Jobs and credit crises call for clear policy response
OPINION:WHILE THE euro zone crisis has momentarily subsided following Mario Draghi’s “do what it takes” statement, perhaps the most remarkable policy declaration of late came from his American counterpart, Ben Bernanke.
He voiced “grave concern” over high unemployment for “the enormous suffering and waste of human talent it entails” and the risk it poses of long-lasting “structural damage to our economy”.
It is remarkable in the context of unorthodox policy from the Federal Reserve and also in that so few European politicians have voiced similar concerns with regard to the euro zone crisis.
Ireland is a case in point. While there is growing alarm at the persistently weak state of the labour market and the paucity of bank lending there seems to be little public debate on the long-term consequences for healthcare, crime levels and human development of our economic crisis.
The political response to the jobs crisis is pitched at the micro level – the drawing in and amalgamation of disparate projects. This might help boost shorter-term employment figures, but doesn’t necessarily bolster the potential long-term economic growth rate. Arguably the correct response is a more coherent strategy, one that links economic factors like our banking system and household debt with social issues, as well as incorporating our strategy on Europe.
In Ireland job creation is popularly associated with tax cuts, multinationals and the IDA. But the employment crisis is much less regularly traced to our balance sheet recession, or rather blockages in the banking system and household finances.
A lack of employment growth is the sclerotic and very unfortunate effect of these underlying difficulties, and of important decisions not taken throughout the past year. Should we fail to address them now, there is a high risk of the “Japanisation” of our economy.
If the lessons of past financial crises are to be taken seriously, and the constraints that the euro zone places on our economy are considered, then at some stage there will have to be a substantial debt restructuring in Ireland – either of Government or household debt, or both.
At the household level, uncertainty and high levels of indebtedness are acting as a very considerable headwind. Households are conserving resources and using extra cash to deleverage. In this respect a restructuring of household debt will remove a significant blockage to the “plumbing” of our economy, and have a potentially positive effect on wealth inequality. Given the State’s ownership of the banks and the possibility of support through the ESM, a very large programme of debt “elongation” for households (up to a threshold) could be put in place and mortgage costs could also be driven lower (with lower profits for the banks).
Businesses are also suffering. One recurring problem is that the supply of quality investment projects from SMEs is poor. This is partly to do with deleveraging (operationally and financially), partly due to lack of confidence, and then partly to do with the need to coach businesses in how to assess and prepare funding applications, as well as the need to coax them towards higher growth sectors. Agencies like Enterprise Ireland already play a role here and their experience should be leveraged further to help prepare and channel new investment projects.