Irish Economy
Globalization and the threats to the accepted way of life in Ireland, Europe and US
By Michael Hennigan, Finfacts founder and editor
Dec 24, 2011 - 3:52 PM

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The Duke of Edinburgh, Her Majesty Queen Elizabeth II, Taoiseach Enda Kenny and his wife Fionnuala, converse in the Taoiseach's office, under the gaze of Michael Collins, the Irish revolutionary leader, May 18, 2011.

The IMF chief economist, a Frenchman, told us this week that optimism for the forthcoming year was greater this time last year than now. In Ireland we have had another year of muddling-through: a leader was sent packing back to Clara with a gilded safety-net for life and while our prospects depend on people in places like Santa Clara, we appear to have found in Europe, a foreign Nemesis for our woes. However, delusion eventually collides with reality and while many may prefer dreams to facing home truths, there are long-term consequences from the crash for both Ireland, Europe and the US as globalization threatens an accepted way of life.

The rise of the middle class thwarted what was once seen as the inevitability of socialism but today, the United States, Europe, and Japan are simultaneously experiencing both economic and political crises; globalization in recent decades has more than trebled the population of the international trading market. Wages when adjusted for inflation have been stagnant in the US since the 1980s and the median wage (mid-way point where half are below and half above) of the American male has declined by almost $13,000 after accounting for inflation in the four decades since 1969. This is a reduction of 28%! The rise of two earner households and using increasing home values to fund loans before the crash, put off the day of reckoning.

At a time when the global economic system is undergoing tectonic change, electorates in advanced countries are expecting their indebted governments to maintain welfare states that have simply become unaffordable. The governments have run out of road and despite the common state of denial, the free lunch had never been invented.

France's last annual budget surplus was in 1974 while the national debt to GDP (gross domestic product) ratio rose from 22% in 1975 to 82% in 2010 and close to 90% in 2011.

We cite again this example:  A French male can enter the workforce at 25, work to 59 and live to 80: dependency on the state for 46 years and working for 34 years.

It takes a severe crisis to prompt people to ask, how can this be afforded?

In Ireland, it's official policy to keep employer social security costs low and the majority of private sector workers do not have an occupational pension. However, politicians and the public service have one of the world's best schemes, linked to earnings and it will take 40 years to reform according to the latest plans - - so it is claimed.

Nevertheless, despite a system where a private sector worker can retire on 32% of average Irish earnings of €38,000 compared with an Austrian counterpart who would typically get more than 70%, the Irish welfare budget is out of control.

Last month, Joan Burton, minister for social protection told a meeting of her fellow chartered accountants in Cork:

When I came in to the Department of Social Protection, the accountant in me was astonished at the scale of the growth in the social protection budget over the last ten years. In 2001 spending on social protection stood at €7.84bn; by last year this had grown to almost €21bn - - an increase of 266%. Inflation increased by around 30% during the same period.

So while some of the expenditure increase is clearly due to the dramatic rise in unemployment since 2007, the most significant factor is a surge in both rates and the number and size of schemes over a very long period of Fianna Fáil government. Frankly, the increases in social protection payments were often cynically timed to help Fianna Fáil win elections. They were funded by tax revenues from the unsustainable property bubble.

As a result, we have inherited a level of social expenditure that is completely out of sync with the funding base of the State. It is clear that we need to put it on a more sustainable footing.

I don't need to remind such a well-informed audience that the gap between what we as a government spend and what we raise in taxes is huge and that the hole is currently being plugged with money borrowed from our partners in the Troika.

Simply stated, citizens will contribute €42bn in taxes and PRSI this year, while expenditure on public services and salaries will be €60bn. The Department of Social Protection alone will spend €21bn. The government has signalled in its medium term fiscal strategy that we have to achieve savings of €3.8bn, of which expenditure reductions must amount to €2.2bn.

Ireland's growing population partially due to the rise in the number of immigrants during the boom may benefit the economy in the long-run but will in the short-term, put pressure on education, health and welfare budgets.

There are almost 80,000 non-nationals on the Live Register -- about 18% of the total.

The Government plans to publish a plan on jobs next month.

Enterprise Ireland this week said that despite a rise in exports, there was no rise in employment among indigenous firms in the tradeable goods and services sectors. In the foreign-owned sector, IDA Ireland in advance of the issue of its end of year statement on Jan 5, was facilitated by a gullible Irish Times journalist who reported: "Despite the downturn, IDA Ireland had another strong year attracting foreign investment and boosting job creation."

Politicians and state agencies like to focus on gross jobs and in recent years indirect jobs are added to jazz up the headline figures.

In 2010, IDA Ireland issued a plan for 105,000 new jobs in the period 2010-2014.

On closer examination, the 104,000 fell to 62,000 direct jobs. There was no estimate for job losses among foreign firms and IDA Ireland this year told Finfacts that it estimated job losses at two-thirds of its 2011 target of 11,000.

