The new National Pension Reserve Fund should have a complete ban on investment in Ireland to minimise the potential for political interference, according to Prof Philip Lane of Trinity College Dublin.
At an Economic and Social Research Institute conference yesterday, Prof Lane argued that the fund should adopt an aggressive investment strategy but should avoid all Irish firms and all other stocks with close links to the behaviour of the Irish economy.
Later, however, Harvard professor and former adviser to US President Ronald Reagan, Prof Martin Feldstein, argued that avoiding Irish investment would be detrimental to the economy.
According to Prof Feldstein, investing outside the State would lead to the US and other countries getting tax revenues from Irish investment and would also mean a loss of investment in the economy.
He argued that the fund should invest in Ireland but buy forward in other states to make sure there was good diversification. This would mean borrowing to invest abroad.
Prof Feldstein also raised questions about Ireland's membership of the euro, stating that it would likely lead to problems further down the line. Without the Bundesbank in Germany, he argued that the days of low inflation might be over in Europe. "Monetary union works in the US because of a flexible labour market, internal migration and fiscal centralisation. That does not apply to Europe." He also argued that the European Commission's recent criticism of Irish budgetary polices was misguided and "most remarkable". According to Prof Feldstein, other states should have been reprimanded for failing to implement policies to deal with high unemployment.
According to Prof Lane, the big issue with the State ownership of assets such as the pension fund is that future politicians will use the funds in parts of the State where it is politically important to buy votes. He said the Government had delegated responsibility for the fund to an independent commission.
"However, this does not provide complete insulation, since the commissioners will be politically appointed to temporary contracts and, as always, ultimate responsibility lies with the Minister for Finance and the Cabinet."
He added that there could also be problems in future battles for corporate control and the fund could be a key swing voter in any contest. In addition if the fund held domestic investment positions, asset sales could attract much criticism as being anti-patriotic.
According to Prof Lane the Minister should consider transferring the Central Bank's assets to the new fund. The Central Bank has a huge fund which it no longer needs since joining the euro. In 1999 this fund generated net interest income of #240 million (£189 million) and capital gains of #648 million. He also raised questions about the power of the National Treasury Management Agency as lead manager for the fund. The chief executive of the agency is automatically one of the commissioners. The commission will perform all its functions through the agency and is also free to delegate any of its functions to the NTMA. On top of that, the agency has been appointed for an initial period of 10 years while the commissioners have three to five years.
