Wednesday, November 24, 2010

Crisis Deepens

Since I last wrote several significant developments have taken place making it clear that the present crisis both in Ireland and in Europe is much deeper that initially realised.

Indeed there is an even growing risk now that the whole financial system - not just in Ireland - but in the Eurozone generally could spiral out of control with disastrous consequences for its citizens. And unfortunately this risk is aggravated through a lack of effective action at the EU level (where intervention is most necessary).

To be honest I was deeply shocked at the manner in which the EU reacted to the growing Irish problems last week.

Though I have been a persistent critic of the terrible mismanagement of our economy (especially since 2000) at least I could not fault the Government for its determination to play by European rules. So for example, despite considerable domestic criticism, Brian Lenihan consistently maintained the Government's intention to fully redeem all senior bondholders in our banks (despite the inevitable huge burden that this would place on domestic taxpayers).

Now I had always assumed that this assurance was pressed on him by the the ECB who in return for such loyalty would guarantee liquidity to the Irish Banking system. After all, given that our National Central Bank is part of the European System of Central Banks, the ECB is now in effect "our" bank.

One of the essential functions of a properly functioning Central Bank is to act as lender of last resort! And as the Irish banks cannot borrow from anyone else at present then certainly this "lender of last resort" facility could never have been more necessary.

Last week as the threat of contagion spreading to Portugal and then Greece increased, the ECB panicked to assume its new role as "part lender of last resort" Admittedly because of the enormous liquidity hole in the Irish Banking system it was using up a great amount of the resources it had available (about 20%).

However the attempted solution to this problem is so inept as to beggar belief.

Ireland had already become a seriously overburdened nation debt wise, with growing doubts as to whether it was at all viable to expect taxpayers to absorb all these losses (without any sacrifice asked with respect to senior bondholders).

Then the ECB decided to pull the plug by setting a limit to the extent to which they willing to fund the Irish banks. So Ireland was inevitably pushed into an ignominious bailout that seems inadequate from every point of view.

From Ireland's own perspective it greatly increases debt at a time when the nation is already overburdened debt wise. Therefore this bailout is not "free money" but rather comes at an onerous interest rate close to 6%. Furthermore it means that independent decision making will be forfeited now for some years.

Personally though in the circumstances we had no option but to accept the bailout, I believe that we have been let down badly by our European partners (who unfortunately are now quickly changing their role to that of our European masters). Worse still despite Government loyalty we find ourselves to a degree betrayed by that very institution on which we believed we could most trust. So it was the ECB that put out the rumours that Ireland would need a bailout and then decided to have the matter confirmed through the Governor of our Central Bank.

This bailout is highly unlikely to reassure the markets in any case. If the ECB cannot guarantee full funding to support the Irish bank losses, how can it possibly have sufficient reserves to deal with the financial problems of the much bigger economies? And a remedy that attempts to place the entire burden for the losses (recklessly funded by large European banks) on to the domestic taxpayers of Ireland is not only morally unjust but is very shortsighted in economic terms. For such a tactic only reduces the ability of the economy to attain growth (which is a precondition for honouring those debts).

So as I write - the day after the package was finalised - the markets have responded in predictable fashion with share prices around Europe falling.

I take no satisfaction in now stating that so many of the problems that I have always seen in the economic system are now coming to a head.

Make no mistake about it! What we are now witnessing throughout Europe is endemic of deeper inherent faults in the way the capitalist global system operates.

Important decisions, so often decided by narrow domestic considerations are hugely inadequate in relation to the scale of problems we are facing (as exemplified by the bailout package to Ireland yesterday).

Perhaps even more serious is that the time scale for which decisions are taken is far too-short term (again largely dictated by sectional political interests).

Also the attempts to treat the market system as an impersonal mechanism (without due concern for the moral implications of those taking decisions in the markets) leads inevitably to great injustice in social terms.

In particular this has already led to an enormous build-up of problems with respect to financial and environmental issues.

So what we are now witnessing is not just a crisis for Ireland or for Europe. It is in fact a defining crisis for the capitalist system.

Sunday, November 7, 2010

Looming Crisis

Things are not looking good at present in Ireland with an enforced economic bailout from the EU/IMF Stability Facility in the new year looking ever more likely.

Unfortunately the damage already done to the economy during the totally reckless latter phases of the Celtic Tiger has been so great that in truth it is hard to see how any credible response can now be made to deal with the financial implications.

As I had always feared, losses from the banking system have been much greater than recognised.
Indeed I suspected that the government was engaging in an unconvincing game of bluff in hiding the extent of such losses. From an initial position that the banks "would cost us nothing" it is now admitted that the losses will be in the order of € 50 bl. (which unfortunately is likely to be a severe underestimate). The projections with respect to property prices on which these figures were made were far too optimistic. Furthermore there is a considerable amount of - yet - unrecognised debt in the banking system relating to mortgages and other loans which represent yet another important aspect of an enormous financial problem.

Effectively therefore our banking system remains on life support and is being almost entirely funded though ECB borrowings.

On top of this despite a severe budget last year, no real improvement has taken place in the budgetary position of the Government. Even with all the banking debt excluded, the current deficit stands at about 12% GDP. With a commitment to get this down to 3% by 2014 this requires that even more severe adjustments will need to be attempted over the coming years. So the Government is trying to reduce the gap by a massive €6 bl. in the forthcoming budget (mostly through expenditure cuts). However for this to have any hope of success, several assumptions (e.g. projected growth in the economy) will need to be realised which do not seem to me at all realistic.

