Govt must chart new course on economy, Burton tells Humbert summer school
Issued : Saturday 21 August, 2010
Speech by Joan Burton TD
Minister for Social Protection
It's a funny old world. Those were Margaret's Thatcher's last words as she left Downing Street bewildered by the events that ended her career. Brian Cowen and his hapless Ministers may be forgiven if they feel the same after a bruising year.
The experts assured them that austerity was the way to go. Take the pain now and the international markets would reward the effort through lower borrowing costs not to mention flattering articles in NEWSWEEK. The spectre of the Greek troubles was added in to the mix as a dire warning of the negative effects of any weakness in governmental resolve.
All through the year we heard about supposed examples of countries that experienced a boom after tightening fiscal policy to show that austerity is good for employment and growth. Ireland in the 1980s was even cited as an example, not a very convincing one since it included a well timed devaluation in 1986,much more favourable international trading conditions and not least a functioning banking system.
Yes, there was a short term boost this year to Ireland's credit rating and lower borrowing costs followed for a while. The case for austerity is rather more threadbare just now. The markets now have doubts about the banking situation and are equally skeptical that austerity will deliver all the suggested gain after the pain. The economy is technically out of recession due to the strength of international companies operating here. But the domestic economy shows few signs of a robust return to health as the continuing rise in unemployment, emigration and business insolvencies testify.
It seems we are damned if we don't take the austerity path and equally damned if we do.
So, this week we are back to exactly the same level of borrowing costs that triggered the austerity programme in the first place.
August is living up to its reputation as a wicked month indeed. A few months ago, I asked a close observer of international markets to give me an educated guess of a potential tipping point for Ireland. Late August was his instant reply. We may be in a for a rocky few weeks and the European dimension will be centre stage if Ireland's funding woes require action from Brussels and Frankfurt.
So this discussion on the Eurozone at Humbert is perfectly timed.
Can it stand another Greece? If Spain were to falter how would the markets react?
If the so called stress tests were found to be inadequate, then what?
Nearer home, what would happen if NAMA and the antics of the present government were to drag us over the edge?
Remember that our debt to GDP ratio for 2010 will be a horrendous 20 percent, by far the highest in the European Union.
The Lisbon treaty, as we will all recall from last year's referendum debate, was supposed to guarantee joined up decision making. Alas, when Greece tottered on the brink of default, it took the European Union almost six whole weeks to get its act together and mobilize a rescue package.
This was not the kind of serious response that the referendum debate promised. The EU just about pulled through back in May. The stabilization fund should be a sufficient protection from any repetition of that disastrous period of indecision. The flaws in the Union's management structure were brutally exposed, the lack of coherence in crisis management procedures were starkly revealed and the lack of preparedness painfully displayed.
One such weakness was the belief that everyone was singing from the same hymn sheet. Not only singing from the same hymn sheet but singing in tune!
That everyone knew the rules, interpreted them similarly and could be trusted to play by them.
Now it beggars belief that anyone could possibly imagine that in a community as culturally diverse and economically divergent as the European Union major differences of interpretation as to what is and is not acceptable would not arise
We need a heavy dose of realism. Difference must be recognized and factored into our
procedures. It is time to drop the one size fits all formula and to get serious about defending the Euro, to forget about the grandstanding and the photo calls, the emergency summits and to set up proper crisis management procedures.
Patience is not a characteristic of the money markets. Weakness is punished with exemplary swiftness. Competence, backed by resolution in execution is accorded a grudging respect. The secret of success in responding to an attack on the Euro depends crucially on the preparations which are already in place for that very purpose.
Crisis management is primarily a technical matter that calls for delegation that enables a response to be mounted in a matter of hours and not days, delegation with clear lines of demarcation as to what is and is not politically acceptable.
That can only happen if the structures required are already in place?
Ireland's own dismal experience of high level bungling in September 2008 should be sufficient to convince everyone in this room of that.
Crisis management is, I repeat, a technical matter, a technical matter with clear political overtones but one which surely can be entrusted to the Board of the European Central Bank.
They must be empowered to take the decisions necessary to defend the common currency in rapidly evolving crisis situations. Inter institutional and inter governmental hot lines must already be in place, consultation must take place, but above all, those charged with containing the worst must be free to act.
To pick a concrete example, the famous bailout fund should have been in place well before the crisis broke, not negotiated as the crisis developed. Institutional arrangements between the ECB, the International Monetary Fund should have been agreed before hand, not in the heat of the crisis.
Lines of authority need to be put in place and clearly defined. Once defined, they must be adhered to. In the heat of last May's crisis nobody had an inkling of who was in charge.
This must change. We cannot afford another Angela and Sarkozy show, entertaining
though it may be.
But long before the need to address crises arises there other more fundamental matters that must be addressed. A bird never flew on one wing and economic policy likewise cannot be implemented on the basis of fiscal or monetary policy decisions which are in blatant contradiction with one another, as was indeed the case here in Ireland.
The effective management of the Euro calls for a considerably greater degree of economic convergence than currently exists and its corollary, enhanced fiscal cooperation and coordination so that potential problems are identified before they spiral out of control.
Solidarity dictates that that the EU's institutions be appropriately empowered to employ resources as the situation demands.
