I start by saying that the following are personal opinions.
Let us keep a sense of proportion about Ireland’s current situation . A few years ago there was a consensus of euphoria, with sceptical voices drowned out. Now we run the risk of forming a new consensus of helplessness and despair. The euphoric consensus was a huge mistake, a consensus of helplessness now would be just as big a mistake. We still have a lot going for us as a country, but we have some decisions to take. We need a long term perspective to make sense of the short term sacrifices that have to be made.
The recent Quarterly Economic Commentary of the ESRI says income per head in Ireland is now back to what it was in 2000. That is quite a drop from the unsustainable heights it reached in 2006, but nobody can seriously suggest that Ireland was a poor country in 2000.
We had a solid economy in 2000, something we did not have in 2006. Of course this is not the whole story. There are many who are worse off than they, or their equivalents, were in 2000. But that also means that there are people who are much better off than they, or their equivalents, were in 2000! There is much more anxiety around now than there was in 2000. America, on which we rely a lot, was much more buoyant in 2000 than it is today. But East and South Asia, to which we must turn our attention now, is much more vibrant than it was in 2000. Growth rates will be an average of 8.5% there in 2011.
So I am not impressed when I read a respected Irish journalist wringing his hands helplessly and writing in a paper last Sunday that “the chasm between the governments revenues and spending cannot be bridged”, and suggesting that we “renegotiate our debts”. He was talking about the Governments debts, not the debts of the banks. Another journalist in the same paper called for “debt rescheduling and renegotiation” of our sovereign debt.
This sort of comment is wrong, and sends out a bad message at home and abroad. The gap between spending and revenues can be bridged. All three major political parties have committed themselves to bridging it, or at least to reducing it to 3% of GDP by 2014.
Whatever about subordinated bonds of formerly private banks, there is no need for , nor wisdom in, calls for renegotiating the liabilities that our democratically elected sovereign Government freely undertook.
A rescheduling or renegotiation of debt would affect one’s future ability to borrow, and Ireland will need to borrow in future for productive purposes, even after it has eliminated its current budget deficit. The country would also need to borrow while and renegotiation was taking place, and with Irelands ongoing deficit, we would have to borrow quite a lot. Who would lend more money to us if we were saying we wanted to evade timely repayment of existing debts?
There is a limited amount of money available to be lent to sovereign borrowers, and we will be competing for those funds with other countries all over the world, including in Africa, who pay their debts on time without renegotiation or rescheduling. We will also be competing with the United States Government which has a voracious appetite for loans, and which will increasingly crowd out other sovereign borrowers, especially smaller countries. A global economic recovery would also crowd us out because it would lead to increased borrowing from the markets by large companies with good bond ratings. We need to get our house in order before that happens.
Those who say that the chasm cannot now be bridged between spending and revenue should bear in mind that the increase in spending, and the gap between it and revenue which it has created, are quite recent.
From 2000 to 2006, the numbers working in the taxpayer financed health sector increased by 20%, numbers in the education sector rose by 27%, and in the Justice sector by 22%.The number is senior grades in the civil service increased disproportionately, by 82% as against 27%, between 1997 and 2009.
In the economy generally, wages, which had grown in line with wages in the euro area generally up to 1996, increased at between two and three times the euro area average between 1997 and 2008. Other payments have also increased similarly. All that was done on the back of artificial buoyancy of taxes collected from the construction sector, which everybody knew in their hearts was temporary.
But in 1997, before that big increase in wages by comparison with the rest of Europe took place, Irish people were still comparatively well off , as we were in 2000 before all the additional recruitment to the public sector took place. That is why we need to keep a sense of proportion about the fiscal challenges we face. They are manageable, if we choose to manage them.
FACING OUR RESPONSIBILITIES AS A SOVEREIGN DEMOCRACY
This is not a poor country. It was not a poor country in 1997 or 2000 either, before we added this additional expenditure, which we are now sustaining by borrowing an additional 11% of our GDP each year, year after year if nothing changes.
We still have a higher income per head than most EU countries have, whether you measure it by GDP or even by GNP.
