consensus and public support to keep the throttle at full blast.

There was of course the Central Bank but Ahern and McCreevy hardly feared a finger-wagging from a governor who had spent decades tugging the forelock, at the Department of Finance.

''There's no monetary policy prescription for the problems of the Irish economy,'' Maurice O'Connell, governor of the Central Bank of Ireland, told BusinessWeek in 2000.

Pub stool economists who blame the euro and low interest rates for Irish economic woes, fall for this blatant nonsense.

It's not an accident that Spanish banks are not in intensive care like their Irish counterparts, despite similar property booms.

The Spanish central bank had better regulated its banks and had for example discouraged off-balance sheet vehicles, while demanding that banks hold higher levels of reserves than international accounting laws required.

The Spanish banks also had the memory of a banking crisis in the 1980's.

Peter Thal Larsen of the Financial Times reported earlier this month, that every Wednesday morning at 9.30 am, five BBVA board members gather at the Spanish bank’s head office in Madrid.

For the following three hours, they review new loans and discuss broader risks that might affect the bank’s operations. When necessary, they reconvene the next day. In 2007, they met a total of 74 times.

These meetings are similar to those that are held regularly in banks around the world. But in the case of the make-up of BBVA’s risk committee, there is one important difference: just one of its members, José Maldonado Ramos, is a full-time bank executive. The other four are non-executive directors.

Other Spanish banks take a similar approach. Santander, BBVA’s main domestic rival, has a five-member risk committee, including three non-executive directors, which met 102 times last year. Managers believe that this intense board-level focus on risk is one reason why Spain’s large banks have so far weathered the credit crunch in better shape than many of their European rivals.

"I think the Government, which I was Minister for Finance in from 1997 to 2004, was particularly successful in terms of economic activity," Charlie McCreevy recently said .

A lame self-serving verdict, as if the failure to set the economy on a sustainable path, is irrelevant.

However, in the time warp of 2004, McCreevy had many cheerleaders.

Damien Kiberd wrote in the Sunday Times in April 2004:"Worryingly, there have been some suggestions that Charlie McCreevy, the finance minister, might relinquish his current post as part of a summer cabinet reshuffle but it would be better for all of us if he stayed where he is. McCreevy is not just a “safe pair of hands”. He is also tough enough to prevent EU interference with Ireland’s benign corporate and capital tax regimes and simultaneously to resist the growing clamour for government meddling in the finely balanced property sector....Property enthusiasts will claim that we need not fear a meltdown because we have entered a different era, an era of long-term cheap credit. Perhaps. But an adjustment to somewhat higher money rates next year is going to place immense strain on at least part of the house-owning public in this country.

For this reason, we need strong leadership at the Department of Finance. The sort of leadership that will ignore calls from Oireachtas committees, NESC and academic economists for substantial interference in the whole property and construction sector."

McCreevy was voted Ireland's Best Ever Minister for Finance, according to a poll conducted amongst the readers of Finance Magazine. Other former ministers who polled well included Ray MacSharry in second place and Civil War era minister Michael Collins in tenth.

In a separate sub-poll carried out amongst the leading Irish financial services economists, McCreevy was also voted as the best finance minister, but the margin between him and McSharry was much closer. One economist who gave McCreevy 9 points out of 10, said that he only missed the top mark, "because of lack of control of public spending in pre-election period. Otherwise brilliant." Another economist, who also gave McCreevy 9 out of a maximum 10, said that McCreevy wouldn’t have been able to achieve his success without the tough stance taken by Ray MacSharry on public spending in the mid -1980s, adding that, "in particular his ability to convince die-hard Fianna Fail members that the ‘spend, spend, spend’ philosophy pursued by the party for years was likely to do more damage than good to the economy in the long-run."

So much for the legacy of sham benchmarking and back-of-the-envelope decentralisation, in the economists' verdict.

"Best Ever..." as if McCreevy created the conditions for the emergence of the Celtic Tiger - - just like CEOs who benefit from an economic boom and claim full credit.

As for the idiot cheerleaders, it's always useful to keep in mind the distinction between having education and being educated.

How easy it is to be fooled!!

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