Change of government will not solve our economic woes
OPINION:Even if there was a change of government, the economic and banking mess in which we find ourselves will continue for some time, writes MICHAEL CASEY.
MANY COMMENTATORS have begun to speculate about a change of government before the next general election.
This speculation has been triggered by recent political opinion polls and by the Greens who want to review, and possibly reopen, the agreed programme for government.
Would a change of government benefit the economy? This is very unlikely. Fine Gael has some interesting policy ideas but Labour remains virtually a closed book. The fact is that there is very little any government can do to fix the economy, banks and public finances.
A great deal could have been done during the good years to avoid a deep recession but it wasn’t done, despite repeated warnings. Fixing a broken economy is a completely different exercise and one for which all political parties are ill-equipped. The analogy that comes to mind is breaking a mirror. It is foolish to let the mirror fall in the first place but once it is broken it is extremely difficult to mend. We can discuss and debate different kinds of glue but the mirror will remain damaged – or “scarred” to use the Economic and Social Research Institute’s (ESRI) term.
The fact is that no one kind of glue is significantly better than any other kind. No new government can provide a better adhesive. There are several reasons for this.
First, the normal range of policy instruments does not exist in this country. Because of Economic and Monetary Union membership we have no control over interest rates or over the exchange rate. There can be no question of leaving EMU to regain control of these instruments; that way madness lies. Consequently, no government of any hue can devalue the currency or reduce interest rates to get the economy going.
Second, the public finances are not just a mess but a dilemma. We can restore stability to the public finances but only at the expense of the economy. We can reflate the economy but only at the expense of the public finances. This is an oversimplification perhaps, but it illustrates the lose/lose nature of the problem (which could have been avoided).The promise of further taxes next year plus expenditure cuts is undermining confidence and could result in civil unrest. Many people have no experience of recession and are frightened by it.
Third, social partnership probably won’t deliver an appropriate incomes policy which is so badly needed to regain competitiveness. According to the ESRI’s recent paper on recovery scenarios, this is crucial if we are to see decent growth rates in the next decade. Unfortunately, social partnership is a wounded animal and is incapable of delivering this outcome. Which government would set aside social partnership and impose wage cuts? The answer is none.
But in any event the recovery of competitiveness is likely to be a medium-term process; it is not going to be achieved over-night. In the short run of course, lower incomes mean lower consumption – another dilemma.
Fourth, public sector reform on the required scale would probably be a 10-year project. Existing bureaucratic practices are deeply embedded and any attempt at reform is likely to be resisted, regardless of which government happens to be in power. The much-vaunted Strategic Management Initiative took years to implement and yet failed to deliver the goods.
Fifth, fixing the banking system will be a Herculean task. The difference between the National Asset Management Agency (Nama) and full nationalisation is not the real issue; indeed, it is something of a distraction. The crucial question is how soon and how well will the agency function when it comes to the valuations and horse-trading which will be required. In terms of the analogy, how well will the glue be applied? If the National Treasury Management Agency (NTMA) feels that Nama has been dumped on it, this is less than auspicious. It is easy to imagine the Central Bank, the regulator and the Department of Finance being relieved to pass the Nama poisoned chalice to the NTMA.
The NTMA may feel it is being used as a scapegoat. It was never popular with the other agencies partly because of pay relativities and partly for reasons which go back to the Public Accounts Committee hearings on bogus non-resident accounts. Institutional rivalries and strained relationships do not augur well for the extremely complex tasks which lie ahead. Adding politics and legal challenges to the mix is likely to multiply the complexity. In this kind of environment the chances of taking over the toxic assets and trading them off at the “right” prices, are slim.
But it is most unlikely that a new government would change this institutional set-up. Starting over again hardly bears thinking about. Even on the most optimistic assumptions it is hard to see a reasonable flow of lending by the banks for another year or so. The Fine Gael proposal about creating a good bank is not all that different from the Nama bad bank. In a way, it is the other side of the same coin; the basic idea of separating the good and bad assets is common to both. The objective of both proposals is to get credit flowing again from the good bank or banks. Under the Nama proposal the taxpayer is more at risk; under the Fine Gael proposal the shareholders and the “legacy” banks are more at risk. Both proposals could lead to nationalisation.
It is possible that Fine Gael in power would insist on its proposal being adopted but it is not clear that this would help the economy to a significantly greater extent than Nama, despite its flaws. Both adhesives are substantially the same; it all depends on how well they would be applied.
If Fine Gael were to try to implement its proposals – including the questionable removal of the state guarantee to the banks – the provision of credit would probably be delayed for another year. This would scupper one of the main assumptions behind the ESRI recovery scenario in 2011. The chopping and changing of policy would, itself, damage Ireland’s reputation even more.
Sixth, it would be wonderful if a new government could wave a wand and attract more foreign direct investment. But the international climate is not auspicious. The world is in recession, we have serious competitiveness problems, and various questions are being raised about our preferential tax regime. There is also the shadow of quasi-protectionism in the US. A change of government is not going to effect any improvement on this front. Indeed, no political party has formulated an alternative industrial policy.
Finally, most important economic decisions are made in Brussels, Frankfurt and Washington. Irish governments of whatever hue do not have the sovereign power to make much difference. They should, of course, have the ability to hold the mirror and keep it safe, but if they let it fall there is not much they can do to fix it. For all these reasons the economy would not benefit very much from a change of government however enlightened it might be. The present Opposition parties would have much to lose if they came to power before the recession ends.
Michael Casey is a former chief economist with the Central Bank and a member of the board of the International Monetary Fund