So even if the Government succeeds in overcoming the considerable political difficulties in getting its budget passed in December, it is very likely that the downward scale of adjustment required will erode any chance of economic recovery in the short-term. If this scenario is proven correct then the revenue side will further deteriorate in 2011 so that we could be facing a largely similar gap in the finances next year.

Meanwhile the bond markets already have made this judgement so that interest rates on longer term issues have risen to nearly 8%. And quite simply if such rates continue it is not tenable for the Government to borrow from the market!

However perhaps there is one little chink of light remaining. Given that Greece has already been forced into a bailout and that there are other Euro economies such as Portugal and Spain also suffering major financial difficulties, the EU will be extremely reluctant to accept that yet another country requires an "official" rescue. Acceding to such an outcome could hasten the end of the whole Euro experiment! Therefore everything possible may be done behind the scenes to actually help Ireland financially (without resort to the Stability Facility).

As I suspect that the very targets (and broad strategy) of the forthcoming Budget have been effectively decided by EU officials, therefore a measure of responsibility falls on them to see that they can be successfully realised.

So in a very real sense Ireland has already handed over a considerable amount of sovereignty to the EU and this process is likely to be intensified in future years (even without formal recourse to a bailout).

However this does raise very interesting questions with respect to economic management.

1) Given the nature of our political system with the petty in-fighting that is so typical of our political parties. it seems that we cannot agree on a coherent overall strategy unless it is enforced by the EU. We already have a precedent for this as the Maastrict criteria laid then in the 90's as a condition for entry to the Eurozone greatly assisted in attainment of financial discipline at that time.

2) As a member of a viable Eurozone, a considerable amount of economic sovereignty would need to be ceded in any case.
Though this has happened immediately with respect to monetary policy we still believed that somehow we could keep control of our fiscal affairs. However the very logic of what has now happened would suggest that overall control of fiscal policy in the Eurozone needs to be conducted at a central level.

Not surprisingly therefore the Germans - who see themselves as the ultimate paymasters - are already suggesting conditions for future bailouts that would significantly erode national sovereignty.

In the case of Ireland these problems are considerably magnified by the fact that we one of the most open economies of the world (with the great bulk of our exports relating to multinational firms).

On a more general note as global interdependence with respect to finance and economic activity increases, the traditional model of taking key decisions at a national level makes less and less sense. Though larger nations will still dominate with respect to influence, smaller nations like Ireland will have to become ever more realistic regarding the inevitable erosion of real power.

3) Despite our present difficulties I still think that the penny has not really dropped as to the highly artificial nature of Irish economic activity.
Though the property bubble has indeed been exposed, a potentially bigger issue relates to the manner in which multinational companies dominate our economic landscape.

This can be highlighted by an interesting statistic.
It now seems that Ireland has risen to no. 9 in the World with respect to the value of export services (which is the fastest rising component internationally of trade). For a small economy of 4.5 ml. inhabitants this does indeed seem highly impressive!
However about 90% of the value of these services relates to the multinationals and when one examines further, a considerable proportion can be attributed to dubious activities with respect to income diversion for tax purposes. To put it bluntly much of our export sales do not in fact originate in Ireland! However we are still happy to turn a blind eye to this fact (and of course the tax loop holes that make it all possible).

In fact the vast bulk of employment in Ireland relates to the generation of domestically produced services (which are very much overpriced). So if one shops in a supermarket in Ireland one can expect to pay about 25% more (than the average EU price). Likewise if one goes to a car dealer, a dentist, a pharmacist, seeks childcare or eats out in a restaurant one is likely to pay well over the odds. Of course providers of such services will immediately counter that their costs are very high (though in some cases this is used to justify excess profit margins)! But this only underscores my general point regarding the uncompetitive nature of the local indigenous economy! And lack of value is even more pronounced with respect to many publicly provided services. For example in the health sector, the law of diminishing returns has been operating for some time with a vengeance. Therefore despite a huge increase in employment over the past 10 years there is little evidence of an overall improvement in service.

The root problem goes back to the days when the public sector was used to provide employment (which was not available in the private sector). Not surprisingly a whole set of practices were then built up that were not based on the need to promote efficiency. And then with these now well-established (and vigorously defended by powerful public sector unions) it becomes extremely difficult to make effective changes.

Much as I hate to admit this, it may even be necessary that the radical changes required be enforced from an outside agency (such as the EU Commission or IMF) for the urgent action now required is unlikely to materialise from within our present partnership type model.

So to conclude the bulk of employment in the Irish economy relates to over priced goods and services which we buy from and sell to each other in the domestic economy.
We thus have an opportunity therefore during the next few years to get to grips with a fundamental weakness (which is the serious lack of competitiveness with respect to the indigenous economy).

And if we cannot do this voluntarily ourselves then we cannot really complain if eventually such changes have to be enforced on us from outside.

The Celtic Tiger was a period of great illusion in Ireland. Part of this illusion is being slowly stripped away (in the shape of the property bubble). However we are still in considerable denial as regards the bigger part i.e. reliance on multinational activity built on artificial tax advantages that are effectively exploited here due to a - deliberate - lack of regulatory discipline.

Friday, October 1, 2010

A 30 Year Cycle

It struck me recently that the prolonged recessions (lasting up to a decade a length) have been a consistent feature of the Irish economy since independence. Furthermore these recessions have occurred on a fairly regular 30 year cycle.

