We need to convince rather than threaten Germans
BUSINESS OPINION:It was interesting if not all together surprising to see Labour respond so strongly to Brian Hayes’s assertion that rasing taxes much further would be counter productive. Labour seem pretty convinced that the rich can be squeezed a bit more before the pips start to squeak.
As ever both sides are partly right and partly wrong. We can of course increase taxes a bit more (and cut social welfare payments for that matter). But what is much harder to do is predict the precise impact of these measures on a society that has endured five years of austerity with extraordinary fortitude.
Where there does seem to be agreement between both parties is that we have reached the point where policies could put at risk the much lauded social cohesion that has allowed the economic retrenchment of which we are so proud and that we understand our European peers are so impressed. Where they differ is over which policies would do the damage.
It is unlikely that one more austerity budget will break the nation on the wheel. Indeed, we are going to have one and you suspect that most people will accept another round of tax hikes and benefit cuts if they think it really is the end of austerity.
But who really knows what will happen if the country is confronted with another five years of pain? You could not rule out by any means the appearance of the sort of fractures which have manifested in Greece. And this is perhaps a point that has been overlooked in the current wave of optimism about the economy and the likely prospect that we will exit the troika bailout at the end of the year.
While this is of course a good thing, it might be a mistake to confuse it – and the associated return to the bond markets – as tantamount to economic salvation and the end of austerity.
We will be able to borrow in the markets again as long as bond traders believe that on balance there is enough puff left in the economy to service our debt and that we will not be increasing our debt very much – in relative terms – from where it will stand come the end of year. They will charge a hefty premium to lend to us to reflect the risk that we may not deliver.
This raises the spectre of a badly managed exit combined with an adverse economic backdrop condemning Ireland to some sort of purgatory of continued austerity as we try to service our just about manageable debts. This in turn raises the question as to whether its really worth getting all that excited about exiting the bailout unless we do it in way that sets us on sustainable path that does not require another five years of hair shirt budgets.
If we don’t then the chances are we will find ourselves back in another bailout in a few years and almost certainly be defaulting in some shape or fashion on our debt. Which brings us neatly to the big story of 2013 which will be the agreement we reach with Europe on our historic bank debt. Opinion is clearly divided in Europe as to the merits of socialising Irish bank debt and opinion is equally divided at home as to the best way in which to convince the Germans – who seem to be the obstacle – that it is the best course of action. The plenary view seems to be that while it would be nice if we could put some pressure on the Germans we should be mindful that they don’t like being threatened and and we don’t hold a very strong hand.
It is hard to see how we could bully our European partners into supporting our cause but our hand is probably stronger than we think.
The best argument we could make at this stage is that Europe has a chance to resolve the Irish problem reasonably cleanly if it agrees to some form of debt relief that ensures debt sustainability. (Its worth remembering that debt sustainability also requires not hammering the economy with tax increases every year.) The alternative – which seems to be the German view – is that we grind our way out of our indebtedness over however many years it takes.
Rather than threaten them we need to convince the Germans that this is a very risky course to follow and when it goes wrong it will take far more than a deal on historic bank debt to fix.
At a minimum it will require a second bailout and quasi default and at worst Ireland will have been destabilised to the point where an exit from the euro starts to make sense.