Between Dublin & Brussels

A birthday celebrated.

Our youngest daughter, Mary Elizabeth had a party to celebrate her 21^st birthday last week.

We all had a great time. Mary Elizabeth is studying history in Trinity College, Dublin and is focussing on the twentieth century. The attendance at her party demonstrated to us how international student life in Dublin has become. There were friends there from the United States, England, France, Sweden and Australia.

New thinking on the debt crisis

I was in Brussels during the week to attend my first meeting of the Board of Directors of the Centre for European Policy Studies, CEPS, which had been voted one of the top ten think tanks in the world.

It is doing some really topical work on how best to cope with the effect of the euro of the unsustainable gap between income and expenditure in the Greek Government. A CEPS paper by Daniel Gros and Thomas Mayer suggests that the EU is better placed to manage an orderly rebalancing of the situation than the IMF would be. This is because the EU has more levers it can use to ensure that commitments given by Greece are adhered to. It can withhold structural funds and the ECB can decline to accept Greek bonds in its monetary operations.

CEPS suggests the building up of a fund to handle the funding of any future rescues that might be needed. Rather than burden the taxpayers of those countries who have managed their finances properly with the burden of helping out those who have not done so, CEPS suggests that the fund be built up to help out euro countries who may get into funding problems by small annual proportionate contributions/levies to be paid only by countries which are exceeding the EUs debt and deficit limits.

This would be a way of minimizing the risk of future problems while also creating a fund to deal with a problem if it does arise. I think this is a worthwhile idea. I hope it can be introduced without creating the need to amend the EU Treaties, which is very difficult to do.

A situation is which no bank, or no state, can ever be allowed to fail is impossible to defend because it rewards irresponsible behaviour.

The goal must therefore be to create a situation in which banks, and even states, can be allowed to fail, but to do so in a managed and orderly way that does not lead to a sudden panic and the undermining of other banks, and states, that can manage their finances if given some breathing space. The absence of such arrangements contributed to the present crisis.

Competition does more than just keep prices down

Another contributor to our present crisis was the fact that some banks had simply become too big. If banks were all small and local, some of them could have gone out of business without creating a panic or bringing others down with them.

This brings up the argument as to whether the EU and the US anti trust/competition authorities should have or use more power to force overlarge banks or analogous institutions to sell off parts of their business to new competitors.

I believe this question of ” bigness” and how to control it will become one of the major economic policy questions of the next ten years, because the problems of “too big to fail” are not confined to banking. It will be controversial too because the shareholders in the companies that are too big will not want to be forced to sell off assets and many of those shareholders are pension fund representing ordinary saver and employees.

The EU Competition rules are there to deal with this. Their goal is of course to keep prices low by guaranteeing completion. But they do more than that. They prevent too much concentration of power, power that could be used to stifle innovation, or to exercise undue influence over the political process

Crisis, An opportunity to make changes

The economic crisis is an opportunity to make changes that would be more difficult in easier times.

IRELAND NEEDS A NEW DEVELOPMENT MODEL

Ireland needs a new development model. The credit crisis is a symptom of a shift in the world economy that will not reverse itself . We need a new approach that faces realities as they are, not as we might wish them to be. Normal conditions, as we once thought them to be, were unsustainable and will not be returning, ever.

We should not focus on defending our individual positions against change. Nor should we simply wait for something to turn up. Instead we should focus relentlessly , not on ourselves, but on what we have to OFFER the rest of the world….that THEY might be willing to pay for.

KEEPING SKILLED YOUTH HERE A KEY GOAL

The greatest risk we now face is that we may lose a whole generation of young people to emigration, our best educated generation yet, leaving Ireland, never to come back. There is a comforting assumption that, just as emigrants returned in the 1970’s and the 1990’s, this generation of potential emigrants will return too in ten or fifteen years. This is unrealistic.

If you look at the papers, published last week by the Bank for International Settlements and last year by the European Commission, on the impact of ageing populations on the fiscal position of developed countries, you will see that, unless entitlements for the elderly change, Ireland will face a bigger problem between 2020 and 2050 than most other European countries, a problem that dwarfs anything that has been brought about by the banking crisis.

