Last chance for Cowen to avert looming economic meltdown

 

OPINION:Changes beyond anything hitherto contemplated are needed in the budget, writes DAN O'BRIEN

IRELAND IS rapidly moving towards the abyss of national bankruptcy. The Government’s response, with its forthcoming budget and other measures, must be proportionate to the dangers.

It is difficult now to overstate the magnitude of the crisis in Ireland’s public finances. One in four euro spent is being borrowed. The gap between revenue and expenditure is widening with each passing month. Public debt is exploding. So are debt servicing costs. In January and February alone, €175 million was spent paying interest, up a staggering 64 per cent on the same period in 2008.

Most of this money left the country. This haemorrhaging will not only continue, but will gush with ever greater force unless every possible measure to staunch it is taken with all due haste.

Central to achieving this are leadership changes in the financial institutions and the Cabinet because the perception of cronyism and Government failings have come together to raise the costs of borrowing.

The foreigners who account for almost all the lending that is keeping Ireland afloat are increasingly alarmed about the country’s creditworthiness (this can be seen in ballooning interest rates on Irish Government bonds). These lenders look at Government actions in relation to the banks and see that every decision taken, and every decision that could have been taken but was not, suited financiers. If foreign investors believe that a government is less concerned with repaying them than with looking after its friends, they shun its bonds or seek a risk premium for holding them. This is exactly what is happening to Ireland now. The perception of cronyism is one reason why the Irish Government faces the highest borrowing costs of any country in the euro zone.

That perception can and must be changed by resolute action. Though it is far too simple to blame bankers for all of the current woes, those who were involved in managing the banks have failed and must go. The interests of individuals who have failed so seriously cannot now be allowed to imperil the solvency of the State. For the Government to demand publicly the resignation of AIB’s chief executive and to refuse to accept Bank of Ireland’s chief executive designate would be proportionate, appropriate and fully lawful.

On behalf of the taxpayer, the Government has given lifelines to the banks. Without these lifelines, which come with great cost and risk to taxpayers, these institutions would long ago have gone under. Having taken such enormous responsibilities, the Government has every right to determine who runs the banks. By taking such a proportionate step, the Government would trumpet to the world that no one is being protected because of his connections, that there is no cosy clique that runs Ireland in its own interests, and that those who have failed so badly are not rewarded at the expense of everyone else.

The point should be driven home by finding replacements to run the banks from outside the country. The appointment of foreigners with no links to the Government would offer a clean break with the past, show that Ireland is serious about the long and difficult task of restructuring and rebuilding its financial system, and that as an open and internationalised economy, it seeks the best talent regardless of nationality.

But it is not only among financiers that a clean break is required. New appointments to the two main Government economic portfolios – Finance and Enterprise Trade and Employment – are needed as much as change in the banks.

Brian Lenihan, by his errors and inaction, bears much of the responsibility for what has become the worst budgetary disaster in the history of the OECD. His credibility is too seriously damaged to be repaired. He has become part of the problem.

To set out the inadequacies of Mary Coughlan as Minister for Enterprise Trade and Employment would be inappropriate and unhelpful. It suffices to say that at a time of national emergency, the patently and grossly unable, by their mere presence, should not be allowed to obstruct efforts to prevent outright meltdown.

Where other countries bring the best and the brightest from society to ministerial office, Ireland’s Constitution states that only Oireachtas members can sit at the cabinet table. For the position of minister for finance it adds the stipulation that he/she must be a sitting member of the Dáil. These are serious constraints, but they must be worked within.

As there is nobody on Government benches who has economic expertise, the Taoiseach himself should take on the role of minister for finance. By so doing, Cowen would signal that he understands the extraordinary gravity of the crisis and that he will bring his full prime ministerial authority directly to bear on attempting to solve it.

For Enterprise Trade and Employment, a non-political figure of high international standing could be brought into the Cabinet via a Seanad appointment (one of the sitting Taoiseach’s appointees could surely be prevailed upon, in the national interest, to stand aside). Peter Sutherland is the most obvious candidate given his stature in international policy-making circles, in the European Union and in the financial and corporate worlds. Knowledge that he has a hand on the helm would calm the bond market and reassure our European partners.

Most important in regaining credibility will be the supplementary budget the Government has so belatedly conceded to drawing up. There are two separate issues here: the credibility of the strategy it decides upon and the credibility of the arithmetic underpinning that strategy.

On the first issue, there have been calls by some normally authoritative figures to focus on raising taxes. Such calls are based on instinct and political preference – not evidence. The literature on fiscal consolidation processes internationally shows clearly that success comes from cutting spending, not trying to raise taxes (higher taxes can work when economies return to growth, but not while they are mired in crisis).

But one does not even need to look abroad for guidance on what must be done now. Ireland’s own experience before and after 1987 should be sufficient. Before that date the public finances continued to deteriorate because there was too little expenditure containment and too much tax-raising. When the emphasis was reversed after 1987, consolidation happened quickly.

The second dimension for the supplementary budget is that the numbers add up. The Government and Department of Finance severely damaged the country’s credibility when they published in October and January sets of figures that had, respectively, no and partial connection to the current awful realities.

There is no more room for error. This time, every data point in the April programme must look credible. In order to ensure this, and convince others that it has been achieved, the Government should work with the European Commission in drawing up the numbers. Its non-national stamp of approval would reassure that the Government’s political weaknesses and Finance’s technical inadequacies are no longer factors.

In the coming weeks radical and urgent action is needed. It must be far beyond anything that has hitherto been contemplated. And the Government must get it right. The wrong decisions will change the course of Irish history.