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News : Irish Economy Last Updated: Apr 29, 2013 - 11:35 AM

Europe's growth crisis as appetite for austerity wanes; Ireland in need of new model
By Michael Hennigan, Finfacts founder and editor
Apr 26, 2013 - 9:30 AM

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Net new jobs in France from the 1970s

Europe's growth crisis is likely to continue even if there is less focus on austerity. Like so many other countries, Ireland needs a new model because the challenge to create 200,000 net new jobs cannot be met with stale ideas that had their genesis in less challenging times.

On Thursday, Spain reported that the unemployment rate jumped to a new record of 27.16% in the first quarter of 2013 as the number of unemployed persons increased by 237,400 persons to 6,202,700. In addition to this astounding figure, 22% of the Spanish workforce are temporary workers. Also on Thursday, France reported record unemployment figures with the number of unemployed rising for the 23rd month to 3.2m in March, overtaking a previous peak in 1997. The total including all those seeking full-time work rose to 4.7m.

An ageing society and the time needed to work through its debt crisis will keep growth in Europe subdued for years to come, Wolfgang Schäuble, German Finance Minister, said last Friday. “No one should expect that Europe will deliver high growth rates for years.”

He was speaking at a presentation at a lunch hosted by the Council on Foreign Relations in Washington DC.

Angela Merkel, German chancellor, on Thursday highlighted the gulf in the Eurozone by indicating Germany would need higher rates, in contrast to struggling southern states of the single currency area.

“The ECB is obviously in a difficult position,” Merkel said in Dresden. “For Germany, it would actually have to raise rates slightly at the moment, but for other countries it would have to do even more for more liquidity to be made available and especially for liquidity to reach corporate financing.”

In London Thursday, David Lipton, first deputy managing director of the IMF warned: "If recovery does not materialise, the euro area could find itself facing the spectre of policy quicksand—in which relentless balance sheet deterioration drags the economy in deeper and blunts the impact of even bold policy adjustment. We saw that scenario play out in Japan over the past 20 years. It has only been in recent months that the new government and BOJ leadership have started to take more vigorous action to escape deflation decisively."

In Europe cross-border capital flows are seen as culprits of the crisis but not all of them were for speculation. The level has plunged since 2007 and it's simply foolish to think that governments can  fill this breach. However, big European companies have over €1tn in cash but they are inclined to invest in emerging markets.

Cross-border capital flows rose from $0.5tn in 1980 to a peak of $12tn in 2007 and down to less than $5tn in 2012. Eurozone banks have cut such cross-border lending and other claims by almost $4tn since 2007, and central banks now account for more than 50% of capital flows within the region.

It would be also foolish to regard the 'end of austerity' as a key victory as for a while at least, it could give the impression that the growth problem was solved. The fact is that austerity has mainly hit minorities in the private sectors. There have not been huge cuts in public spending in most countries.

As for Ireland, tax and social security revenues as a percentage of GDP (gross domestic product) were at 30% in 2011 compared with an EU average of 40% and 44% in Finland and Austria. Use GNP (gross national product, mainly excluding the profits of the foreign-owned sector) as a metric and the ratio is still well below the average.

The Department of Finance said in April 2012 that while Irish taxation receipts in 2012 would be above 2004 levels, while the gross voted expenditure of Government Departments and Offices in 2012, at €56bn, would be about 37% above the level it was in 2004.

Seamus Coffey, the UCC economist, has put the estimated deficit ex bank support and debt interest in 2008-2013 at €60bn — almost 50% of GNP.

Contrast that with California....

Last year welfare payments, healthcare for the poor, and benefits for elderly and disabled Californians were immediately cut by around $8.3bn - - 17% of Governor Jerry Brown’s entire discretionary budget. And state offices, which employ roughly 200,000 people, were forced to operate on a four-day, 38-hour work week.

San José, the biggest urban area in Northern California in the midst of Silicon Valley, one of America’s richest regions, has been struggling with its budget for a decade.

This was after several years of cutbacks and last November, voters supported a rise in the sales tax to avoid education cuts.

