Coalition must look beyond public relations coups

INSIDE POLITICS:Closing our Embassy to the Holy See or crippling the potential crown jewel in the banking sector won't make things better

SINCE IT took office in March the Coalition has shown itself very adept at the art of gesture politics. The way it played to the gallery by forcing the banks to pass on the European Central Bank rate cut displayed the populist touch that has characterised its performance to date.

Whether the Government has the capacity to take courageous decisions in the long-term national interest is another question. So far the omens on that score do not look so good, but a proper judgment will not become possible until all budget decisions are unveiled.

The grandstanding by Enda Kenny and Eamon Gilmore on the bank rate cut may have gone down well with the public but the upshot is that AIB, a big and potentially profitable bank owned almost entirely by the taxpayer, has been forced to take a decision that will render it uncompetitive.

The bank executives had a justifiable case for not passing on the rate cut, as they had chosen not to increase their rates in line with the last two ECB rate increases. However, the interests of the bank’s long-term viability, and ultimately of the taxpayer, were sacrificed to the Coalition’s need for a public relations stroke.

Something similar happened in the case of the closure of the Irish Embassy to the Vatican. The decision to close one of Ireland’s oldest mission’s abroad had obvious short-term popular appeal but the country’s future interests and history were ignored in the process. What made it even worse was the disingenuous statement from the Tánaiste that the Embassy to the Holy See yielded no economic return. The Embassy to the Vatican was never about economic return in the first place. The decision to close it had nothing to do with economics and, in any case, if that was the criterion then many other embassies would be closed along with it.

There is still widespread outrage at the disclosures of clerical sexual abuse, just as there is about the behaviour of the people who ran our banks, but closing our Embassy to the Holy See or crippling the potential crown jewel in the State banking sector won’t make things better.

The important question is whether the Coalition is capable of matching its public relations successes with real policy decisions that will help the country along the road to recovery, assuming the euro zone is going to survive.

The indications in the early days were good. Michael Noonan’s swift move to recapitalise the banks restored a great deal of international confidence in Ireland. That in turn put the country in a good position to benefit from subsequent jitters in the euro zone with a substantial cut in the interest rate we are paying on the bailout deal.

All the election rhetoric about “burning bondholders” and telling the ECB where to get off was quietly forgotten as the Government continued to implement the banking strategy put in place by the heavily criticised government led by Brian Cowen. In the process Ireland’s credibility improved and we are no longer regarded internationally as a basket case like Greece.

The Coalition would do well to remember, though, that the country has been down this road before. After the initial economic shock in the autumn of 2008 Ireland was perceived for a time as the “good boy” among troubled economies, with a government prepared to take tough decisions to get the public finances under control.

All that changed because of the Cowen government’s slowness to react when the Greek crisis took a turn for the worse in the late spring and early summer of 2010. Ireland spiralled into bailout territory before the Fianna Fáil/Green Party government knew where it was, and the rest is history.

The Fine Gael/Labour Coalition could also find its credibility evaporating if it fails to meet the targets set out in the EU-IMF programme. The medium-term fiscal statement issued last week recommits the country to the target of achieving a budget deficit of 8.6 per cent of gross domestic product next year, through a budget adjustment of €3.8 billion, but it does not leave a lot of room for manoeuvre if things go wrong or growth does not reach the target of 1.6 per cent of GDP. The newly established Fiscal Council urged the Coalition to aim for a higher adjustment target of €4.4 billion to put the country on a faster trajectory to healthy public finances, but the Government has chosen to ignore that advice.

Achieving an adjustment of €4.4 billion is easier said than done and the short-term social cost cannot be ignored. Still, all experience shows that the sooner the adjustment is made the better for the country in the long term.

The cuts in the capital programme published on Thursday indicate a government willing to make politically safe rather than radical decisions. Cutting capital spending is so much politically easier than cutting current spending but there is a real cost in terms of jobs that will be lost as a result. Kenny and Gilmore spent the election campaign saying “it’s all about jobs” but when it came to hard decisions it seems other things are more important.

The protection of the pay, pensions and conditions in the public service appear to be a bigger priority for this Government than the job creation potential of the capital programme or the hardship likely to be inflicted by cuts in the social welfare budget.

Of course the entire budgetary strategy could become academic if the euro zone collapses. That would present the Government with some really difficult choices, all of them with appalling consequences. Ireland as we know it could not survive with a currency of our own, so the question will be whether we can stick with our link to the German currency or whether we should swallow our national pride and go back to sterling.

In the Dáil on Tuesday, Shane Ross forecast that if the euro crisis continues, “every country will be running for its own lifeboats”. He asked the Taoiseach what Ireland’s Plan B was. Not surprisingly, Kenny refused to be drawn on the issue. With luck we will never know what Plan B might have been. Nonetheless, it is to be hoped that the Department of Finance is preparing for the worst, just in case.