|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
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
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 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
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
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
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
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
€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
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
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
Just over two decades after Finland and Sweden
faced serious economic challenges, the two countries will be flush with cash in
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
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
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
Reform and Europe
Ireland remains a bastion of conservatism and the constituency for reform is
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.
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
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
Today, the people are also victims of
forces they cannot understand.
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