When we obtained our Independence in 1922, the country became ravaged by a very damaging Civil War. Manufacturing industry was practically non-existent with the country almost totally dependent on agricultural production.

Though little progress was made during this first decade of freedom, surprisingly, in a qualified fashion, the economy started to revive during the era of the Great Depression. The high tariff barriers now in place enabled the replacement of - formerly - imported commodities by new domestic firms. Also the Government, recognising the lack of private capital took the initiative in setting up several large state-owned enterprises. Then we escaped the worst ravages of the 2nd World War through our neutral stance.
However during the next decade of the 50's the limitations of this strategy were cruelly exposed. As the import substitution phase of industrial development (afforded by tariff protection) neared completion, further possibilities for growth were stunted through the small sized uncompetitive nature of Irish industry. So in contrast to the rest of Europe which was now booming, the Irish economy stagnated with an enormous amount of associated emigration.

A dramatic change in policy then took place. Rather than using significant tax and grant incentives in a vain attempt to promote Irish export growth, we now sought to attract foreign enterprise to Ireland. Half a century later, this policy is still very much in place and so successful that we are now one of the most open economies in the World with about 90% by value of exports (goods and services) coming from foreign multinationals located here.

So the 60's and lesser extent 70's were a period of comparative growth and prosperity. In addition Ireland had joined the EC in 1973 creating further opportunities for trade and significant financial support (e.g. agriculture and regional policy).

Then in the 80's we had another prolonged recession. The root cause of this was due to an accumulation of borrowing (mostly foreign) in a vain attempt by the Government to maintain an illusionary boom.

However the harsh adjustment required to adapt to this new situation eventually brought about many of the conditions for a return to growth in the 90's with the commencement of the famed Celtic Tiger. When the first phase of this - based initially on a genuine competitive advantage - had run its course by 2001, we embarked on an ill advised second phase almost totally fuelled through an enormous property bubble. Then all of this came crashing down as the result of the financial shocks in 2008 (after the collapse of Lehman Brothers).

So as we entered the new decade in 2010 we were facing the aftermath of another major economic recession, the effects of which are likely to last for the entire decade.

Enormous losses have been accumulated in the banking system. The domestic economy is now very uncompetitive compared to neighbouring countries and there is an enormous hole in our public finances with current expenditure greatly exceeding tax revenue.

Though it is perhaps small consolation to the many struggling to cope with such adverse financial circumstances, the economy will eventually recover. And if the past is to be a guide this will be due to many painful adjustments lasting the best part of a decade.

However perhaps it is time to learn an important lesson. If we do not manage the next recovery wisely we could be facing an even greater economic crisis in 30 years time.
Perhaps it is not accidental that these prolonged recessions have been recurring at regular 30 years cycles. They all have had a similar pattern 1. A decade of pain and slow adjustment 2. a following decade of recovery based on a new competitive advantage 3. a further decade of attempting to prolong the good times in the absence of such advantage. And inevitably this has then paved the way for the next economic crisis.
So if we do not properly learn from our mistakes, we are likely to make them yet again with perhaps even more devastating consequences.

Sunday, September 26, 2010

Iceland and Ireland: economic comparisons

I must admit that I enjoy reading the economic columns of David McWilliams. Whereas I do not generally agree with him with respect to the fine detail implications of his proposals, he invariably however manages to make interesting suggestions assisting valuable reflection.

In this morning’s Sunday Business Post article, he addresses the present situation in Iceland, where apparently interest rates on long term bonds have now fallen below corresponding recent - and still rising - rates in Ireland.

And given that a short time ago Iceland was looked on as the undisputed financial basket case of Europe, this indeed is a disturbing revelation.

One has to admire the resilience of the Icelanders in dealing with their problems. Though they did require IMF assistance, they refused to bail out their banks with the losses therefore falling on depositors and lenders (rather than as in Ireland on the shareholders). Also in allowing depreciation of their currency, they have thereby managed to substantially reduce costs giving them a more competitive edge in trade.
Probably most importantly - as McWilliams emphasises - they have based their revival on the success of locally traded goods and services. So rather than relying on the rest of the World, the Icelanders are looking firstly to themselves to resolve their issues.

McWilliams - perhaps unsurprisingly - then uses Iceland as a blueprint for what we should be doing. In particular he believes that we should transfer the mounting costs of our bank debts (especially in Anglo Irish) on to the bondholders and then concentrate on increasing domestic trade as the prime means of achieving economic recovery.

However what McWilliams’s article fails to address is the fact that the Irish economy in many ways differs from that of Iceland.

Though geographically we are both islands of roughly the same size on the periphery of Europe, the Icelandic economy is much smaller than that of Ireland being less than 1/10th the size. Therefore though relatively their banking debts were greater per head of population than in Ireland, they have less impact on the overall international financial system.

Secondly, not alone is Iceland not a member of the Eurozone, it is not even a member of the EU. In fact their present status is pretty much akin to that of Ireland at the time of the 2nd World War. Because of the isolationist stance then pursued by Fianna Fail under DeValera, Ireland was able to come through that period without any great damage to its economy. However since those times, there has been a fundamental change in policy direction. So from an economy that looked decidedly inwards we are now one of the most open in the world.

So when one looks at the percentage of the total value of exports in Ireland (relative to GDP) it comes to about 90% (with the corresponding percentage of imports only slightly less).

What McWilliams does not also relate is the uncomfortable fact that over 90% of the value of our current exports in goods and services is directly related to the activities of the multinational companies that have invested here in Ireland (mostly from the US).
So unfortunately the big difference in this regard from that of Iceland is that we do not at present have a sufficiently viable domestic economy with which to spark recovery!

