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News : Irish Economy Last Updated: Oct 15, 2010 - 6:47:50 AM


Irish Economy: Why should the possible intervention of the IMF be viewed as 'scary'?
By Michael Hennigan, Founder and Editor of Finfacts
Oct 14, 2010 - 6:58:42 AM

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International Monetary Fund's managing director Dominique Strauss-Kahn delivers the Opening Plenary Session speech at Daejeon Convention Center, July 12, 2010 in Republic of Korea.

Irish Economy: The challenges facing the Irish economy may or may not require the intervention of the International Monetary Fund (IMF) in coming years. However, despite the gravity of the crisis and the patent evidence of a failed governance system with its limited accountability in a culture where the buck stops nowhere, there has been no evidence so far that the political elite is willing to embrace significant reform. Why should IMF intervention be viewed as 'scary' when it maybe the best hope for Ireland to become a model economy comparable with those of well-run countries such as Austria, Denmark, Sweden and Finland?

At the Economic and Social Research Institute's (ESRI) Budget Perspectives conference last Tuesday, UCD economist Joe Durkan said the idea of the IMF imposing its will on Ireland was "scary."

Durkan said he had seen the organisation at work in Nigeria and he was “scared” by what it might do here. The organisation tended to impose changes without having an understanding of the society on which it was imposing those measures.

Speaking to The Irish Times, he said he did not have much faith in the European Commission either. “They don’t have the people. The best people who know what to do about Ireland are here in Ireland.”

On local knowledge, that is of course true but with 450,000 on the Live Register (this includes about 60,000 part-timers) compared with 156,000 in January 2007, the big question is on the likelihood of having a change from the muddling through approach so far.

Give a dog a bad name and hang him as the saying goes.

The IMF has been fairly criticised in the past for overdosing the patient on harsh measures and last July in Daejon, South Korea, the Fund's managing director Dominique Strauss-Kahn said that while IMF’s measures in response to the Asian crisis of 1997/98 yielded substantial fruits in many nations of the region, it was perhaps possible to do it in a less painful manner. At the time, he said the Fund placed interest on all sectors but now it focuses on the causes of the crisis and has supplementary policies such as adding conditions to protect the socially weak.

During the current crisis, under the leadership of the former French finance minister, the Fund has regained its important role in the global economy.

We consider below a number of relevant points:

1. The case of Greece provides a useful reference point:

Credit must first go to the Greek Prime Minister George Papandreou for his candid acknowledgement that his country has been endemically corrupt with a sclerotic system of closed shops which have destroyed the competitiveness of the economy.

"In a study done last year, the OECD described government-run Greek hospitals as deeply corrupt. It concluded that we could save 30% of the costs, which is enormous....In Germany, a stent for heart operations costs about €500. In Greece it costs €2,000 to €2,500. The fault lies with corruption," Papandreou said in an interview with Der Spiegel magazine last February.

Finfacts said last May that the best course of action for Greece was not to have an immediate debt restructuring but to bring in the IMF to assist in pushing through structural reforms of the economy.

With the support of €110bn from the IMF, the European Commission and the European Central Bank, the budget deficit has been halved and is currently below 8% of GDP (gross domestic product). The 2011 budget provides for a 7% of GDP deficit target versus 7.6% in the original IMF/EC/ECB plan.

Greek 10-year bond prices have risen 10% with yields falling 13% since June; Parliament supported a controversial law last month to open up the country's freight sector to competition, despite fierce opposition by truck owners. The next battle will be with lawyers, pharmacists and civil engineers.

A privatisation program has been announced; Qatar and China are planning further investments in Greece and there is more than €20bn in EU structural funds in the pipeline

The IMF’s projections show that Greece will have a debt to GDP ratio of about 145% in 2012 and last weekend, Dominique Strauss-Kahn signaled that beyond 2012, the IMF will continue its lifeline : “If the Europeans decide to do something, we certainly will do the same thing.”

Jacob Funk Kirkegaard, economist at the Peterson Institute for International Economics in Washington DC, said on Tuesday that as the first program was negotiated at the height of the Eurozone debt crisis in May 2010, at a time of fears of sovereign contagion and spillover effects across the weaker Eurozone economies, care was taken to avoid haircuts or losses for holders of Greek debt. The purpose was to avoid undermining market confidence in peripheral Eurozone debt. Since then, however, a series of constructive policy measures in Eurozone members, most noticeably Spain, will likely lift the risk of market contagion from round two of the Greek debt crisis. The risk to the systemically important Eurozone countries (excluding small members like Portugal and Ireland) is likely to be far more limited well into 2011, when this discussion will accelerate.

