A journey into the labyrinth
One of my favourite little shorthand sayings – often recycled by me – is former US defence secretary Robert McNamara’s ‘fog of war’. He said the fog of war explained the phenonenon whena largescale military action began. It was so complicated that it was beyond the scope of human comprehension. It thus became: unpredictable.
We get lulled into complacency by nice aphorisms. Like the Spanish philosopher George Santayana’s persuasive: “Those who cannot remember the past are condemned to repeat it.
I’ve seen that used a couple of times reminding us that we should have known it was not different this time; we should have been mindful what was happening in Ireland with the banks/property was another in a longer series of bubbles going back to those of the Dutch Tulip Bubble and the South Sea Bubble. Indeed, in the latter, gullible fools invested a lot of money in a scheme ‘the details of which have yet to be announced’.
So merging the two above, brings me to the point of this blog: that yes, we can learn from history, but when it does repeate itself, it manifests itselfs in very different ways. Thus, the bubble we are dealing about in Ireland can be broadly compared to the Japanese bank bust or the Finnish one, but there are manifold subtleties, and complications, wider problems, and other extraneous factors that have come into the reckoning.
Another expression I love is JK Galbraith’s one that described the double ignorance of those who invested in the bubble that led to the Wall Street crash. ‘They did not know that they did not know’.
I’ve spent a lot of time going through the archives between 2005 and 2007. The level of ignorance and/or complacency was frightening among politicians, journalists (and that includes me), economists, business people, regulators, senior public servants.
The money swilling around had a narcotising effect. There was no real scrutiny. With a tiny number of exceptions, everybody accepted that the tide would continue rising, nobody questioned that property would experience anything other than a soft landing.
Now little is taken for granted. And the numbers of the economically literate (or should that be numerate) has swelled in direct proportion to the burgeoning national debt.
It must be borne in mind that economics is an inexact (and flawed) silence. Part of the skill set is soothsaying. And even the best and most authoritative sounding get it wrong. The reason? It’s just too complicated. There are too many variables, too many economies, too many different economic activities, too many human beings, and too much relies on sentiment (and that’s polar too; either irrational exuberance or sinking pessimism). The Fog of War.
The following timeline shows how the predictions for the economy of 12 months ago became undone. In hindsight, it’s easy to see why. The biggest fault-line were the predictions for growth from late last year, all above 4 per cent from 2012. It shows that it’s hard to look at the Irish economy in isolation. As a small, open and mixed economy – relying so much on FDI and exports – were are very exposed to any changes in the global economy. In a sense, we are as in control of our destiny as is a cork bobbing in an ocean.
Anyway, here’s the timeline.
November 2009: European Union decides that Ireland can have an extension of one year, to 2014, to get the Government deficit to 3 per cent. Then economic and monetary commissioner Joaquim Almunia says it is because of the deterioration in Ireland’s finances since beginning of year. Tax receipts have been weaker and social welfare payments have been higher due to sharp rise in unemployment.
December 2009: Talks between Government and public sector unions break down over reform. In its December 9 Budget, Government cuts €4.1 billion from economy, with over €1 billion cut from public sector pay; and €700 million social welfare cuts. The following day, interest rate on Irish foreign debt falls.
Later that month, Government publishes its EU stability programme update. Says will make €3 bn in savings in 2010 Budget. Predicts economic contraction of 1.3 per cent in GDP in 2010 but predicts growth of 3.3 per cent in 2011; 4.5 per cent in 2012; and 4.3 per cent in 2013. It says that over four years, it will try to reach €7.5 billion in annual savings.
March: Croke Park agreement guarantees no cuts in public sector pay until 2014. In mid-March, a European Commission report argues that deeper cuts than €3 billion may be required in December’s Budget. It describes the Government’s growth projections of 3.3 per cent as optimistic.
“The authorities should stand ready to take additional measures beyond the planned consolidation package in case growth turned out lower than projected.”
Its forecast for growth: 2.6 per cent for 2011.
April: Big set-back for Government when the EU’s statistical servive, Eurostat, rules that funds paid for the Anglo bailout need to be added to national debt. Will eventually push figure to a spike of 34 per cent of GDP for 2010. Brian Lenihan says the ruling will not mean a harsher Budget or will not require greater borrowing. EU commits €45bn for Greece bailout. Borrowing cost for Irish, Spanish and Portugese sovereign debt increases.
May: IMF bailout of Greece. €110bn. Ireland contributes €1.3bn over three years. Irish economy has grown in first quarter.
June: Economics and monetary commissioner Olli Rehn says that no more than 3 billion correction needed in Irish Budget. Tax projection a little below target but gap between State spending and income for year predicted at €18 billion.
July: A number of agencies, including ESRI, Central Bank and IMF, predict stronger growth for 2010 but revise growth downwards for 2011. IMF forecasts 2.2. per cent. Green’s Dan Boyle says may take until 2020 to reach 3 per cent target. Cost of Irish debt rises.
August: Ratings agency Standard and Poor’s downgrades Ireland’s debt from AA to AA minus. Predicts €50 billion as cost of bailout of distressed banks. Government dismiss claim. Central Bank Governor Patrick Honohan says Anglo bailout will be “costly but manageable.” Total cost is estimated at a possible €25bn.
September: Cost of Irish debt has risen to over 6 per cent; a premium of 389 basis points over the standard, German bunds. On the 13th, Brian Lenihan discloses that €3 billion is the “minimum” cut in the Budget. Amid fears over Anglo, and anxiety over the Irish situation in Brussels, Prof Honohan says that the Government needs to look at more cost-cutting measures. Financial Times editorial advises Ireland to default on Anglo bondholders. Interest on Irish ten-year bonds rises to a record 6.69 per cent, a level considered not sustainable.
On last day of month, a Thursday, Government statement discloses that total cost of Anglo will be €29.3bn and could rise to €33bn in a worst case scenario. Lenihan reveals interest payments on bank bailout will cost €1.7bn annually. Government announces it will publish a four-year detailed fiscal plan in November, amid warnings from Rehn and from the ECB’s Jean Claude Trichet that such a course is necessary. Government also announces it is suspending borrowing of national debt until January. Day is dubbed ‘Black Thursday’ by opposition.
October: Attempts at a consensual political approach to the fiscal crisis, initiated by the Greens, fail. All parties commit to the 3 per cent 2014 target. Opposition parties are briefed on economic situation, and a crisis prompted, among other things, by much lower growth forecasts for 2012 and 2013. An ESRI report concludes that 2014 target is over ambitious and that the Government will need to cut €15 billion over four years to achieve the target. Five days later, that figure is officially confirmed. It is twice the €7.5 billion estimate from ten months ago.