Banks' woes a distraction from good news on competitiveness
Public perceptions of the real economy are distorted by problems in the financial sector
SO, THE curse of Anglo Irish strikes again! The Eurostat decision that the €4 billion the Government has already put into this bank – plus, by implication, the further €20.7 billion to be provided for its future needs and those of Irish Nationwide – must be treated as a bailout rather than as an investment will more or less double our published 2009 budget deficit. While this doesn’t add anything to our actual debt burden it certainly makes our indebtedness look much worse.
Depending on the degree of financial sophistication of those in external financial circles looking at the pattern of indebtedness of European states, this is potentially distinctly unhelpful. The scale of our economic crisis certainly does not need to be exaggerated, especially as the effect of a good deal of what is written and spoken on this topic has been to alarm and depress domestic public opinion beyond what the economic situation actually warrants.
Very few people understand the ramifications of our banking debacle, and even among economists the debate on this issue is, to say the least, very confused. Part of the general confusion around the issue seems to arise from a widespread failure to distinguish between gross and net figures. We hear all the time about enormous sums having to be borrowed by the State to take over impaired assets from the banks, or to invest in our main banks. The fact that these borrowings are matched by assets – even if some of these are impaired – is never mentioned.
It has therefore been helpful that in its Spring Quarterly Economic Bulletin the ESRI asserts firmly that “while [there] will be a large addition to the national debt, it is manageable and in no way threatens the solvency of the State”.
Moreover, the institute refers back to a key paper it published 11 months ago in which it said if “outcomes in respect of the public finances, competitiveness, and the banking system are all achieved, the Irish economy could rebound from its current difficulties, to see an average rate of growth in GDP in the region of 5 per cent per annum between the years 2011 and 2015. This could restore incomes to a pre-recessions level by 2016.” It now foresees this high growth rate starting in 2012 rather than in 2011, thus involving a brief postponement of this timetable – with growth in 2011 at 2.5 per cent rather than 5 per cent.
It is worth noting that the preconditions for such a recovery that were set out in that May 2009 report have now been largely met – through the adoption of last December’s budget, the transfer of the banks’ bad debts to Nama, and progress with the restoration of our cost competitiveness.
On the latter point, the institute estimates that by the end of next year a combination of lower wages and increased productivity will have improved our unit labour costs by 13 per cent. Moreover, when combined with an increase of over 1 per cent in output per head in 2009, yesterday’s CSO data on private sector hourly earnings, which shows a decline of almost 5 per cent in the first three quarters of last year, offers support for these estimates of substantially improved unit costs over this three-year period.
The Central Bank cites European Commission figures indicating that over this same period our principal competitors will, by contrast, have experienced unit labour cost increases of 3 to 5 per cent.
The very positive relative competitiveness trends probably reflect a more positive situation in respect of the foreign-owned high-tech side of the manufacturing sector – within which last year the chemical and pharmaceutical sector accounted for over half of our goods exports, but employed only a small fraction of our manufacturing work force. Domestic manufacturing firms, almost all of which experienced major reductions in exports, may gain somewhat less ground in respect of competitiveness during this period. Nevertheless the overall favourable trend in relative competitiveness is encouraging, and should facilitate a recovery in exports when European and global demand starts to improve.
Both the ESRI and the Central Bank expect that, after a 14-15 per cent drop in national output between 2007 and 2010, there will be a recovery starting later this year and gaining momentum during the course of 2011. However, public perceptions of our economic situation are, I believe, being negatively affected by daily developments in relation to the banking situation which have been persistently attracting attention away from the evolving economic situation.
Understandable anger about Anglo Irish and Irish Nationwide complicates the issue greatly. No one can understand how a government could have ignored the inactivity of our regulatory system. There is also justifiable anger at the fact that all those responsible for our crisis, whether by incompetence on the regulatory side or by sharp practice and greed within the banking system itself, seem to end up being extensively rewarded instead of being punished. As the ESRI remarks, “the taxpayer should never have been put in a position whereby it had to fund Anglo Irish Bank to this extent. If the bank was of systemic importance, and this has never been established to our satisfaction, it should have been regulated accordingly.”
Unfortunately public concentration on the banking issue has distracted attention from more positive developments in the real economy in respect of which there is a hint of optimism in the ESRI report. For, having pointed out that its experience in forecasting for much of 2009 was of continual downward revision, its authors conclude by saying “we are mindful of the possibility that we might be surprised on the upside during the coming months”. Assuming, of course, that the Greek crisis does not destabilise Ireland again, as well as Greece!