To support its aged population on present levels of entitlement, Ireland would have to have levels of taxation far above what we now have. Today’s emigrants will not want to return here to pay those taxes, unless we do something big now to change the entire dynamic of our public and private sectors.

A GREEN PAPER ON PUBLIC FINACES AND AGEING

We need to have an honest debate on how the very large additional long term

fiscal burden of ageing can be borne. Changes will be necessary and difficult, but these should not be sprung on people. That is the best way to keep the essentials, and to avoid conflict or hasty ill considered decisions which might otherwise be announced overnight, and withdrawn a week later.

The long term(2020-2050) public finance implications of continuing present policies, while having proportionately far more older people in our population, need to be laid out fully for our people, including the tax implications of that for those of working age. All the options should be explained, including the advantages and disadvantages of each. A Green Paper might be a good way to do it. Irish people of all ages are reasonable people, and will be able to face difficult decisions, as long as all the cards are put on the table.

WHAT PUBLIC SERVICE CAN LEARN FROM MULTINATIONALS IN IRELAND

But we also need to change the way we deliver all other tax funded public services too.

To see how that might be done, we should look at one of Ireland’s success stories, the attraction and centralisation here of the back office and administration functions of global multinationals of all kinds. They have come here, and continue to come, because they have discovered that that, with the use of information and communications technology, they can get that work done more efficiently and make better use of their peoples’ talents in one location here in Ireland rather than by duplicating those services in each place where they are used.

Can Irish Government not learn from this? Why does Irish Government need to duplicate separate back office and administration facilities in every local authority, in every state agency, and in every Government Department dotted around the country?

Just as global multinationals have been able to strip out layers of inefficiency, cost, and duplication by coming TO Ireland and centralising here to save costs and overheads, surely Irish public administration can do the same IN Ireland? Surely Irish public administration can also shorten decision making loops, and eliminate multiplicities of grades of staff as the multinationals we attract here have done?

HOW TO KEEP THE YOUNG AT HOME

Meanwhile the critical challenge is to ensure that as many as possible of our well educated 15 to 28 year olds stay here in Ireland, and work here, not just pursue endless courses. Let me make some suggestions.

A PRSI and income tax holiday might be granted up to the age of 26 to young people who have completed a third level qualification to make it attractive for employers to employ such people. It might be accompanied by a relaxation of the minimum wage rules.

Am internship programme in all Irish Government services might be introduced as a temporary measure so that we keep talent in the country. I was amazed at the number of highly talented young Europeans and Americans who competed to work as unpaid interns in the European Commission office in Washington, just to learn about how the office worked.

Both these proposals are short term stop gap measures. We need to change our entire development model as a nation, if we are to keep this vital generation in Ireland..

Irish people are very patriotic. Surveys show we are more willing than most to make sacrifices for our country, of which we are proud. If offered a credible description of the changes needed, and the possible long term benefits, Irish people are willing to do difficult things to bring them about. We have seen something of that in the positive response to the 2010 budget, a very necessary budget that has bought us breathing space, but no more.

A DEVELOPMENT MODEL THAT CHANGES THE CULTURE IN ALL SECTORS

Now the people need to be offered something with a much longer time frame—a new development model for the country, built on an understanding of past successes and failures, but presenting an optimistic possible future that is derived from actions taken now.

We have had development models before.

In the 1920s, the model was export led growth based on agriculture.

From 1932 to 1956, the model was a protectionist one, which led to economic and cultural stagnation.

From 1956, and the exemption from tax of export profits by Minister Gerald Sweetman, we have had a model which relied heavily on exports generated by foreign direct investment. That model brought us tremendous success up to 2000, when we started to lose competitiveness rapidly, and the credit boom concealed reality from us until 2007.

Now we need to restore competiveness by cutting costs, the cost of energy, the cost of wages and professional services, and the cost of public services. But that must be accompanied by something more positive, a lifting in the productive capacity and the inventiveness of our public and private sectors.

