Paying a price for unaffordable wages and bonuses

 

External factors as much as domestic trends will determine health of economy, writes GARRET FITZGERALD

WE ARE a good deal worse off than we were before this crisis hit. Our national output this year is likely to be about one-seventh lower than three years ago and, even after allowing for the resumption of emigration, our population today is slightly higher than it was in 2007. So the average purchasing power available per head of our population is now almost one-sixth lower than was the case in 2007.

That decline has been far greater than the drop of 1-5 per cent in purchasing power experienced by most other euro zone states. So, because of the unique mess that government policies led us into between 2000 and 2007, we have lost a lot of ground compared to the rest of western Europe. That is the bad news.

However, we tend to forget that three years ago we were the most prosperous country in Europe, Luxembourg excepted. According to OECD data, the purchasing power of the resources available to us in 2007 was one-seventh higher than the average for the rest of western Europe – and indeed several percentage points higher than those available to the next most prosperous European state at that time – Sweden. So, although virtually no one in Ireland recognises this fact, the reality is that even after the dramatic collapse of our economy, since 2007 our resources per head have been reduced to – but not below – those of the rest of western Europe.

However, like other overspending countries such as Spain, we also had to eliminate a substantial external payments deficit, with the result that the amount left for us to spend at home has been reduced by about one-sixth. The brunt of this has, however, been borne by a massive three-fifths cut in public investment – with the result that the fall in average living standards has been about 10 per cent.

This has been necessary because in the middle years of the last decade, before the housing bubble and bank collapse, we had allowed unsustainable prosperity to mislead us into paying ourselves unaffordable wages, salaries, and bonuses – sums that ran far beyond the capacity of any European country. And at that time many people – including most of the media and Opposition politicians – were intimidated by a dangerously bullish public mood into not challenging this deception.

Understandably, we are suffering from the disillusionment and anger of a people who were encouraged to believe they had a right to what was an unrealistic standard of living. And it has been very difficult for the Government that created this problem to persuade workers and their dependants to accept the need for a return to a sustainable living standard. In order to succeed, they would have to admit to the serious policy errors that created this problem – something our government leaders have not done.

Omissions and other inadequacies marred the Taoiseach’s recent account of the mid-decade banking and housing bubble issues. More seriously however, he clearly felt unable to make any reference to the public policy blunders for which he shared collective responsibility in the years after 2000, in the form of grossly excessive public spending, price inflation and public service pay policies, which together had made us uncompetitive before the housing bubble and bank crisis.

Six months ago, I said in this column that the Government must first act to undo the damage caused by their mishandling of the initial Lisbon referendum; to enact Nama legislation about which the Opposition parties had a hang-up and finally to carry through their December budget. But I added that, with those tasks completed, it would be better for the country to have a change of government.

I said this not in criticism of the initial remedial action taken by Brian Lenihan – the scale of which, (whatever about its specific content), was well-judged – but simply because I believe a new government would be better placed to provide the leadership required to get us out of the hole we are in.

As for our domestic situation, it is still too soon to judge whether there are reliable signs of recovery. On the domestic side, the most that can be said is that the decline in retail sales exclusive of car sales, which have been artificially boosted by scrappage schemes, has been rapidly decelerating since the end of last year. They fell by barely 1 per cent in March, as against a drop of almost 7 per cent during the course of last year.

Meanwhile, since January last, consumer prices, which since September 2008 had fallen 8 per cent, thus partly offsetting the drop in incomes, have started to rise again at a modest rate, equivalent to 2 per cent a year.

In the first two months of the year exports – upon which a recovery mainly depends – were well up on the last quarter of 2009. But this growth seems to be dependent on a single sector: chemicals and pharmaceuticals.

However the recent sharp drop in the euro, if sustained, should help to start a reversal of the 25 per cent decline in the value of non-chemical and pharmaceutical exports of the past eight years. In the months ahead the composition and value of our exports will, therefore, be monitored by everyone concerned with the future of our economy – which depends upon our capacity to recover our lost share of global markets.

Of course much depends upon the successful international tackling of the euro zone issue, and the messy, ham-fisted way in which this matter was handled by European governments up to the crucial meeting of May 9th would not encourage optimism about its future. Nevertheless, what I find encouraging is that despite all that, the logic of the situation eventually prevailed.

Deep disagreements between European governments and apparently insoluble German political and constitutional obstacles had to give way before what was recognised by all concerned as a need to save the euro. And that compelling need is why I remain optimistic about the survival of our currency.