Time to look forward and to build on growing confidence

There are two different ways of looking at the crisis engulfing Greece. Syriza claims to be acting heroically, following its democratic mandate to end austerity and to refuse to implement the diktats of the troika, including the Orwellian decision not to speak to the troika but to negotiate with the EU, ECB and IMF.

Critics, which include every other euro zone government, see Syriza as hopelessly naive, useless negotiators and self-indulgent performers in a populist pantomime. That unanimity among European governments is almost without parallel and may end up as Syriza’s singular achievement.

During our own crisis there were suggestions that we too should stand up to the troika. Various proposals were made, arguing that the delegations camped out at the Merrion Hotel should be told to sling their hook. Every financial crisis is different but it is reasonable to suggest that we now have some hard evidence of what would have happened if we had tried to adopt a more aggressive stance.

Spending plans

A few months ago, the Greek economy was growing. That is no longer the case. The obvious cause is the evaporation of confidence amongst Greek citizens who have made the understandable decision to postpone whatever spending plans they may have had. They have also been withdrawing their cash from Greek banks, not necessarily expecting an exit from the euro but buying a little insurance.

It has been reported that some Greek hotel-owners have been asked by tour operators to agree to contract amendments that commit them not to raise their prices if Greece does leave the euro. Those tour operators don’t seem to understand what the restoration of the drachma would mean. The point, if there is one, of leaving the euro is that Greece lowers its tourist prices via a massive devaluation.

Confidence

The evisceration of Greek confidence stands as a bit of a rebuke to Paul Krugman and others (including this columnist) who giggled when members of the troika argued that austerity would work mostly by restoring economic confidence. In this instance at least, the “confidence fairy” appears to be more than a figment of Olli Rehn’s imagination. Indeed, the Irish economic growth story is a testament to the value of restoring financial stability.

Krugman would no doubt cry foul and argue that our growth rebound came much later than necessary and could have been even stronger if our own version of austerity had been more moderate.

Of course, we will never know, but neutral observers will probably conclude that the troika's polices worked in Ireland. Growth vanished in Greece as soon as the abandonment of austerity was promised; it is worth repeating that it wasn't that long ago, when policy was still being dictated by the hated folk of Brussels, Frankfurt and Washington, that the Greek economy was staging a rebound.

That point about confidence is important. Indeed, it is curious we didn't think it mattered that much. Economists of all persuasions have for decades acknowledged the importance of expectations. Keynes thought "animal spirits" were central to the way economies behave. Two Nobel Prize-winning economists even called their recent Animal Spirits, a reference to those 80-year-old ideas.

Ireland is regaining its economic confidence. It might be a stretch, but there may be a positive economic effect from our recent constitutional referendum: the sign of a country at ease with itself and the self-confidence to shake off so many past shackles could well have a welcome economic consequence.

Nobody is worried about rewriting the contracts of Ireland’s tourist industry. Indeed, the signal of welcome implicit in that referendum result sent a very positive message to potential visitors.

Psychology

Confidence is all about psychology and can a be very fragile thing. The drivers of confidence are poorly understood. Not enough, for example, is made of the connection between the rapid growth of the Irish economy that followed the 1993 Downing Street declaration and subsequent IRA ceasefire.

Our own potential for a populist pantomime is obvious and will no doubt come to the fore during the forthcoming election campaign. We need to ponder what we have achieved and how easy it is to go backwards.