We need to change the culture in every area of activity, from the care of the elderly to legal services, from engineering, to the health services, to the universities. The new culture has to be one which focuses on using new technologies and practice from all over the world to bring new and better products and services to potential customers from all over the world.

BRIDGING THE BIG GAP BETWEEN IDEAS AND SALES

What is missing in Ireland is a bridge between the generation of a new idea or a patent, and its conversion into a new product or service in Ireland. I was shocked to read that the share of the turnover of Irish firms going to product innovation is only 5% in small firms and 6% in bigger firms. In stark contrast, the figures are 15-26% in Slovakia and 8-15% in Finland.

But those figures are for private businesses. How much of the turnover of the Irish health service –a large talent bank- is devoted to devising and testing new service ideas? A similar question might be asked of our public transport monopoly.

Our tax funded universities might also be asked how vigorously they are pursuing Enterprise Ireland to find firms for them with whom they can collaborate in developing new products and services.

To get the right answers to these questions, we need to tell all these bodies that they can keep the proceeds they earn from any commercial successes that originate with them.

Product and service design needs to be made academically respectable. It needs to be able draw on engineering, sociology, psychology and many other disciplines. It should be backed by a new mindset in our colleges at every level. They have received very large sums of taxpayer funds through the Science Foundation and have used it to generate more Ph Ds. But can we identify a commensurate increase in innovation in Ireland flowing from all this investment? How many of these Ph Ds are engaged in new product development and design in Ireland?

In essence, we need to apply all our talents to the practical tasks of developing new products and services that people in other countries will buy, or which will improve the efficient use of our own resources here in Ireland.

Speech by John Bruton, former Taoiseach, at the annual dinner of the ACCA in Thomond Park in Limerick on Friday 19^th February at 8.30 pm

The greatest of all englishmen

Finest Years: Churchill as Warlord 1940-45 Max Hastings (Harper Press, £25)

Max Hastings starts his book, perhaps with a view to promoting sales among patriotic British readers, with the claim that Churchill was the greatest Englishman and one of the "greatest human beings of the 20th century, indeed of all time". The book itself certainly demonstrates that he was human, human in his self-centredness, but also human in his sense of humour. It draws a contrast with Roosevelt, who emerges as distant and non-committal, unwilling to get too far ahead of US public opinion until America was attacked at Pearl Harbour.

Despite the fact that President George W Bush had a bust of Churchill in the Oval office, US public opinion at the time, and Republican opinion in particular, was very sceptical of Churchill and of the British war effort against the Nazis.

After the fall of France in 1940, only 30pc of Americans thought the allies had a chance of winning in the end. In 1941, before the Pearl Harbour attack, Americans were far more supportive of Roosevelt's oil embargo against Japan, than they were of his lending supplies to Britain. Even as late as 1944, far more Americans expected Chiang Kai-shek's China to be a more trustworthy post-war ally than Britain would be.

Against this background, Churchill had to fight an uphill battle to get the US help, which he believed was the only way he could enable his country to hold out. He faced scepticism from Americans who felt he was trying to use US resources to preserve Britain's rickety old empire. But he persisted and got the support he needed.

British opinion was firmly behind him in 1940, but as soon as the invasion threat eased, he faced more difficulties at home. In 1932, 48,000 man days were lost through strikes. In 1940, when Britain was under immediate threat of invasion, 163,000 days were lost. But by 1944, the annual toll of days lost through strikes rose to 1,048,000 days. This shows the limits to Churchill's capacity to rally his people.

Churchill, for reasons not fully explained in this book, was very nervous about the invasion of France, and believed that the best way to defeat the Germans was to go up through Italy and on to Vienna. He was proven wrong in this judgment.

It is also clear now that it was in neither of these theatres that Hitler's military machine was broken. That happened on the Eastern Front, at Kursk in 1943, long before D Day in June 1944. After Kursk, it was only a matter of time. But D Day did save Western Europe from Soviet domination, for which a great debt of gratitude is owed to the Americans.

This is a well-written book. It makes great use of newly released archives and throws much light on how today's Europe came to be what it is.