Kirkegaard added: "By mid-2011, EU governments and the IMF may be far less reluctant to impose losses on remaining private holders of Greek sovereign debt than they were in May 2010. As illustrated by the bankruptcy and emergency federal loans for General Motors - - which occurred after the height of the financial panic in late 2008 - - governments are more willing to impose losses on financial participants in times of relative calm. This is likely to prove true in the European Union, too, even if it won’t necessarily be pleasant for the two weakest Eurozone members, Portugal and Ireland."

2. Business as usual in conservative Ireland:

The lack of Irish interest in structural reform is striking despite an economic crash that has brought misery to tens of thousands of people.

The governance system has failed miserably but it is safe from reform.

Taoiseach Brian Cowen has been focusing, if that is a reasonable description, on dousing a fire he had helped start; the main Opposition Party Fine Gael has proposed some institutional reforms which created a firestorm reaction from the potential losers of privileges and the Labour Party's big idea is a 4-year gabfest on the Constitution.

Of the 216 members of the Oireachtas, the public would be hard pressed to name more than 5 who have provided an inspired vision for the future and dared challenge a people who had foolishly bought into a Celtic Tiger fairytale, that in the words of Finfacts in 2005, was a structure built on quicksand.

Parties have issued headline aspirations on jobs but there is no evidence of recognition of the challenges ahead as the conventional model of globalization is changing.

Labour Party leader Eamonn Gilmore has ruled out a property tax and welfare changes and  pledged not to hit "middle-income Ireland."

Gilmore is Ireland's most popular politician and he will very likely be either Taoiseach (Prime Minister) or Tánaiste (Deputy Prime Minister) after the next general election.

If the former trade union official does not have an agenda of serious reform on entering office, he could become another Bertie Ahern, who as Taoiseach, never made a tough decision.

SEE: Ireland's Celtic Tiger 2005: Built to last or on a foundation of quicksand?: So as the sands of globalisation, move under our feet, there is staggering incompetence at the heart of government and certainly no interest in contemplating how long will the good times last?

That was in 2005!

3: The Status Quo

Both the public sector and the protected private sector are in need of significant reform but the two main representative bodies ICTU and IBEC, avoid advocacy of change.

The ESRI budget conference was told on Tuesday that spending on pharmaceuticals and payments to community pharmacists rose by 181% in real terms in the nine years to 2009.

The Croke Park agreement on public sector reform is a set of aspirations and the same people who headed the public service during the boom are now expected to implement radical change.

The slow-motion process so far, could hardly inspire confidence that there will be radical change. Realistically, baby-steps are the best that could be hoped for.

For more see here: Ireland can choose a path to greatness or perdition

4. No constituency for change

It is not only the political elite or the vested interests who lack an appetite for change.

Even tenured academics who may tackle sacred cows at a safe distance, keep silent about the gravy train in their midst.

Last month a report from the Comptroller and Auditor General showed that it has been an exception in universities for both academic and non-academic staff to retire without additional pensions years allocated, at a substantial cost.

The university pension fund deficits amount to about €630m led by Trinity College at €315m.

The majority of Irish private sector workers have no occupational pensions and those who do face the prospect of meagre payouts, while the C&AG's report showed that at NUI Galway, one individual could approve additional years, paid from tax funds.

The official response from the university was: "custom and practice and legitimate expectation dictate that added years form part of the terms and conditions of employment. There is in practice, effectively no discretion available to the Governing Authority in respect of existing staff."

Should beneficiaries of care services, have "legitimate expectation'?

And the response from academics?

None. 

During the boom, avoiding taking a stand against the convenient conventional wisdom was the rule and clearly endures.

SEE: Irish taxpayer to provide €1bn bail-out of FÁS and university pension funds

5. Low Corporate Tax

Some have argued that IMF intervention could imperil the low corporate tax rate of 12.5%.

This is very unlikely.

According to the US Bureau of Economic Analysis, Ireland is more dependent on US firms that any other economy..

Foreign-owned companies account for 90% of Ireland's tradeable goods and services exports.

Why would the IMF want to undermine a key sector of the economy?

SEE: Value added of US firms overseas as % of GDP highest in Ireland; US Employment of its Multinationals was 70% of total in 2006 down from 80% in 1988

6. Reputation

In the short-term, the news across the world wouldn't be positive.

However, if IMF help is the best alternative to slow motion government and shambolic responses to the challenges facing Ireland, then that is the course which should be taken.

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