No growth means second bailout grows more likely

 

ANALYSIS:Stagnating economies at home and abroad spell gloom for hopes of Ireland growing its way out of trouble

AT THE half-way point in Ireland’s three-year bailout ignominy, the prospects of exiting the “programme” by next year are gradually fading. Although it will be some time before it can be said for certain that the Government will have to go cap in hand to look for a second bailout, weakness and risks outweigh reasons for optimism.

The biggest weakness is a stagnating economy.

In this Ireland is not alone. The focus across Europe in recent weeks and months has increasingly been on economic growth, both because there is far too little of it and because without it, Ireland and Europe will drift on to the rocks. The continent’s multiple debt crises cannot be resolved unless economies expand.

As such, Ministers were talking up their plans for growth-boosting measures yesterday. It was significant, too, that the only on-the-record comment of note by any of the troika people yesterday was also about growth.

The IMF man, Craig Beaumont, mused by phone that if the economy plodded along at its current pace, public indebtedness would go on rising, rather than stabilising and then starting to fall, as the bailout programme envisages.

Although he didn’t say it, that would push Ireland towards Greek territory. If growth does not pick up sustainably over the next couple of years the prospects of avoiding default will dim, particularly given that the Irish State’s debts are already at, and possibly beyond, the point of manageability.

Beaumont’s comment was indicative of the darkening mood about austerity’s poster child getting back on her own two feet by next year – the domestic economy keeps shrinking and exports cannot compensate if the rest of the world is contracting too (this week alone, Britain and Spain formally announced that they had returned to recession).

There is almost no end to the number of issues that would make even the starriest-eyed optimist glum these days, but few cause a greater sense of despair than not knowing what to do about growth, despite the confident pronouncements of those who claim to know all the answers.

Liberals say freeing up hide-bound professions and uncompetitive markets will unleash growth, while leftists are as sure that investment programmes are the way to boost economic activity. Both have a point, but the gains from these courses of action are highly uncertain in magnitude and timing.

Opening up markets means more dislocation in the short run, which could further enfeeble already weak demand. Investing more now means more debt (and ultimately, more taxes) which could be self-defeating if it undermines confidence.

The sad truth is that economists do not know a whole lot about what makes economies grow – if they did, the entire planet would be prosperous and expanding at a clip to keep everyone happy.

But despite this, and because the need for growth is so great, even the European Central Bank’s chief Mario Draghi has been getting in on the growth act lately. Speaking earlier in the week to the parliament to which he is nominally accountable, he called for a euro zone “growth compact”. The ECB’s newfound concern for growth could mean that Draghi will do his bit to stimulate it next month by cutting interest rates – something that is long overdue both because it is easy to do and because it has fewer near-term downsides than the measures mentioned above.

If there is reason to hope for a rate reduction from Frankfurt, there is less reason to fear a second budget this year from the Department of Finance.

Despite weakness thus far in the year and poor growth prospects, Michael Noonan’s claim yesterday that there would be no second budget this year looks increasingly plausible.

Five months into the year and budgetary targets are being met. At this rate, it would be autumn before it could be said with certainty that full-year targets won’t be met. At that point there would be a strong case for waiting until budget 2013 in December before acting – better to give the ailing Irish economy one big glug of unpalatable medicine than trying to force down two spoons within a few months.

Although it has been some time since the last bank recapitalisation, the bitter taste of doing so lingers. And, horrifyingly, the banking nightmare is far from over.

Yesterday, the troika voiced concerns about the banks’ loan books. They fear that more mortgage holders and small businesses than originally anticipated may not be able to repay the debts.

All of this is complicated by the impact of modernising bankruptcy laws. While nobody suggests that going bust should not be made easier in Ireland, this is the worst possible time to change regime (like so much else, it should have been done in the good times but because there were no votes in doing so it went undone).

What the troika described prosaically as a “tradition of debt servicing discipline” is likely to be less about a tradition of discipline and more to do with Victorian credit protection laws.

No matter how warranted it may be to put in place a fairer system, doing so now risks a damburst of personal insolvencies. If that happens the banks could burn through so much capital that they need even more.

The last government’s standing with voters was undermined by multiple failings, but nothing did for its credibility more than getting it so wrong so repeatedly on the scale of the banking fiasco.

If Noonan has to tell the Irish public that he will take even more of their money to prop up infernal banks, the Coalition’s already weakening support would take a hammer blow.

But, thankfully, there is a way to go before that has to be contemplated. And just as a second bailout and a renewed slump are not inevitable, neither is more bad banking news.

A final observation: over the past 10 days the troika people did not meet Opposition parties and interest groups, and yesterday they were thinner on the ground than usual having decided to abandon their customary end-of-visit press briefing (a very grumpy Vincent Browne showed up at the last one three months ago and seems to have frightened the technocrats so much that they did not want to subject themselves to the broadcaster’s ire again).

While it cannot be a particularly pleasurable experience for bureaucrat-types to be berated by all and sundry, it’s surely better for a scene to be had and the air cleared than to skulk away and leave ill feeling bottled up.


DAN O'BRIENis Economics Editor

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