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.
With respect to the flow of credit, the pillar banks and other parts of the economy are badly co-ordinated. Existing bodies like the Credit Review Office do not go far enough. One idea might be to create an emergency credit committee (ECC), a small group of policymakers with one given responsibility for the State’s holdings in the pillars, another with project appraisal experience, as well as co-ordinators in the Department of Finance and the Central Bank. Such a group would require very strong political support.
In simple terms the goal would be, within a limited number of physical locations, to set up a structure where viable SME projects can be brought to the fore, financing needs assessed, and then allocated by the banking pillars. There is also a need for a debate on whether the near-term regulatory burden on the banks needs to be eased somewhat.
The committee structure can be further developed in a number of ways, such as the need to make more management changes in the banks and change the nature and training of loan officers.
It could also prefigure the establishment of “implementation teams” to push through policy initiatives, especially where there needs to be co-ordination across departments and State bodies.
The Irish labour market is an apt example where there is a glaring need for better co-ordination of information on jobseekers, better appraisal of their needs for training and reskilling and improved matching of labour supply with demand.
One reason that new policy initiatives like an ECC and household debt restructuring have not been confronted is that this would further weaken the pillar banks. In the context of the “promise” of the EU to re-examine the banking bailout, extra funding for the banks through the ESM should at the very least be considered.
There are many other important components to the jobs puzzle. One complication is lethargy in the Asian, American and European business cycles. From the point of view of the forthcoming Irish EU presidency there is an urgent need to recapture the “growth agenda” that very briefly made the headlines after the French elections and there should be an aggressive effort to push the need for a stimulus or at very least make the case that co-ordinated austerity constitutes economic self-harm.
Few of the above ideas will generate the kind of immediate jobs announcements that politicians love, but taken together they should help to unblock the critical arteries in our economy, so that it recovers from the property bubble and begins to function normally again.
Michael O’Sullivan is author of Ireland and the Global Question (Cork University Press).