Whereas the Icelanders can rely on their fishing industry, the tourism sector and the enormous potential of geo-thermal activity for producing energy, the fact is that we are deeply dependent on the multinational sector. Indeed the one bright recent indicator here amidst all of the doom and gloom has related to the buoyancy of exports (which again highlights the importance of the multinationals).

Likewise McWilliams ignores the important fact - that unlike Iceland - we are members of the Eurozone. What this means in effect is that we simply do not have the luxury of making fully independent decisions as economic policy in Ireland ultimately has a bearing on the potential viability of the Euro.

Therefore the most important reality regarding our present situation is the extent to which we have mortgaged our economic independence to the whims of international sentiment both in Europe and elsewhere.

I would agree however with McWilliams that recovery will ultimately come from domestic - and not international - initiatives. However in the meantime we have an extremely uncomfortable transition period where we will have to rely on the international community (and be held hostage in many ways to its transient opinions) while gradually trying to wean ourselves from such dependence.

There are other examples which McWilliams might have quoted - but which would not have suited his argument - regarding the best approach here in Ireland in the short run.

For example Latvia is suffering an even greater economic meltdown than Ireland in in recent years with the origins of its problems very similar i.e. an enormous property bubble. However though having a separate currency, they did not use devaluation of the lats to attempt a recovery. Rather it resorted to a much more dramatic form of internal devaluation than we have attempted in Ireland. So for example in the public sector, salaries have been cut by up to 30% with welfare payments also suffering.
So in dramatically cutting costs, it is hoping to significantly improve competitiveness and use this as the main means of economic recovery. Also in showing such discipline at a time of acute crisis with respect to the value of its currency, it is attempting to quickly attain membership of the Euro (which it would see as affording greater protection in any future crisis).

So in the examples of Iceland and Latvia we see two separate accounts of how small countries in Europe are attempting to deal with a severe economic crisis.

And what explains this difference is the nature of the two economies in question!

Iceland for its part sees itself as largely self sufficient and therefore entitled to follow a go-it-alone strategy. However Latvia by contrast has a high level of interdependence with neighbouring Baltic and Scandinavian economies and sees its future in cementing ever closer ties with the EU.

When we look at Ireland these problems of interdependence with Europe and the Euro currency are further complicated by a massive reliance on US foreign investment.

So the go-it alone strategy that presently suits Iceland would seem particularly inappropriate at this time.

I would of course agree with McWilliams that we need to greatly increase self reliance which is the best long-term solution. However this will not be achieved overnight.
What is obvious to me during recent debates is the extent that we are in denial regarding the need to reduce costs (which presently on average are way in excess of the EU average). So whatever way you look at it addressing this issue in the short-term will inevitably mean significant internal deflation and a big drop in general living standards.

A large part of the present lack of confidence on the bond markets is due to the fact that investors doubt whether we have the appetite to apply the necessary painful measures.
Though this problem has been greatly aggravated by rising bank debts and an uncertain political climate, a firm commitment on all sides to follow through with the necessary competitive adjustment (possibly with both EU and IMF assistance) would eventually reassure the markets.

And here is another point that McWilliams glides over. Whereas in certain circumstances the cancellation of debt obligations can swiftly aid economic recovery, a long term price could also apply. So if the same economy that previously cancelled debts was to get into further difficulty, bond holders would have greater reason to fear for their investments thus raising interest rates.
On the contrary if a country has a reputation for always attempting to honour debts (despite domestic problems) this would cause less risk for bondholders thus lowering interest rates in the long-term.
However having said this the performance of the Government - especially in recent months - has been unsure and hesitant which has only compounded the growing fears of the markets. Thus it is becoming increasingly difficult to convince them of our ability to properly manage the crisis.

Now there are wider issues about the very viability of the Euro for small economies in Europe, and on this score I would share many of the same opinions as McWilliams.

Unfortunately in the short-term we have to work within that system and achieve a compromise as between what is presently workable in terms of our own interests and that of the wider Eurozone. This leads to a range of possible policy choices all of which are uncertain as to their effects. Which of these might prove the best option is not obvious; all are likely to be very painful!

Saturday, September 18, 2010

Democratic Deficit

It is now some months since I last wrote regarding the Irish banking crisis and unfortunately the situation has worsened since then with debts accumulating at an even faster rate than previously expected. Also because of our accompanying severe fiscal crisis, international confidence has steadily receded. This in turn has led to sharply rising interest rates in the bond markets, which could yet prove a vital tipping point for the economy.

Realistically speaking, there is no easy solution to our problems. The present Government lacks true legitimacy (with Fianna Fail having presided over the very crisis that it is now trying to solve). However there is little reason to suggest that the main opposition parties would bring about any real improvement.

A new Government is likely to entail a coalition arrangement of Fine Gael and Labour. Enda Kenny the leader of FG and - likely - larger party after the next election is thereby in line to become Taoiseach. However he seems to lack sufficient intellectual grasp of the issues involved to inspire any real confidence (even among his own TDs). Also, there is likely to be a degree of conflict as between FG’s proposals to deal with the problems and that of Labour. So the uneasy comprises that will inevitably be required may only add to the uncertainty.

In any case political leadership at all levels is quite weak in Ireland with every mainline party desperate to achieve a wide level of popular consensus. This means in effect that there is no appetite anywhere for taking the really hard decisions needed to genuinely recover from the present recession. In effect political leaders just go along with the mood of the – in many ways – uninformed electorate regarding proposed policy decisions.

