ESRI lets itself down with report blind to new bailout and euro break-up risks

The Economic and Social Research Institute is a fine body of people. It produces a great deal of informative studies and analyses on matters that affect the lives of all citizens. It is one of the few institutional sources of ideas and questioning on policy issues in a country that has too little of either. But today the ESRI has been found wanting. The think tank's five-yearly, forward-looking medium-term review – one of its flagship publications – is, at best, a missed opportunity. At worst, the report amounts to a dereliction of the institute's duty as a provider of national thought leadership.

It is difficult to know where to start a critique of today’s large and multiauthored tome, but the summer of five years ago is as good a point as any. Then, the ESRI published its last medium-term review, in which its authors wrote: “The forecast for growth in GNP over the period 2007-2015 is identical to what it was when we published the last review in December 2005, an average of around 3¾ per cent a year.”

Although almost everyone in the economics business underestimated the downside risks the economy then faced (this writer included), the ESRI could hardly have got it more wrong. With so many clear and present dangers now facing Ireland, one might have thought that considering unpleasant eventualities would be a top priority for the think tank as it ponders the economy's fate over the remainder of the decade.

But no. The ESRI appears to have learnt nothing from the past five years. A half-decade ago, the prospect of Ireland being bailed out was remote and the likelihood of an OECD state defaulting on its sovereign debt almost unthinkable.

Second bailout ignored
Despite both eventualities having come to pass and the report's description of the State's debt as currently being at "the limits of sustainability", there is no discussion of the prospects of a second international bailout and what the implications of that might be. Nor is there even an acknowledgement that Ireland could end up in a Greek-style default scenario well before the end of the time period analysed in the report.

Little attention is paid to the increasing likelihood of further losses in the financial system. The danger of British withdrawal from the EU is also neglected, despite the probability rising rapidly. How would new barriers to trade affect the Irish economy if withdrawal happens? How could free movement of labour be affected? Would Border checks hamper movement between the two jurisdictions on this island? All these issues go unexamined.

And then there is the biggest risk of all – euro break-up. Despite acknowledging the massive impact on Ireland the collapse of the currency would have and the admission that “while we believe that extreme possibilities are very unlikely, recent experience shows that such events can occur”, it is not considered in detail. Why? Because the institute’s economic model cannot handle an event of that magnitude.

Other than a blindness to risk, there is more to be critical of in the report. Its worst-case scenario (stagnation) will be avoided if the European economy grows and domestic policy is got right, it believes. But even if both happen, the economy could still stagnate.

Ireland is suffering one of the most severe balance sheet recessions on record. Historical evidence suggests that balance sheet recessions last seven years on average. Given Ireland has some of the highest levels of debt in the world, the debt burden alone could cause stagnation for considerably longer.

As to putting forward ideas and solutions, Prof John FitzGerald said yesterday that the ESRI was not in the business of being prescriptive.

Far too meek
So how can this statement be interpreted? "To the extent that there are costs for taxpayers arising from any future resolution of bust banks, these must be socialised within the euro zone" (emphasis added).

It seems the ESRI is willing to be prescriptive to leaders in Berlin, The Hague and Helsinki, but much meeker in telling their counterparts in Dublin what to do. They have got it precisely the wrong way around.