France has raised more in taxes than spending cuts and its public spending is still 56% of GDP -- temps accounted for 13% of jobs in 2007 but more than 60% of job losses since the onset of the crisis. France’s public sector generated 600,000 net new jobs in the 1980s, shed 40,000 jobs between 2000 and 2009.

So it's no longer able to rely on adding public sector jobs while growth in the private sector is mainly in health. China has 10% of its workforce in the public sector compared with France's 27%.

Philip Stephens in an op-ed in the Financial Times today, 'The New Deal for Europe: more reform, less austerity' says:

"the economy is too important to be left to economists. More importantly, it presents policy makers with a chance to escape a flawed orthodoxy.

Excessive austerity has seen much of Europe mired in depression. In spite of swingeing spending cuts and tax rises, debt is increasing. The crisis of the euro may be over, in the sense that the existential threat to the currency has been lifted. But the crisis within the euro is extinguishing political consent for European integration. The continent badly needs to reset its course.

The answer is not a new fiscal splurge. A heavy price must be paid for the unchecked spending and credit booms that ended in the global financial crash. But timing and pace matter. Governments with a demonstrable determination to raise long-term economic growth with supply-side reforms should be given more time to cut deficits."

Sweden, Finland and Germany responded to financial crises in past years with significant reforms. Ireland carried on with business as usual and the bubble provided a temporary prosperity.

President Jacques Chirac of France lost the appetite for reform after street protests in the early months of his presidency.

Until the 1990s, France was among Europe’s leading economies in per capita GDP. By 2010, however, the country had dropped to 11th out of the EU-15. Low labour force participation of older and young people, as well as high unemployment rates are the main drivers of this per capita GDP gap.

I hope the young Enrico Letta (46), the prime minister designate, will have a chance to govern Italy well.

The southern countries were particularly hit by globalization and within Europe competition from the former communist states.

Even Brazil had to impose special duties on Chinese shoes as its industry was facing decimation.

Italy has had a poor record in attracting FDI for several reasons. It's the same with Greece even though it has a much better infrastructure than Romania and Bulgaria.

No country can be assured of maintaining a high standard of living or even reaching one without a sustainable model.  

Tom Healy of the Nevin Institute wrote yesterday:

"There is little evidence that the lessons of this most recent economic crisis have led to a new understanding or determination to rebuild our economic and social model in a different way.

The Republic of Ireland has not been alone in championing a model of economic development which is short-termist and lopsided.

Reliance on ever lower rates of effective taxes for corporations and tax reliefs for those on relatively high incomes reduces the capacity of the Irish State to provide quality public services in an efficient and fair manner.

The policy of pursuing export-led growth through reliance on foreign direct investment is seen as the silver bullet that will deliver economic success once again."

There is an obsession with exports in Ireland even though jobs in that sector have been static for years.

Only 7% of Irish SMEs are engaged in exporting — so most private sector jobs are engaged in the domestic economy. FDI production has a high import content. The Irish Central Bank has said [pdf] that "64% of all workers work in indigenous, non-exporting firms, highlighting the importance of domestic demand for job creation."

Nominal export value almost doubled between 2000 and 2012 but full-time jobs in the exporting sectors are still below the 2000 level despite a 25% growth in the workforce (including the unemployed).

The target to be recognised as a 'world-class knowledge economy' by 2013 was based on a delusion that in the lexicon of the current and former enterprise ministers, Richard Bruton and Micheál Martin, 'quality jobs' would grow in the West while low paid manufacturing workers would continue to  dominate in regions such as Asia.

Of course a job in a manufacturing plant can be much more interesting than sitting in a call centre battery-hen like production line.

Ireland produces 5% of the Dutch output of potatoes - -  they export seed potatoes to China and the technology. In Ireland because farm welfare comes from Brussels, there seldom is attention to the greatest native resources.

How bad do things have to get before people wake up?

333 Action Plan for Jobs initiatives!! Let’s have a new national ideas competition!

The first step in a long march is to junk the pervasive fairytales and look at the emerging challenges with a cold realistic eye.

Irish Economy: Innovation, a failed enterprise policy and inconvenient facts for 2013

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