For example because of the huge losses of Anglo-Irish Bank, the popular angle is to promise to close it down (without any real recognition of the huge financial issues that inevitably would still be involved).

Now a more honest – and credible approach – would require doing a careful analysis of the likely cost and benefits of a variety of the possible proposals on offer before reaching a difficult decision with respect to any one option (which would still inevitably imply huge potential costs).

So opposition to present policy does not represent a coherent strategy (as the likely costs of any proposed alternative strategy are not honestly addressed).
However because the electorate – understandably perhaps – is still unwilling to embrace this harsh reality, opposition politicians are in many ways pandering to such sentiment.
And this is the very same problem that led to the huge property bubble of the Celtic Tiger (and its subsequent crash).

In the last general election in 2007 all the major parties had proposals based on unrealistic growth rates of 4% plus being maintained in the Irish economy (though such rates were clearly unsustainable due to the massive property bubble already existing).

Now imagine for a moment if say the main opposition party e.g. Fine Gael had accurately foreseen the impending crisis in 2008 thereby promising to put into effect immediately the harsh economic measures required for adjustment! Well, it would simply have been decimated at the polls even though such a proposed strategy would have represented true foresight and leadership!

So the point I am making is perhaps the very unpopular one that even though we like to think of ourselves otherwise, in fact we act quite immaturely as an electorate. Therefore we are always more ready to accept the easy option than the harsher medicine that true leadership and responsibility might often require.

And indeed this is not a problem solely confined to Ireland but rather is endemic throughout the democracies of the Western World. It could even spell the death knell of the capitalist system, as we know it. Basically the problem – which is the same problem that has created a growing monster out of the financial system – is that we continually place the desire for prosperity based on short-term perspectives above the need for policies that are sustainable in the long term.

And then when things go badly wrong we immediately look for scapegoats. So, in Ireland we blame the government, the bankers, the developers and the regulators for our problems.
However during the good times the behaviour of all these groups (which indeed was often greatly misguided) in large part was greeted by our enthusiastic approval.

So for example we voted Fianna Fail back into office because we saw this party as the best hope of continuing the illusionary Celtic Tiger dream.

We greatly welcomed the easy credit terms on which money was simply thrown our way by the bankers because this enabled us to purchase more and more houses; we were equally happy that the developers kept planning new estates providing what we were so eager to buy; and then when this was enough we went abroad in droves amassing property all over Europe and beyond.

And finally we were very happy with the easy regulatory and planning environment, which placed so little obstacles in the way of all this happening. Now when things have gone so badly wrong we project our anger on these same groups who we so vigorously supported during the boom.

Before true change can take place, firstly we need to properly acknowledge both the nature and extent of our current problems. Secondly we need to honestly accept responsibility for our considerable collective role in enabling these problems to develop.
Unfortunately there is little sign that either requirement is being properly met. While we now consciously recognise many of the issues, subconsciously we are still in a state of denial and largely unwilling to make the adjustments required.
And while this continues, we will just stumble on in the same unsatisfactory manner with our anger being vented on an ever increasing range of convenient targets.

Sunday, March 28, 2010

Anglo Irish Bank - again

Once again Anglo Irish Bank is in the news - for all the wrong reasons.

This week it is about to announce the largest corporate losses in Irish financial history which could be - if reports are right - as high as €14 bl. Having already received in the region of €4 bl. last year in Gov. capitalisation, it looks like a further $7 bl. or so further handouts from the Government will now be additionally required to keep the bank functioning. And it would take a great deal of optimism to believe that this will be the end of the story!

Not surprisingly when the public hears of the horrendous losses made by this one bank (that has no branch network) the cries go up to close it down immediately so as to avoid further losses.

However though understandable at one level such a policy is not realistic. The losses that arise relate to the excessive loans extended during the Celtic Tiger to fund - in the main - highly extravagant commercial property developments both here in Ireland, the UK and the US.

If these loans were now just written off the ultimate losses would be much greater than currently projected.

I have always accepted that even greater problems would perhaps be created if the Government was now to renege on commitments to depositors.

Because of the closely knit nature of the Irish banking system, this could immediately jeopardise confidence in the whole fragile structure with potentially devastating consequences.
Also because of the present lack of confidence in the international market (that is presently used to fund the great bulk of Irish government debt) non-payment to senior bond holders (or even proposals to renegotiate terms with such bondholders) would probably backfire in raising international uncertainty further thus adding to the cost of funding the fast growing national debt.

There is perhaps some scope for renegotiating terms with junior (i.e. subordinate) bond holders. However the amount now owing to this group is not particularly large (in the context of the overall total) at about €2 bl.
Though I would be open to alternative suggestions, given the present precarious financial position in Ireland it would perhaps be best even here to honour existing commitments in full while the present state guarantee is in place before reviewing the situation again in August.

Indeed on this point the arguments put forward by others such as David McWilliams - and in a more modified sense - Richard Bruton I would not find convincing.

McWilliams for example argues that bondholders are forward looking people with short memories who accept fully the nature of the capitalist system. So they invest in bonds knowing the potential risks and therefore winningly accept their losses when things go wrong.

I would find some merit in this argument (especially with respect to speculative bondholders). Indeed I would even accept that alternative examples can be provided where default on such debt proved the best option. However I do not believe that in the particular circumstances of the present financial crisis in Ireland that a similar remedy should be adopted.

