THE ECONOMY faces into another tough year in 2012 but, for once in a long time, we can argue that the problems are not entirely of our own making.
The State has taken a decisive step towards fiscal rehabilitation by adhering to the terms of the assistance programme agreed in the dying days of 2010 with the European Commission, the European Central Bank (ECB) and the International Monetary Fund. In doing so, Ireland has managed to win back some credibility with investors and a limited return to the bond markets in 2013 – the acid test – looks plausible.
The single biggest threat to this positive trajectory is a recession in the EU which looks unavoidable in the first half of the year as a result of the economic and political dislocation caused by the swelling sovereign debt crisis. The consequences for Irish recovery are hard to gauge but a number of tests will have to be met in the first few months of 2012.
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The first is whether the defensive nature of Irish exports will shield the economy from the impact of falling global demand. The skewed nature of our exports, particularly in pharmaceuticals and food, protected this all-important driver of growth from the worst of the previous downturn. If this performance is not repeated, then one of the central planks of the strategy for recovery collapses.
The Government’s budgetary strategy will be tested also early next year. For reasons of political expediency or economic management, Budget 2012 has offered some respite from the unrelenting austerity of the previous five budgets. The decision not to raise income tax or to cut core benefits may be the consequence of foolhardy election promises. But it represents the addition of a new ingredient to the test tube that is the Irish economy.
It will become apparent in the next few months if this experiment is working and whether consumer spending – as measured by the amount of VAT generated for the exchequer – holds up or stages a recovery. One thing is certain: the scientists in charge of the experiment – the EU-ECB-IMF troika – will not let VAT returns drift too far off course given the extent to which the 2012 exchequer finances depend on them.
Yet the very fact that the troika has permitted the Government to pursue this budgetary strategy speaks volumes. Although austerity alone is no panacea for the economic woes of Ireland or any other euro zone state, the flexibility that has allowed the Government to mix and match in formulating policy is a clear dividend from the diligence with which it has implemented the assistance programme.
The foundations of the trust which underpins this arrangement will face another test when the Government’s reliance on VAT forces it to accelerate the introduction of politically difficult property and water taxes in order to stay on track in 2013 and beyond.
Also under the microscope in the first few months of next year will be the measures introduced in the budget to kick start the commercial property market. Time is running out. The continuation of a moribund property sector would be a big setback for the National Asset Management Agency’s plans and would put further stress on the Government’s finances.
The wisdom or otherwise of the Government’s banking policy will also become apparent. The expected introduction early next year of a personal bankruptcy and debt resolution mechanism will allow one of the last impediments to recovery – Ireland’s crippling level of personal debt – to be addressed. The banks, rescued at such a heavy price by the taxpayer, must play their part.
A failure to pass this and the other tests will focus attention in turn on what is arguably the Government’s most questionable commitment, the Croke Park agreement.
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However none of these domestic issues will matter much if the euro zone debt crisis is not resolved. The shape of the solution has emerged with greater fiscal integration and control leading in time to the adoption of a more conventional approach by the ECB.
The problem lies in the mismatch between market expectation and the time it will take Europe’s politicians to deliver the outcome. The incremental and minimalist approach that has characterised Europe’s response to the crisis is unlikely to change and the risk that some sort of political or financial “accident” will derail the process with catastrophic consequences remains high.
Faced with this prospect, the Government would be well advised to reflect on what worked for it this year and what did not. The grandiose posturing of the Labour leader during the election campaign did little other than make him seem impotent. Likewise the Minister for Finance’s resurrection of the threat to burn Anglo’s bondholders proved empty.
What proved effective was the resolute implementation of the assistance programme and the trust and credibility engendered with our temporary paymasters. More than anything else, this bolstered the argument for cutting the interest rate on Ireland’s loans. A similar move to defray or share the cost of rescuing the Irish banking system would transform Ireland’s prospects dramatically. And it is not an unrealistic aspiration in the context of the huge efforts that will have to be made to secure the euro zone.
The continued demonstration of our ability to manage our own affairs, despite the policy aberrations of the previous decade, is the strongest argument that can be made for further concessions.