Will road to recovery bear weight of debt burden?

Mon, Nov 29, 2010, 00:00

EU/IMF deal saddles us with debt of up to 102 per cent of GNP – the rate of pre-boom years

TAOISEACH BRIAN Cowen insisted last night that the debt burden on Ireland under the terms of the EU/International Monetary Fund bailout would not cripple the country as his political opponents are claiming but would instead put it on the road to recovery.

He pointed out that the assumptions underlying the plan mean that, at its height, the burden of debt will be 102 per cent of gross national product, roughly where it was in 1992/1993 when Ireland was on the cusp of the Celtic Tiger period.

Cowen recalled that, back in 1985, the debt burden on the shoulders of the Irish taxpayer was considerably worse than it would be under the EU-IMF programme for Ireland announced last night.

Of course, his confident predictions are based on the assumption that the programme will work and that the targets set out in it will be met both in relation to the public finances and to the banks.

Ultimately, it will all depend on whether the doom merchants are proved right and the European Union lurches into a crisis from which it will never recover or whether normal economic and political conditions are gradually restored.

Back in 1987, few people believed the Bruton/MacSharry budget introduced at one of the lowest points in Irish history would within a few years have led to the Celtic Tiger economy. Good luck as well as courageous political decision-making underpinned that transformation and both elements will be required if the programme is to work as planned.

In terms of Irish politics, the programme is Cowen’s last throw of the dice. An election will be held by March at the latest, and it will hopefully be clear by then whether or not Ireland and the EU have been able to withstand the worst that market uncertainty can throw at them.

It is quite clear the Government’s four-year fiscal plan is a key element of the EU-IMF programme and regardless of what the Opposition parties say they will have very little power to change it unless it happens to work much better than expected and stronger-than-anticipated economic growth resumes.

Fianna Fáil will be fighting for its very survival in the election and has little or no hope of being back in office unless the main Opposition parties refuse to work with each other. That is highly unlikely for both historic and contemporary reasons, and all the signs are that Fine Gael and Labour are already preparing to share power in a new coalition.

Both parties, however, have made some hasty promises to reverse elements of the programme and substitute alternative cuts of their own without being very specific about what alternative cuts they have in mind.

Former taoiseach Garret FitzGerald gave his Fine Gael and Labour successors wise advice when he cautioned them against trying to tamper with the programme. After all, the cuts it contains are Fianna Fáil’s answer to the crisis and the party will have to live with that legacy for generations.

If, however, a new Fine Gael-Labour coalition substitutes some serious cuts of its own for those already in place, it will simply antagonise the electorate and generate unnecessary unpopularity for itself.

Another dangerous aspect of the Opposition reaction is that it has exposed itself to every vested interest group in the country during the forthcoming election campaign. The avoidance of foolish promises should be the top priority for Fine Gael and Labour rather than encouraging people to believe they have some magic wand to wave the cuts away.

Fianna Fáil is on a course for a hiding in the election and the main Opposition parties are both on course for record-breaking performances. The worst thing they could possibly do would be to engage in foolish competition between themselves by promising to reverse specific cuts.

It is fair enough to bewail the use of the National Pension Reserve Fund to capitalise the banks yet again but there was no other option. Future pensioners are utterly dependant on a healthy economy and there was little option but to throw the fund into the deal.

Sinn Féin will have no inhibitions about promising to reverse them all but the party has the luxury of knowing that it will not be in power to implement its policies. If by any chance it is, the reality of the EU/IMF supervision will soon put paid to the rhetoric. In Northern Ireland, the party has managed to adapt very quickly to the constraints of office and it would probably be no different on the southern side of the Border.

As the Taoiseach made plain last night, the surveillance from the EU/IMF on a three-monthly basis will keep the Government’s nose to the grindstone whoever happens to be in power. He also pointed out the international institutions are here because we need them and they have no interest in making things unnecessarily difficult.

That is why they did not raise the issue of the Irish low 12.5 per cent corporation tax regime in any serious way during the talks that led to the bailout, despite the fact it is highly unpopular in Germany and France in particular and is not liked by the British either.

Many commentators around Europe expected that our bigger neighbours would have tried to raise the issue when they had us on the ropes. The fact that they did not indicates that they are keen from the point of view of self-interest as well as good neighbourliness to help us back on our feet as quickly as possible.

Another issue that did not get serious traction in the talks was the simplistic call to “burn the bondholders” for which German chancellor Angela Merkel has to take a lot of responsibility.

The European Central Bank was adamantly opposed to the notion as any such move would threaten the financial stability of Europe. It is ironic that the zealots of the US Tea Party movement and many of those on the left in Ireland share a common belief in “burning bondholders” and damn the consequences.

The lesson of the Great Depression of the 1930s was that taking that kind of approach leads to widespread bank failures and national economic collapse which, in turn, threatens the democratic foundations on which our society is built.