Firstly Ireland is an extremely open economy and therefore more vulnerable to loss of international investor confidence. The present total annual value of exports (goods and services) is almost as large as GDP (with 90% coming from multinational companies). Also with respect to our present large borrowing requirements about 85% is funded by overseas investors!

Secondly we are members of the Eurozone and therefore not full masters in this regard of our own decisions. Indeed the present financial and economic policy correctly represents more a jointly agreed Irish-EU initiative (than an independent Irish Gov. policy).

Thirdly - and most importantly - the Irish financial system comprises a few key institutions with close interlocking arrangements. One could make the argument that Anglo Irish Bank was of no systemic importance but this would be somewhat disingenuous. Clearly it had no branch network and did not deal with ordinary retail customers. However in many ways it was in fact the most important in determining the whole banking ethos in Ireland that lead ultimately to such a dramatic financial collapse. Also the manner of its rapid growth is inseparable from the extremely weak regulatory environment that prevailed at this time which in turn was approved by successive Fianna Fail administrations.

So unfortunately Anglo Irish Bank is of key systemic importance in the manner it highlights the overall weakness of Irish banking, regulatory and political practice especially during the latter phases of the Celtic Tiger. So if we are ultimately to get out of this present debacle the best course is to start by taking full responsibility for the failure of Anglo.

So I do not accept as some are arguing that Anglo should be immediately closed down.

However I would have serious questions regarding the present policy as articulated by Chairman Alan Dukes. My own preference - in the absence of convincing counter arguments - would be for an orderly wind down of the bank. In the present climate a quick fire sale of the assets relating to the considerable volume of loans extended by the Bank would realise very little money. So a great deal of importance attaches to the manner in which these assets are managed over the coming year (a significant proportion of which have been transferred to NAMA). Some perhaps should be disposed of quickly. However the value of others may well increase by waiting somewhat longer while further development will inevitably be required in other cases to secure a realistic return.

So the ultimate losses that will accrue to the taxpayer greatly depends on the skill through which outstanding loans are managed in the coming years.

However Dukes is strongly committed to an alternative good bank, bad bank model plan for Anglo, which I suspect owes more to pragmatic political considerations than any sound business logic.

In other words, through at some stage proposing to resuscitate Anglo as a profitable special purpose business bank, Dukes unconvincingly argues that this course could thereby save the taxpayer billions of euro.

On the face of it there are very good reasons for not attempting to breathe new life into Anglo as its reputation has been destroyed, for ever symbolising the grave excesses of the Celtic Tiger. Of course Dukes would respond that this problem could be avoided through "rebranding" the bank with a different name and image. However if a solid case does indeed exist for such a specialist bank, why not set one up a fresh institution with no connection to Anglo?

So I suspect that the attraction of eventually rebranding Anglo relates to financial sleight of hand.

So for example if the new bank - when eventually reconstituted - was to make regular profits, it could then be argued that this would be thereby reducing the overall financial cost to the taxpayer. However this is to ignore the fundamental economic principle of opportunity cost!

Indeed the same fallacious argument had been used by Brian Lenihan when originally trying to sell the NAMA project when he stated that he was confident that NAMA would return a profit to the taxpayer over 10 years.

After yesterday's horrendous news regarding the deepening losses of the banking sector, it is hard to see how anyone can believe in this outcome! However even if profits were to materialise, this ignores the important notion of opportunity cost relating to expected returns on alternative ways of investing the same money. So where a higher return would arise from an alternative investment, then in economic terms one thereby makes a (relative) loss through proceeding with the first option (even where accountancy profits arise).

So applying this argument to Anglo! Even if the proposed good bank could return regular annual profits, this has to be contrasted with the profit prospects of an alternative freshly constituted business bank (with no previous links to Anglo).

Now I find it hard to see why such an alternative, with no damaging previous history would not have better prospects for profits than a "good" Anglo. So if this is true, then to go ahead with Duke's proposal would actually lead to even greater losses in economic terms!

After yesterday's announcement we are now told that another €10 bl. on top of the amounts already indicated will be required, bringing the overall liability to the taxpayer to over €20 bl. And who can be confident that even this figure will represent the end of the story?

If there are in fact good reasons for Duke's good bank, bad bank strategy for Anglo I would like to hear them, for certainty nothing convincing has been put forward yet that would suggest that this represents a better option than an orderly winding down of the bank. And where the taxpayer is being asked to underwrite ever growing massive losses, it is not enough for Dukes to simply state that that the specialists dealing with Anglo recommend this course as the best option!

Also another important factor is now entering the equation. The present strategy has been based on the understandable desire to restore international investor confidence in Ireland through restoring our financial system and quickly returning to fiscal rectitude.
However the financial liabilities associated with the banking system have grown so large (especially due to Anglo) that it is now more likely likely to severely threaten the Government's ability to proceed with further severe cut backs that are required to achieve the EU's budget deficit target of 3% by 2014.

If this in fact is the case then - rather than enhancing investor confidence - the rapidly growing costs associated with the banking cleanup may in fact increase uncertainty as to our ability to achieve the necessary fiscal reforms. And this problem will be accentuated if the anticipated return to economic growth does not in fact materialise later in the year. So whatever way you look at it, we have got ourselves in a deep bind.

Only yesterday, pay talks as between Government and public sector unions were finalised with a commitment by Government not to reduce public sector pay further over the coming 3 years. However this begs the question as to where the Government is going to find the money to meet its projected fiscal targets!

