Ticking time bomb

By Business & Finance
15 February 2012
time bomb

Bereft of ideas or courage, Ireland is hurtling inexorably toward a social oblivion, writes Michael Casey.

The difficult period we are experiencing at present is far worse than a normal recession. Severe balance-sheet problems are afflicting the household and government sectors – both massively over-indebted. On top of that, structural problems are coming to the fore, such as the loss of jobs to BRIC (Brazil, Russia, India and China) countries, peak oil, the flawed euro system (thrown into stark relief by Greece) and the possibility of additional banking problems in European countries.

We are approaching Japanese-style ‘lost decades’.  Some economic historians believe that western countries generally are running out of steam as the BRIC and other countries come into their own. Books are appearing with apocalyptic titles like, ‘How the West was Lost’. The European political system is patently unable to solve these major problems even though  categorical assurances were given that the Lisbon Treaty would greatly improve democratic decision-making in Europe.

Our Government, which has as much influence as a town council, has also shown itself to be bereft of ideas, apart from austerity and more austerity. All the other ideas such as, burden-sharing with bond-holders, Eurobonds, quantitative easing by the ECB, creating a larger bail-out fund, sales of domestic assets, elimination of public–sector waste, have been avoided or postponed. Our Government continues to sit on its hands and indulge in ‘learned helplessness’ – or vague and aspirational job strategies.

The new fiscal pact, based on strict rules imposed by Germany, will be embraced by our Government without, they hope, any need for a referendum. The fiscal rules do not, however, equate with true fiscal federalism and hence will not be consistent with monetary union. Not only is this fiscal pact too little too late, it is also largely irrelevant. Moreover, even if it is passed there is no guarantee that Germany will undertake any policies to ease the liquidity/debt crisis in the euro zone.

In Ireland, it is unlikely that the coalition can last for more than another year or so. It is clear that the Labour Party cannot ‘do’ austerity and will soon regret having gone into government.
Thus, the first big change will be political instability. Even if the present Government loses its popularity, it is hard to see Fianna Fáil gaining pro rata. Independents and parties like Sinn Féin are likely to be the main beneficiaries. It is possible that some new party or parties will be established. In any case, volatility will ensue. The old political certainties are withering on the vine and we do not know what will replace them.

As Ireland is forced into closer European integration where most important decisions will be taken in Brussels and Berlin, it is apparent that not only will our Senate have to be abolished but the number of TDs will have to be halved at least. State bodies, quangos, and local authorities will also have to be dramatically scaled back.

Ireland may not be forced to raise its corporate profit tax rate, but it is likely that its effectiveness will be eroded by harmonising the tax base or by other means. Educational cut-backs will make Ireland less attractive as a location for foreign direct investment.

The policy of depending on foreign investment and know-how began 50 years ago and has never been seriously reviewed. How will we cope with a diminished inflow of direct investment? How will the IFSC fare if France and Germany insist on imposing a Tobin tax on financial services? No contingency plans exist to deal with such developments. Will our own entrepreneurial or professional classes suddenly come to the rescue? Given present policies, this seems unlikely.

Unemployment will remain high for several years in Ireland.

Emigration of skilled people will represent a major loss to national productivity and to the Exchequer. Emigration of less skilled people, however, may well decline because of sluggishness in other Western economies, pushing our average unemployment rate up towards 20%. This will have a number of effects. The first will be to put upward pressure on social welfare payments — which the Exchequer cannot afford. The second will be to make the existing workforce nervous about losing their jobs.

Insecurity about employment will in turn hit consumption and lead to less home ownership. People will be reluctant to saddle themselves with mortgages for 25 years or more. Banks will be reluctant to lend. More people will be forced to live in rented accommodation and rents will inevitably increase.

Society will not be immune from change. The greater squeeze on social welfare payments, combined with renewed pressure from the troika, could lead to a restoration of the extended family, fewer lone parents living outside the family home, fewer divorces and more abortions. Public services and community action will deteriorate across the board.

A higher rate of unemployment is likely to lead to an increase in crimes of various kinds. This will be exacerbated by budget cut-backs in the area of Garda enforcement and prison places. The general increase in inequality of wealth and incomes is likely to give rise to a proliferation of gated communities like those in US and Latin American cities. Homelessness, deaths of young people in care, and suicides are, regrettably, likely to grow in significance. Because of health cut-backs, mortality rates will also increase.

In an attempt to rectify some of these adverse developments, governments will have to raise tax rates and broaden the base. This may lead to tax evasion on a Greek/Italian scale, a generalised flight of capital, and additional emigration of skilled people. Hopes for a voluntary reunification of the country may be set aside for a generation. The Republic could not afford reunification, while the Unionist community would hardly be impressed by recent developments south of the border.

There is of course always the law of unintended consequences, so the future may not be quite as bleak as this.

Agriculture and food exports could benefit substantially as the BRIC countries advance. In this regard the visit of the vice-president of China is encouraging. This seems to be one of the few silver linings in a very dark cloud.

Michael Casey is an economist and writer.