Book review by John Bruton

A week in Spain.

Finola and I have just returned from a short break in Spain. We stayed near Nerja on the coast of Andalucia.

We took the opportunity to visit Granada, and its magnificent Alhambra palace. This beautifully preserved remnant of Muslim Spain is worth seeing. The journey across the Sierra del Chaparral to get from the coast to Granada was a chance to experience some of the peninsula’s dramatic scenery.

While in Spain, I read John Hooper’s book, “The New Spaniards” , which is a great introduction to the changes that have taken place in Spain in the past thirty years, similar in scale to the ones that have taken place in my own country in the same period.

The Euro

Much debate is raging in Europe now as to whether to taxpayers of the other euro area countries should provide a stand by credit of some kind to Greece to help it through its present budgetary difficulties. When the euro was initiated a provision was made for a “no bail out” rule. Now it is argued that, to get around this rule, the individual member states should provide the help to Greece, rather than the EU as such. It is also argued , for example by Wolfgang Munchau in the Financial Times, that if the IMF were to be brought in to provide a financial back for Greece that this would send out “a disastrous signal” about where the euro was headed. Instead he argued up that the euro countries should set up its own anti crisis plan to deal with the problem of countries like Greece, a sort of local IMF.

I have to say I am not convinced by these arguments. Markets look for predictability. The EU should try to act within predictable rules. The EU Treaties do not authorise what is being proposed and no case for such measures was made in the Convention when the Lisbon Treaty was being put together. The member states of the euro are all individual members of the IMF and are contributors to its funds. Those contributions give them rights and responsibilities. They were not asked or expected to give these up when they joined the euro. It is hard to argue that only the IMF members who a part of a currency union should not avail of IMF facilities ,just because they are members of a currency union, and that they should instead rely on the other members of the currency union. There is no such stipulation in the rules of either the IMF or the euro.

Perhaps if all else has failed, and the IMF is not up to the job, there might be a responsibility on the shoulders of other member states. Improvisation is sometimes necessary in politics. But it should not be the first, or the only, option

About the American Economic Dominance

Last week I chaired a debate between students of Harvard University in Massachusetts and students of Trinity College, Dublin at the Hist debating society in Trinity.

The motion was that the House welcomes the decline in American economic dominance, and it was proposed by Trinity and opposed by Harvard. Opinion was very evenly divided among the student audience and the case was argued vigorously on both sides.

Those arguing for the motion put a lot of emphasis on alleged abuses of American military dominance, such as the invasion of Iraq and detention without trial in Guantanamo Bay in Cuba.

My own sense of it is that military dominance and economic dominance are two very different things. The US has been economically dominant in the world since the 1880s, but it did not become the world’s militarily dominant power until about 1943. It was quite happy to allow the British Navy bear the expense of keeping the world’s sea lanes open for American commerce! Indeed the US kept a much smaller military establishment than it could have afforded for many years. It felt its geography was enough to protect it from attack, and that it did not need to divert economic resources into the military.

It was only in the second world war that the US started to devote a serious proportion of its vast resources to military matters and thus became militarily as well as economically dominant in the world.

Europeans have reason to be glad that this happened and that the US was able to intervene militarily in Europe by invading France on D Day in June 1944. Germany had already lost the war through it major defeats by the Soviets at Stalingrad and Kursk, long before D Day. But if the US had not invaded France in June 1944, and had focussed solely on defeating Japan, it would have been the Soviet Union on its own that would have completed the defeat of Germany , and thus all of continental Western Europe would have come under Soviet dominance.

Strangely, the debaters did not have much to say about the ill effects of economic, as distinct from military dominance. The big side effect of US economic dominance is the dollar’s status as the world’s sole reserve currency. This has meant that the dollar could defy gravity and the US was not subjected to balance of payments constraints of the kind that disciplined other countries. This allowed the US to run big deficits with China, which in turn has pumped that money back into the global financial system, and gave us the credit boom that has recently burst. If the dollar had not been not the world’s sole reserve currency, it would have lost value much sooner, the US would not have had such a big boom, nor such a big bust. That would have been good for all of us.