So the 105,000 target was really only 21,000 --  a little over 4,000 per annum job gains.

Firms such as Google in Dublin, which service East European markets, likely have a large proportion of its staff who are from the region.

So in 2011 when official unemployment rose to 315,000 and the Live Register (including part-timers and casuals) is at 448,0000 full-time employment in the Irish tradebale goods and services sector remains at 1998 levels despite the workforce (including the unemployed) being 25% bigger.

The Government like its predecessor is delusionally banking on university research to become a engine of jobs growth.

The annual public science budget is €2.5bn and about €1bn goes to the higher education sector. Thirty university spinout companies provided about 150 jobs last year.

Anyone with potential is bought by an overseas firm before there is any payback for the taxpayers. This year a UCD professor of engineering became a multi-millionaire on a spinout sale to a US firm. Risk for the typical entrepreneur is a lot different. 

Believe it or not, public agencies, Science Foundation Ireland and Enterprise Ireland have publicly bragged about such sales - - even though apart from the employment of thousands of researchers on the public payroll, the spending of billions of euros has resulted in a derisory number of commercial jobs.

Ministers see that blue-sky innovation by a bankrupt small country is the route to the Promised Land and Oireachtas members are out of their depth to ask inconvenient questions.

€1bn of the science budget should be used elsewhere to promote the formation of startups across all sectors as they are crucial for sustainable  job creation.

Seamus Coffey, a UCC economist, recently said, that Ireland is heading for a general government debt of around €200bn by 2014. One-quarter of this is as a result of bailing out the banks. One-half is due to the need to borrowing beginning in 2008 to fund government expenditure on social welfare, public sector pay and other goods and services, while we brought the final quarter of this debt with us into the crisis. This debt was largely the overhang from the last fiscal crisis in the 1980s. The debt was never repaid but its significance was reduced by growth and inflation.

This is a huge debt level but one that is on the border of sustainability. It is likely that a debt of €200bn can be carried from 2014 but it will be difficult. Just like the debt from the 1980s we have little ambition to actually pay this off. The aim is to service the debt by paying the interest and hope that, in time, growth and inflation will reduce the burden of doing so.

Coffey said that at the start of 2011 it seemed that even this was a goal that was unattainable. At that time there were some forecasts that the debt would reach €250bn by 2014 and even the IMF were forecasting a debt of around €225bn by 2014. The interest costs on this level of debt could not be managed by the State. The debt would not be brought under control as we would have to borrow continually just to meet the interest payments so the level of debt would rise inexorably.

It is now clear that Ireland will not have to service a debt of €250bn by 2014. There are a number of reasons for this. The worst-case scenario of the cost of the bank bailout was €85n and this was built into the earlier forecasts. This has since turned out to be €62bn with €45bn of that borrowed.

The economist says the interest rate on Ireland’s EU loans was significantly reduced last July resulting in annual savings of around €1bn. It was also revealed that the Department of Finance had made a double-counting faux pas and that €3.7bn of the debt never even existed in the first place.

€200bn is still a colossal amount of debt and the ability to carry it will depend on the required growth and inflation rates materialises. There is also the possibility that we may be able to offload our stakes in the functioning nationalised banks and use the receipts to reduce the debt burden.

The International Monetary Fund predicts that Ireland's gross debt as a ratio of GDP will be 118% in 2014 -- the net debt, after offsetting cash balances and the balance in the public pensions fund will be 106%.

Just over two decades after Finland and Sweden faced serious economic challenges, the two countries will be flush with cash in 2014.

Finland will have a surplus (net debt) of 53% of GDP; Sweden will have a surplus of 29% and oil-rich Norway will have a surplus of 176%.   

Denmark's net debt will be 10% of GDP.

Charlie McCreevy, bubbetime minister for finance is claimed to have said: “When I have it, I spend it and when I don’t, I don’t” or something similar. In 2006, the craziest year of the national period of madness, Tánaiste Michael McDowell said the Exchequer was collecting too much money.

Prudence in use of public funds never won Irish votes; the post-crash narrative is the euro allowed us to lose the run of ourselves and German banks should have had the sense to see that we were after all just running a massive housing Ponzi scheme.

Finland was also a member of the single currency area.

Reform and Europe

Ireland remains a bastion of conservatism and the constituency for reform is not significant.

Public commentators and academic economists are preoccupied about Europe rather than needed change at home.

After the international rescue in 2010, John Banville, the writer, wrote an op-ed in The New York Times titled: The Debtor of the Western World:

At first, when the poor beast began to sicken, we Tiger cubs set up a great roaring and ranting. Who is to blame for our sudden travails? we demanded - - somebody must be to blame. The bankers? Them, certainly. The politicians? Well, the politicians are always to blame, so nothing new there. The markets, those shadowy entities that seem to operate by whim? Ourselves, perhaps? - - now, there was a sobering possibility.