We also have a little pride. We worked hard to gain our independence. A survey has shown that only two other peoples in the world have a higher level of patriotic pride than we do, the Americans and the Venezuelans. That is an asset on which you cannot put a price.
As a comparatively well off , and a proud, people, we are not the sort of people who would want to “renegotiate” what we owe to others, especially as these were debts incurred on our behalf by the Governments which , for good or ill, we freely elected. Almost every other country in the EU has sovereign debt problems, even Germany has a deficit. We have received more EU funds per capita over the last thirty years than any other EU country, and we are one of the better off countries in the EU.
As in life, so it is in finance. All rights have their corresponding responsibilities. Being a fiscally sovereign democracy involves responsibilities, as well as rights. The sovereign right to borrow goes with a sovereign responsibility to repay. Those are the rights and responsibilities that we have, that Northern Ireland does not have.
Some even went out to die, and to kill other people, almost 100 years ago to win the right to fiscal sovereignty. Others worked for the same goal by constitutional methods. The main difference between Home Rule and the Treaty was not legislative autonomy, it was fiscal sovereignty.
What would the people who won fiscal sovereignty for us 100 years ago think if we were to show, 100 years later, that we cannot manage our sovereign finances, without asking to be forgiven some of our debts, and that we had shown by that that we could not fully shoulder the responsibility of fiscal sovereignty?
That need not happen, and it will not happen
OUR STRENGTHS
We have the capacity to meet all our liabilities because we have the means of generating income by selling goods and services that others will want to buy.
Our human resources in Ireland are second to none. Proportionately more young people have a third level education than in almost any other European country.
Our roads, our accessibility to hotels and cultural facilities, our public transport, our airports...these are all better than they were. Not all of the borrowed money was wasted.
Exports are buoyant this year, rising faster than in most European countries.
More significantly, Irish exports fell much less in the recent downturn in global markets, than did the exports of most European countries. The pharmaceutical sector has been particularly strong. This general trend in exports shows that Ireland is invested in economic sectors for which there is consistent demand, whereas other European countries are heavily into sectors, like cars, where demand is much more volatile.
While the Irish public sector still has unresolved debt problems, Irish households have paid down a lot of their debts. Irish people are saving more of what they earn. The private savings rate is now 10% of GDP as against 2% in 2007.
According to the ESRI, in 2009 there was an increase in net financial assets of Irish households of almost 25 billion euros , due to a reduction of personal debt of 4.6 billion euros and an increase in financial assets of 20 billion arising from an improvement in the value of pension funds and insurance policies. Of course, this improvement starts from a very high level of indebtedness, and it is unevenly distributed.
Some sectors have come through the crisis very well. The international financial services industry in Ireland , which is quite separate from the domestic banking sector, has done remarkably well. It is spread all over Ireland and is creating and sustaining highly skilled jobs, especially for young Irish people with good mathematical skills. I have been struck by how diverse the international financial services industry in Ireland is, and by how much inventiveness has been applied in using information technology to provide global services from Ireland that are better than can be provided from anywhere else.
Our relative competitive position has greatly improved too.
House and apartment rents, new office rents, wages costs and prices have reduced proportionately more here in Ireland in the last two years, than they have in other European countries. We need to talk more about that.
Staff turnover is much less than it was, so a new employer coming in here from abroad will finds it more worthwhile to train Irish employees than he would have in 2006.
Irish people are still inventive and adaptable.
The industrial society, with its emphasis on disciplined repetition of tasks, may not have suited the Irish character all that well. But the information society, with its emphasis on adaptability and innovation, is ideal for us
Irish people have shown themselves to be more sensible about facing up to the need to make the painful economies to adapt to our reduced economic circumstances than have other societies. Major economies, including wage reductions, have already been made. The contrast between Irish reactions to this and the street theatre in France and Greece is stark.
The Irish tendency towards too much consensus , that may have collectively blinded us to reality during the boom, can now work to help us come together to face up to our problems in a practical way.
THE EMERGING ECONOMIC POWERS AND IRELAND
We are living in a changed world. Between 2000 and 2010, the global output share of the advanced economies fell from two third to one half, while the share of the places, like China, India ,the Middle East and Brazil, where the immigrants and students come from, has risen dramatically. These are increasingly the people with the money.