But over all, it has to be said that US economic dominance has had broadly beneficial effects because, with US economic leadership, the World Trade Organisation has opened up the world’s markets to exporters from poor countries, promoted economic liberalisation, and in the last fifteen years has brought prosperity to billions of poor people, particularly in Asia. That has made the world more interdependent than ever before, which has created its own dangers. The trouble now is that the archaic constitutional system of the US makes it very difficult for a US Administration to contribute properly to governing the more prosperous and interdependent world it itself has done so much to create.

It cannot pass a climate change Treaty because, under the constitution, any Treaty can only be ratified if two thirds of its Senators vote for it. A two thirds majority in the Senate is almost impossible to achieve if a Treaty is even slightly controversial. One Senator can block the appointment of vital leaders in a US Administration. Almost 40% of the posts in the Administration that require Congressional approval are still vacant, and one Senator from Alabama alone is blocking 70 appointees because he is looking for concessions for his state. The difficulties passing healthcare legislation suggest that the much more difficult task, that of closing the fiscal deficit by expenditure cuts and tax increases, will be completely beyond the capacity of Congress, at least until it is almost too late. The US is already in financial arrears to the United Nations

The American constitution of 1783 was the world’s first written constitution. It gave the world a model of the rule of law and the liberty of the individual. But it was designed for an agrarian society which wanted to curb government, not for giving global leadership of the kind the US is now called upon to provide. It was designed for the eighteenth century, not the twenty first. It needs to change, for the sake of the world as well as for the sake of the United States.

EU/US Summits

The news, emanating initially through a background briefing of an American newspaper, that the US President will not attend the planned regular EU/US Summit in Spain in May will deeply disappoint many Europeans who believe that a structure should exist for regular top level contact between the European Union and the United States. It may mean that there will be no EU/US Summit at all this year, because a meeting without President Obama is not a Summit.

I believe that a regular system for EU/US Summits is a good thing in itself and a good use of time, especially if there is no big announcement to be made, because the very regularity of the meetings prevents misunderstandings turning into crises. Routine meetings reduce the risk of megaphone diplomacy becoming the norm, because participants know they have other ways to get their point across.

That thinking was shared by all US Administrations since 1991, when the system of regular Summits was agreed between the EU and the US. These Summits were not initiated as some sort of favour to Europeans, but because it is the European Union, not the 27 member states, that has primary responsibility for a wide range of economic , environmental and travel related issues which impact directly on the constituents of every American President. European countries are the biggest external investors in the United States. American policymakers have been happy to see the European Union take in new member states, and may even want to influence that process in the future.

I attended EU/US Summits under Presidents Clinton and Bush. Both Presidents evidently saw them as a more time efficient way of pursuing US interests with 27 countries at a single meeting rather than at 27 separate meetings.

President Obama’s spokespeople say he has visited Europe a lot, and has a busy domestic agenda. All participants in all Summits have busy domestic agendas. All previous US Presidents had busy agendas too. President Obama has indeed visited European countries, including during his election campaign, but that is not a replacement for meetings with the European Union.

Of course, the European Union needs to examine its own contribution.

To be heard in the United States, the EU needs to present a united front. It needs to have something meaningful and strong to say. It must be prepared to be critical, if necessary. That requires prior work at home among the EU members, to establish a common position on the message the EU wants to convey to the United States. The 27 EU members need to put Europe’s general interest first, and avoid competing with one another to develop special relationships with the US at the expense of other EU members.

Europeans cannot complain that the United States does not take the EU seriously enough, if they do not make a sufficiently serious effort themselves to develop common EU policies that are so strong and effective that no sensible US President could afford to pass up an opportunity to influence them.

What is be done now? The newly chosen President of the European Council, Herman Van Rompuy may be able to put things right. Even if the 2010 meeting does not take place take place in Europe this year as is due under the long established rotation, it is even more important that the regular rhythm of EU/US Summits is maintained. So perhaps exceptionally, President Van Rompuy and the European leaders could offer to come to the United States this year at a time that fits everyone’s busy agenda.