From the ESRI's Quarterly Economic Commentary Winter 2008 - - see link in box below

Irish Economy 2009: In this year of turmoil, much attention has been given to toxic assets with their alphabet soup acronyms, held by banks. In Ireland, the toxic assets have been of the human variety and while bringing order to the banking sector is crucial, politics and political leadership remain the key issues. With the death of the Celtic Tiger and a grim outlook for the year ahead and beyond, the country is in dire need of an effort that could be termed the moral equivalent of war. However, the current blundering government supported by the one-issue Green Party, has no credibility and a general election is needed that would focus on the stark choices to stabilise the economy and prepare for recovery.

In the absence of a government without a mandate, there is a risk of civil strife as thousands lose their jobs while the 35 ministers - - 3 senior ministers building up ministerial, TD and teacher pension entitlements and at least one junior minister also drawing a teacher's salary - - - remain immune from the havoc to people's lives that they have largely caused. Yes, there is a global recession but crony capitalism, laziness, short-term political self-interest and a political system that produces politicians who are simply incompetent to hold ministerial office, has left Ireland in the sorry state of  scrambling around for alternatives to construction for economic success, at a time of economic peril.

In the banking sector, it is also a sign of the times, that Anglo Irish Bank, for long Europe's most successful, with years of double-digit returns, on Friday closed with a market capitalisation of €266 million, while its directors' loans amounted to €150 million. It's hardly reassuring that auditors Ernst & Young could miss a September 30, 2008 year-end transfer by then chairman Sean FitzPatrick of €87 million - -  the 8th year in which he massaged the year-end figures.  While the Government is reported to be planning to axe senior bankers in return for public funding, during the boom, it encouraged the same banks to fund its developer friends and Taoiseach Brian Cowen, as Minister for Finance in 2006, agreed to change a provision in building society legislation, at the request of Michael Fingleton, chief executive of Irish Nationwide, which has a loan book with 80% in commercial property funding - - 45% of it related to UK projects. Did Cowen ask any questions or did he even care to?

The central bank was asleep at the switch and it's instructive that Niall Crowley, former CEO of the Equality Authority, who was the only public official to challenge ministerial fiat, had his agency effectively scuttled. In contrast, the Financial Regulator only got some back teeth, long after the horse had bolted the stable.

Trinity College Prof. Philip Lane highlights research from Carmen Reinhart and Ken Rogoff, Banking Crises: An Equal Opportunity Menace. Their analysis shows that the average fiscal impact of a banking crisis is to increase the level of public debt by 86 percent, such that the public debt nearly doubles. They also show that the typical duration of a housing bust is 4-6 years.

So we move from reckless bankers to kowtowing regulators to the political leadership. 

The Chinese say a fish rots from the head down and last Thursday, when the Dáil adjourned for a 40-day Christmas break, there was a vivid illustration of the comatose political leadership, provided by Brian Cowen.

Cowen offered no reforms to deal with the raging economic storm but an aspiration list with its key headline, the planned establishment of venture capital funds with €500 million to be available for investment in start-ups and additional incentives for inward investment.

The plan is modelled on Israel's Yozma Fund, which was set up in 1993 with just $200 million and today holds $10 billion worth of investments. However, Israel has 65 companies on the US tech-focused Nasdaq Stock Exchange, compared with Ireland's 5 including Ryanair and has the advantage of cross-fertilisation from the significant defence research industry. Ireland's high-tech sector is on a respirator and no company has annual revenues of above $100 million while the biggest home-grown tech company Iona Technologies, was sold to a US firm this year.

The list of aspirations is produced and with a former social worker Mary Coughlan, in charge of enterprise policy, it's not known if policymakers even raise relevant questions. Earlier this week, there was a report produced on two years of public spending on R&D. It was the usual marketing spoof and nobody has to address questions about the strategy of depending on university research. The issues also seem to be beyond the competence of the Opposition and much of the media.

Innovation specialist Professor Danny Breznitz of the Georgia Institute of Technology says Ireland's research infrastructure is too narrow in its focus and may not be sustainable. He says we are not creating enough new businesses, and when new businesses are set up, the financial supports are not there to keep them innovating. Breznitz says the building of Ireland's R&D infrastructure is something that should be imitated by other countries, but he said he feared that Irish research is too narrowly focussed on biotech and the ICT, or information and communications technology industries. Prof. Breznitz said that if a country wants sustained economic growth it has to focus on innovation, not only on the research side but on the commercialisation and the growth of productivity. Breznitz visited Ireland in June 2007 to to meet with key government agencies that are working together to build Ireland’s knowledge economy. The purpose of his 4 day visit was to share his research findings on rapid innovation-based industries and the role of government in developing science and technology policies under the constraints of globalisation. He will give specific guidelines to help Irish State agencies make advantageous decisions about research and development, relationships with foreign firms and investors, and other critical issues. Prof. Breznitz's latest book called Innovation and the State: Political Choice and Strategies for Growth in Israel, Taiwan, and Ireland, looks at one of the most unexpected changes of the 1990s: the fact that firms in a number of emerging economies not previously known for high-technology industries, including Ireland, moved to the forefront in new information technologies (IT). Contrary to popular belief, Breznitz’s new book argues that under the current conditions of intensified globalisation, emerging economies have more options for developing their high technology industries then at any time since WWII. Each of these ways fits into a specific stage in the modular global production network, and hence, each option confers different benefits and disadvantages, as well as different distribution of the gains of success. “The role of the State in economic development has changed,” says Breznitz,“but it has by no means disappeared”.

What is shocking about Brian Cowen is not that he lacks a record of innovation himself, which he does, but that for example with the cost of living going to fall in 2009, he refuses to take a lead on issues of pay.

On Friday, the Economic and Social Research Institute, published research which showed that public sector staff earn in the range 10% to 30% more than comparable counterparts in the private sector.

The head of the National Consumer Agency earns over €182,000 and the NCA has a board of 13.

So when the head of a small Irish State agency earns as much as the chairman of the US Federal Reserve, there is something surely wrong?

There will be a rake of panic public spending cuts in 2009 and Cowen will appeal for unity and sacrifice. He will surely delude himself if he believes that sacrificing a few bankers will soften public anger, while maintaining the status quo for the Insiders.

The Irish economy is facing the worst crisis in decades and to borrow from American philosopher William James' famous 1906 essay, The Moral Equivalent of War, the country should be on the equivalent of a war footing. Dell may close its Limerick plant in the New Year and by February, there will be many business collapses. It is imperative that we avoid another lost decade like the 1980's and the inept approach up to now, has put the economy on course for such an eventuality. 

A general election appears to be the best option to force public attention on the choices that will have to be made. Low taxes are always popular but what should the balance be between public spending cuts and tax increases?

Given that Budget Day projections were junked within two months by the Minister for Finance, even a multi-year plan produced by him on the choices, would have no credibility. People's lives are at stake and the Green Party, which props up Fianna Fáil, could exercise the one power it has and save Ireland while leaving its warm words on saving the planet, on the back burner.