Only in this way can convergence evolve and stability be assured. Likewise there is going to have to be a serious attempt to lay down and to enforce more rigorous standards in the financial sector. The era of casino banking and lotto style bonuses, of the too big to fail banks, of the untouchables, is over.
How is it possible that we still have no sign of a bank resolution system to cater for future crises without requiring recourse to further taxpayer funded bailouts? The deficiencies in our corporate laws became glaringly obvious this year both in re the case of the banks and in the astonishing Shipsey report that failed to find any wrongdoing in the DDC -Jim Flavin episode.
My party has been abused in the media for an alleged absence of policy proposals. Yet more than anyone else we have promoted corporate law changes under many headings, reforms that would make a huge difference and would, if implemented, create an entire new culture of corporate standards in Ireland. As on the damaging iniquity of the property tax reliefs, we have ploughed a lonely furrow on our own in this crucial area.
We have to get a grip on the banks and the hedge funds, on those purveyors
of super sophisticated junk that has cost us all so dearly. The weak approach to bank regulation has done irreparable damage to societies the world over, damage that will take years to clean up.
If we are to put in place the measures to ensure the stability of the Euro, we need also to accept a greater degree of political convergence. The one is simply not workable without the other. Some degree of monetary and fiscal oversight from Brussels is a necessary corollary of monetary union.
Now if the measures that I have outlined are put in place, namely effective and timely crisis management structures, monetary and fiscal coordination, and the political cohesion needed to give effect to these measures then I believe that the Union will surmount the inevitable crises that will beset the Euro as it comes of age in a multi-polar world.
I want to make some brief remarks about current economic strategy. Brian Cowen laments the lack of optimism in the country. He and his Ministers insist that Ireland has turned the corner. Happy days are almost here again, it seems. That only shows how detached they have become from the real state of affairs. The official figures do suggest a modest level of growth and this may well be the case as international companies here maintain their exports. I find it strange, nonetheless, that tax returns remain so anemic with income tax returns particularly weak.
In addition the unemployment figures do not suggest a dynamic recovery. To slash public spending without strangling growth is a delicate operation at the best of times even when international conditions are favourable and the country has healthy banks. It is the denominator in the equation that counts. Deficits are percentage rates. X, the budget deficit divided by Y, the value of GDP. We are locked into a strategy to reduce X with little regard for increasing Y. Y has to increase for the percentage to fall to the level required by Europe and the markets. That is not happening so far. Not all cuts are equal and some are very damaging indeed to future prospects. I cannot see why business people will be persuaded to invest if demand in the economy remains so stagnant and banks remain in such a zombie state.
Ireland needs a reserve Plan B to combat a resumed recession. All current plans seem to suppress spending power in both the private and the public sector. It is an almighty gamble. The warning signals are showing danger signs that the Government needs to heed.
It is the level of unemployment and associated emigration that is so destructive to our country and so corrosive to confidence. Ministers and their policy advisors have dropped the ball completely in their timid responses to this tragedy.
Most disconcerting of all, in my view, is the apparent absence of a Plan B. Do you remember the dreary mantras that dominated the NAMA debates?
TINA, THERE IS NO ALTERNATIVE.
IT'S THE ONLY GAME IN TOWN.
We are sadder and wiser now a year later as we can now recognize how vacuous these slogans were.
There is a lively debate internationally between the deficit hawks and the deficit doves over public borrowing and sovereign debts. Ireland uniquely has a third breed. I call them the deficit hypocrites. They protest loudly at any increase in public spending but these very same people don't bat an eyelid when the Minister shovels another mind boggling sum over to the Anglo Irish incinerator. An extra billion of borrowing to sustain jobs is a total NO NO. An extra €10 billion for Anglo is met with a patient sigh. The former is impossible, unsustainable. The latter has to be endured come what may. I suspect public patience with that line of argument has reached breaking point.
In Ireland today, many self-described deficit hawks are pure hypocrites. They're eager to slash benefits for children, for patients, for pensioners. But their concerns about red ink on the Exchequer returns suddenly vanishes when it comes to keeping tax breaks for the wealthy and saving Anglo Irish.
It has been infuriating, as the economic crisis has unfolded, to watch how public opinion has been coaxed to accept as normal many things that would have been classed as entirely unacceptable just 2 years ago. Now that the nightmare of mass unemployment has become a reality for hundreds of thousands of our people, the powers that be in Merrion Street seem to feel absolutely no sense of urgency. As hopes are destroyed, as small businesses are driven into bankruptcy, as lives are ruined, they just shrug their shoulders and say, never mind, let's focus about the evils of budget deficits and plan a further bail out of Anglo and Nationwide.
It is rank hypocrisy of the first order
The present Government has done terrible damage to Ireland and is leaving an appalling legacy of unemployment, emigration and debt for both this and the next generation. It is small comfort, I know, but it would be even worse, if Ireland was not in EMU, and would be even more difficult to manage our way out of this catastrophic mess. Despite the economic damage and the myriad problems, I am confident that a new Government will be able to introduce the right policies and in time get the debt down, reduce unemployment and obviate the current push to emigrate. Being in EMU is a major support for Ireland