There used to be a nice acronym that neatly expressed how the Irish people conceive of themselves: MOPE, that is, Most Oppressed People Ever. For a decade or so, when the Tiger was at its fiercest, we threw off the mantle of oppression, as once we had thrown off what used to be called “the yoke of British rule.” On Wednesday, the British chancellor of the Exchequer, George Osborne, announced in Brussels that his government stood ready to help Ireland in its hour of need. Oh, bitter day.

All the same, life goes on, somehow. We are learning a new resilience. Humbled as we are, we might even begin to learn social responsibility, a quality in which we have been singularly lacking up to now. Who knows, we may at last recognize the irreplaceable value of public and private honesty. But let us not light the firecrackers just yet.

If a referendum will be held on a Eurozone 'fiscal compact' -- tentative steps towards better monitoring of member country budgets  - -  in 2012, it's likely to be lost given the current outrage about Europe.

It's a pity that the likes of Finfacts were rare exceptions during the boom, asking where was the outrage?

We want big picture vision from Europe but the conclusions from The Economist and other commentary on The Irish Economy blog is that we find most excitement in legalistic hair splitting.

InterTradeIreland, the inter-governmental enterprise agency said last Monday that a survey of 1,000 firms on the island showed that small businesses are still suffering disproportionately from the economic downturn with nearly half (46%) of businesses reporting that they are winding up, contracting or simply trying to survive.

'Forgive us our debts and we'll pass Treaty' was the main headline in last Sunday's edition of The Sunday Independent.

Like a line from a Catholic litany, it is a hope but what is likely are better terms including longer maturities.

Ireland was the only member of the Eurozone to guarantee debt during the crisis; there was no consultation with Europe on Sept 29/30 2008 regarding the issue of a guarantee of bank debt for two years.

It's a bitter truth but fact that the authorities knew at the time that Anglo Irish Bank was bust; its main customers had stopped paying interest or making capital repayments many months before. Given the international backdrop, almost fourteen months into the credit crunch, only fools could have expected an early recovery of the property markets in Europe. Bigger fools could have only expected that the once on fire Irish property sector could return to a state to make the bank solvent.  

Hours before the guarantee was agreed, Anglo’s chiefs had been a stone’s throw away at Bank of Ireland's headquarters, begging for an arch rival to help.

So when the bank was nationalised just over three months later, the Irish Government was out of aces.

On the euro debt crisis, Angela Merkel is correct when she says it will be years before a final solution is reached.

Countries will have to reform their economies first.

Italy stagnated over the past decade and in the period 2000-2010, real per capita income fell. The devil may or may not wear Prada and while Italy has some strong international brands, its tradeable business sector is stifled. Mongolia ranks higher in the World Bank’s rankings for ease of doing business.

Irish politics

Swedish MPs can live on a salary of €72,000, high taxes and expenses that are very moderate compared with Irish counterparts: who earn a standard salary €92,000 plus daily lunch and dinner money; overnight expenses (the State in effect pays the costs of a second home for TDs serving up to 20 years), a secretary, parliamentary assistant (messenger boy/girl  - -  usually a family member), travel, office and mobile allowances.

In addition, non-party TDs who have announced that they will not pay the €100 household charge receive annual tax-free gifts of €41,152 (not one receipt required) thanks to a deal that Bertie Ahern agreed in 1997 to win support  in the Dáil. Seanad Éireann independents receive a tax-free lump sum of €23,383 annually.

The Standards in Public Office Commission said last May: "Non-party members are not required, however, to provide a Statement of Expenditure of the allowance to the Standards Commission, or to any other authority." The money can be spent as the individuals choose.

Almost €206,000 tax-free over a Dáil term in addition to the standard expenses sums up the failure to tackle the extensive scrounging of public funds during the bubble period.

Globalization, Stagnation and Depression

The current crisis is the fallout from the greatest credit-fueled asset-price bubble and burst since the late 1920s and it has happened in the developed world when it is facing unprecedented trends.

The solutions eight decades ago were easier for those who were not chained to the orthodoxy of the gold standard and balanced budgets when government debt was generally very low.

President Herbert Hoover had entered office in March 1929, almost seven months before the Wall Street Crash. It was 1954 before the Dow Jones Industrial average scaled its 1929 peak.

Hoover had favoured the term 'depression' for the economic contraction rather than the then common terms of 'panic' and 'bust' 

The catastrophic economic failure is presented by the late historian William Manchester in his 1974 magisterial book, The Glory and the Dream: A Narrative History of America, 1932-1972, that vividly presents the human cost of the bleak years at the start of that period.

Manchester's first chapter, The Cruelest Year, begins:

That August [of 1932] a writer for the Saturday Evening Post asked John Maynard Keynes, the great British economist, whether there had ever been anything like the Depression before. 'Yes', he replied. 'It was called the Dark Ages, and it lasted four hundred years.' This was the calamity howling on a cosmic scale, but on at least one point the resemblance seems valid. In each case the people were victims of forces they could not understand.

The Prologue from New York magazine

Today, the people are also victims of forces they cannot understand.

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