Indeed we are not far from social anarchy with taxpayers, facing ever larger financial commitments to bail out the banks, likely to revolt at the patent injustice of what has transpired.

At one level I have a great deal of admiration for the manner in which Brian Lenihan in particular - almost single-handedly in Government it would seem - has attempted to come to terms with the enormous financial and economic problems facing the country.

However the one great weakness of the strategy has been the failure to address glaring injustices that have been allowed to fester, with the very rich in society seemingly immune from any real censure. And this in turn is largely due to the fact that the main ruling party since 1997 (Fianna Fail) has aligned itself so closely with this wealthy inner circle. During the Celtic Tiger, wealth creation became the new God in Ireland and this has left an extreme political reluctance to take any measure that might scare off its representatives in our midst.

The single most infamous speculative development of the Celtic Tiger era relates to the Glass Bottle site in Rigsend. This site was acquired at the height of the Celtic Tiger for a grossly inflated figure of over €400 ml. by a consortium involving the Dublin Development Dockland Authority (DDDA) and two prominent appointees from Anglo (Sean Fitzpatrick the Chairman) and Lar Bradshaw a former director. It was now clear that these Anglo personnel were driving the whole project as major partners and financiers.

The value of this site has now fallen so rapidly that the DDDA values its own stake at zero. However worse still most of the money to finance these stakes was lent by Anglo so that the taxpayer could now owe up €500 ml. from this one failed investment!

So this whole sorry saga says a great deal about the unacceptable free-wheeling climate that pervaded the latter days of the Celtic Tiger. It was totally inappropriate in the first place that the biggest high fliers in Anglo should be appointed to a state board. Had everyone in Government forgotten about conflict of interest? It was also unacceptable that this state agency should then have engaged in a highly speculative commercial investment with such partners. This incident then also points to the total lack of regulation in the system that allowed all these machinations to happen without interference and finally receive tacit Government approval with the Minister for Finance (Brian Cowen) meekly signing off the whole deal.

Just reflect for a moment on the massive imbalance in our justice system! Failure to pay a TV licence could ultimately result in a prison sentence. However the loss of €500 ml. on a speculative deal (with every governance safeguard flagrantly disregarded) is still highly unlikely in Ireland to lead to penal censure for anyone involved!

This growing sense of injustice can only have been further highlighted by the announcement last week that many employees of Anglo would be receiving increases in pay. And judging by the reluctance of Alan Dukes to specify the actual figures involved, we can take it that in certain cases these proposed increases are considerable.

Dukes unconvincingly tried to defend this move by stating that due to many Anglo staff losing their jobs, overall pay has fallen. On the contrary, what surprises me greatly is the high proportion of staff that have retained their jobs! And Anglo at present is merely a zombie bank with no lending service to the community. Now I accept that an important role still remains with respect to its orderly wind down. However staff pay had been already exceptionally high during the Celtic Tiger with bonuses featuring strongly. So surely there should be significant cuts to pay with respect to existing remaining staff to reflect the present changed reality.

Now, admittedly if new specialist staff are required from outside the organisation to manage the wind down, they should be paid the going rate. However I think it eminently reasonable to expect this to be done through compensating downward adjustments to pay rates of existing staff (or through additional redundancies).

It simply will not wash with the public (many of whom are finding it increasingly difficult to manage their financial situations) to ask them to pick up the tab for Anglo's losses of over $20 bl. and then announce increases in pay to Anglo staff.

Not surprisingly, this only causes further outrage. Now Dukes somewhat dismissively retorts with "Anger is not a policy" and that new awful cliche "We are where we are". However I would say simply in response that if we do not properly address the justifiable anger that is out there, we will not be able to pursue any chosen policy in the first place. And before people can accept where we now are, the various institutions involved (government, bankers, developers and regulators) need to accept full moral responsibility for the grave mistakes that have been made and once again the failure to properly recognise this, reveals a glaring weakness in present policy.

We are indeed facing critical financial, economic and social problems. However underlying all of these are extremely important moral issues of justice and fairness. Ultimately we cannot hope to satisfactorily resolve the former without properly addressing the latter.

Friday, February 19, 2010

Tackling Unemployment

Unemployment is truly a great scourge in economic and social terms.

It is welcome therefore to see that the main motivation of some of our most popular analysts (such as David McWilliams and George Lee) has arisen out of a genuine desire to deal with unemployment ills.

The present statistics however are certainly not encouraging. The official figure (for standardised unemployment) has risen from 4.8% in Jan. 2008 to 12.7% in Jan 2010.
However this does not convey the full story regarding worsening unemployment conditions. According to the methodology by which standard rates are assessed, 1 hrs. paid work a week would exclude one from the unemployed statistics!

However, we have also many others - still listed as employed - who may however have suffered a significant drop in working hours or in temporary contract work that may not be continued.
And even for those not yet directly affected a much greater degree of uncertainty exists with respect to the security of their employment.

While readily accepting that the recession poses special problems in terms of dealing with unemployment, much more imaginative measures could be taken by Government to help alleviate the situation.

The official line aims at a return to economic growth as soon as possible and then hope that employment will slowly rectify itself in the process. Thus with current concerns so much devoted to budgetary arithmetic and bank rescue measures, little attention has been focused directly on job creation.

