PLATFORM:If Ireland recovers it will be in spite of the Government's efforts, not because of them, writes SHEILA O'FLANAGAN
SINCE OCTOBER of last year, world economies have behaved like stricken submarines in a Hollywood movie. As one half of the crew frantically tries to close bulkhead doors in a desperate attempt to keep out the weight of water, the officers stand on the bridge and, amid the ominous creaks and groans from the hull, watch the depth gauge plunge relentlessly.
Every so often someone mutters tersely that the sub wasn’t built for these kinds of pressures. And everyone wonders when and if the craft will hit the bottom.
In the last few weeks, the relentless downward spinning of the gauge has eased somewhat. Ben Bernanke, the US Federal Reserve chairman, has even used the word “optimistic” about the future, saying that the sharp economic decline has begun to slow down.
But burning questions remain: are the economic subs actually snug on the bottom of the ocean floor or simply balancing precariously on a ledge before making a final, fatal fall?
And will the actions that are now being taken turn out to be the correct ones, or will they lead to unmitigated disaster?
In the US, the decision taken is to blow the tanks and hope to force the sub to the surface. The key element of this strategy is the nearly $800 billion bailout plan to stimulate the economy. Huge chunks of cash have gone into propping up the banking system. Around $275 billion is earmarked for the housing market in an attempt to help Americans to refinance their mortgages and to prevent foreclosures. And, although this is a step too far for many, the car industry has a bailout plan too, albeit at this point the administration is looking at swapping part of its $13.4 billion loan to GM for equity.
The results of these strategies are unpredictable. The US economy is still extremely fragile, having shrunk at an annual 6.3 per cent for the last quarter of 2008, a performance not seen since 1982. Despite Bernanke’s cautious optimism, Dallas Fed chairman Richard Fisher, speaking in Hong Kong this week, gave a grim prediction of further contraction for the first quarter of this year and an unemployment rate of over 10 per cent for the year. So the waters are murky at best.
Other major economies are also taking ballast-boosting action in response to shrinking economic growth. In Singapore, the central bank devalued the Singapore dollar amid predictions of a fall of 9 per cent in growth rates. In China, the authorities unveiled a $585 billion stimulus plan as growth fell to the lowest levels in 10 years.
And, as the OECD forecast that Japan’s economy would contract by 6.6 per cent, Japanese prime minister Taro Aso announced a $154 billion stimulus package, as well as an economic restructuring plan.
The UK’s $47 billion plan, unveiled last November, was based around tax cuts, including the VAT reduction, to boost spending.
All of these plans are based around increased borrowing, in itself a risky strategy as more and more future earnings are diverted to interest payments. The tough call is whether borrowing for stimulus is better than doing nothing.
In Ireland, though, our economic recovery plan is based around increased borrowing, no economic stimulus and an economy that will probably shrink 8 per cent this year. In fact the last thing that can happen as a result of the recent Budget is that the economy gets a boost, as the swingeing tax hikes take chunks out of discretionary spending. Our non-stimulus was forced upon us by the parlous public sector finances, the disproportionate effect of the domestic banking crisis and the necessity to bail out the banks.
For those who object to bailing out the banks (and I’m with them in principle), in practice – just like with the global banking system – there really was no alternative.
However, the cost of our borrowing has now also increased disproportionately. Investors have plenty of other governments they’d prefer to lend money to.
Given the openness of the Irish economy, our Government is gambling on the ballast-blasting tactics of other economies to lift our creaking sub too. It is hoping that the sealing of the bulkhead doors and sticking fingers in the leaking joints will do enough to keep us intact while that happens.
In the meantime, a lot of us are getting very wet and cold. The Irish workforce is more nimble, creative and forward-thinking than it has ever been. But a hell of a lot is being asked of it.
The truth is that if our sub breaks the surface, it will be in spite of our commanding officers, not because of them. And the next burning question will be whether or not they have the balls to give it a complete refit before putting out to sea again.
www.sheilaoflanagan.net