Ireland is an open society and has handled the transition to a multi faith, multi ethnic, society much better than have some of our European neighbours.
In fact, I think Irish people have a better instinctive understanding of the way the balance of economic power in the world is changing than do some of our continental neighbours, who are now convulsed by very backward looking debates about ethnicity and immigration. Looking for Islamic finance, and making immigrants of Islamic faith feel uncomfortable do not sit easily together.
Our own religious heritage, our lack of a colonial past, and our own experience of emigration has made us more welcoming of strangers in our midst than some other societies have been . That will be a big help to us in attracting foreign investment here, from the Gulf States to which I will travel in a few weeks, and from the emerging economies from which many of our immigrants in Ireland have come. Some of the students from China, India or Brazil who are educated for a time here will, if they return home with a good impression of the country and rise to influential positions in their own countries, will be helpful to us in attracting investment here.
In Hong Kong last week in my capacity as Chairman of IFSC Ireland, I saw the dynamism of the Far East at first hand. China is growing at 10% a year. Hourly wages rose by 14% last year in China. This is spinning off into the rest of Asia. India will grow by 8.5% next year, South Korea by 6%, the Philipines by 6.2%,nd Singapore by 14%.
The transformation of the China’s economy has been described by the OECD as one of “the greatest economic success stories of modern times”.
Savings are very high in China, and opportunities for private investment are limited. This has fuelled a lot of property speculation. Only 47% of second homes in China are earning a rent, and 20% are vacant. The Chinese Government wants to divert saving away from property. This is an opportunity for Irelands financial services sector, to devise ways of helping China spread it investment globally in ways that minimize risk and maximize returns .
WHAT IRELAND HAS TO OFFER
We have the expertise to do this. Dublin is already the 9th largest international banking market in the world, and 6th largest for the issue of international debt securities.
The administration of 49% of the world’s hedge funds takes place in Ireland, and 350 fund promoters from 50 countries have chosen Ireland as the base from which to service their funds.
Ireland id the world centre for aircraft leasing finance.
The international insurance sector has a big presence in Ireland, writing 26 billion euros worth of non Life and reinsurance business, and 28 billion worth of Life insurance business .
3000 international investment funds are listed on the Dublin Stock Exchange. These originate from 40 different countries. There are over 2700 UCITS funds in Ireland with investments of 682 billion euros, and 1245 Qualified Investor Funds (QIFs) with investments of 135 billion euros. Both types of fund operate under EU rules. UCITS are the more conservatively managed of the two types of fund.
These are strong Irish businesses that all have the capacity to help China, and other emerging economies, to use their savings wisely and well.
ANOTHER “ECONOMIC DEVELOPMENT “ DOCUMENT NEEDED NOW
Turning back to our own economy, let me conclude by saying this.
Yes, we have a deal to learn from our mistakes. Yes, we will have to make some painful changes. Government services will be reduced and the direct and indirect tax base may have to broadened.
But the fundamental human resource base of the Irish economy remains young, adaptable and well educated. That is what provides the basis for economic recovery.
The challenge today is as much psychological as financial. What is needed now is a 5 to 10 year perspective, like the Economic Development document, produced by Ken Whittaker in 1958,
which shows a credible linkage between sacrifices now, and results later and,
which explains the difference between necessary and intelligent risk taking and reckless speculation and
which shows how the burden of change can be borne by all in a fair, prudent and proportionate manner.
Economic Development in 1958 was an educational exercise, not a dogmatic prediction of the future.
We need a similar educational exercise now, to paint a picture of what is possible.
Not a set of promises,
not a lot of numbers plucked from the sky,
not pious management speak,
not an impossibly prescriptive and detailed plan either ,
but a logical explanation of the linkages between what we will do now, clear and courageous choices we are now making, and an honest estimate, no more than that, of we could achieve ten years from now, once those choices are made .
If a much smaller public service could produce something like that in 1958, after years of economic stagnation and wilful isolation, surely we can do even better now with the much enhanced expertise available in our much bigger public service today.
1 comment:
John, why are you not Taoiseach?
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