In the modern economy, the bulk of employment - and especially new job creation - is in the services sector (accounting for close on 70% of total).
What would worry me however about the Irish situation is that a high proportion relates to "soft" employment in locally traded services that are very high cost compared to other jurisdictions. By their very nature little competition exists for such services. Though still requiring an appropriate level of domestic demand to remain viable, during the Celtic Tiger years this was substantially generated through artificial wealth creation in other sectors (speculative property development and multinational companies locating here for tax advantage purposes).

It is now slowly being realised that the Irish economy had in many ways become very uncompetitive during the boom years and that these problems will need to be addressed if we are to restore exports (especially for indigenous companies). However it is not really feasible to reduce costs for export firms while ignoring the problem of high costs in the locally traded economy. So as the artificial high incomes of the Celtic Tiger are reduced, the fall in demand in local discretionary services (e.g. restaurants and hotels) is likely to force down costs leading to a further increase in unemployment. However providers of essential services (e.g. energy, communications, financial, medical and pharmaceutical) in the absence of tough regulation, will still collude to maintain excessively high charges.

We are thus facing a Catch 22 situation at present. Though the Government is paying lip service to the need for improved competitiveness to retrieve the economy, instinctively it knows that any serious attempt to achieve this will create considerable further unemployment in the short-term. Though the recession will indeed force such competitiveness in certain sectors, costs for essential services are likely to significantly increase. And without such reform, adjustment to the recession will be somewhat uneven with overall competitiveness difficult to achieve.

Measures to deal with unemployment must therefore be realistic and consistent with the need to maintain - and indeed significantly improve - overall competitiveness. This clearly creates a considerable problem in the short run where an increase in present figures may prove inevitable.
So the following suggestions relate to measures that 1) relate more specifically to better management in the short-term and 2) creating more sustainable employment opportunities in the long run.

Apart from the adverse social consequences, dole payments to unemployed workers make little sense from an economic perspective (involving financial commitments by the Government with no productive return). Indeed there are likely to be further opportunity costs in a recession with loss in tax revenues, downward multiplier effects on economic activity and also possible additional costs due to rising crime levels.

Much more should be done therefore by Government to preserve existing jobs through a degree of subsidisation in appropriate cases.
Now this would require a greater degree of intervention in the day to day management of firms with every option explored for keeping workers (or at a least a proportion of them) in employment through a measure of state financial assistance. And if this entails a 4-day or 3-day week, surely this would be preferable than the alternative of the dole!

In the present climate, the problems of these firms would be in many cases be compounded through an inability to raise finance from existing banks. Therefore I would propose that a state bank - on the lines perhaps of the former ICC - should be set up to deal with the financial requirements of supported firms.

Though it would not be practical to have such a bank attempting to generally service business needs, it could however play a special limited role in cases such as this i.e. where jobs could be reasonably saved through additional financial assistance by the state. (Also additional temporary placements of young people with firms providing valuable work experience could also be facilitated in this manner!) Remember that the failure to preserve such employment in a recession would require extra expenditure by the State in any case! So the alternative option of using this money to actually save many of these jobs represents a much more sensible strategy.

Even with such a policy, unemployment unfortunately in the immediate future is likely to rise. However much greater imagination however could be used to provide community based work activity for those presently unemployed.
I am not of course suggesting this as an ideal answer as the loss of employment has major implications in personal, financial and social terms.
However I would still propose however that when this happens, that a much better strategy would attempt to maintain an affected individual active and involved in some alternative work capacity.

Our current notions of work are unduly influenced by the needs of the market based economy. Meanwhile however it is glaringly obvious that many community based tasks - that can serve a valuable role in their own right - are not properly serviced. Alternatively when they are provided, their value is not adequately recognised.

For example, carers in our society give a huge commitment in time and energy to looking after the needs of others. However most of these (tending to loved ones in their homes) would be deemed as unemployed, though the opportunity cost of replacing such care with paid employment through health and social services is considerable.

However there are many other activities in communities - not carried out by the market economy - which are inherently of significant value.

Therefore I believe that an enormous opportunity is being lost during our recession in not seeking to mobilise the unemployed to carry out such activities.

Of course a great deal of attention would need to be given to appropriate ways of organising this work.

My own suggestions would go something like this. Each local community - perhaps based on traditional parish lines - should be asked to come up with suggestions as to the kinds of work that could be usefully provided (not presently being offered on a market basis). These could range from tidying up operations such as removing litter to calling on old people in their homes, helping with sports based activities for young children, community based neighbourhood watch schemes, providing time relief for carers etc. Now many of these may already be provided to a certain extent on a voluntary basis. However incentives could be deliberately provided to mobilise the resources of unemployed members of local communities to enhance their provision.

For example a tiered kind of unemployment relief could be structured with a basic payment (for those opting out of such participation) that would be less than the current rate. However for those opting in, the basic payment could be progressively increased depending on the level of commitment.

The financing of such a scheme could come from a number of different sources.

With the cut in the basic rate, some financial resources would thereby be freed for supplementing payments to "active" unemployed. Also a concerted effort should be made to tighten up on present abuses in the social welfare system where over 10% is paid out on fraudulent claims. Savings made here could then be available for these other purposes. Also I can see no reason why the EU could not include such schemes in payments for its Social Fund. Indeed if schemes were in place the Government could perhaps have already achieved a commitment from Brussels for funding!

Some of the proposed initiatives would perhaps overlap with community based employment schemes promoted by FAS. So it would make sense therefore to promote greater liaison as between local based community promoters of work schemes and FAS representatives, with perhaps some of its financial resources diverted to fund viable proposals.

Finally once the positive benefit of such schemes becomes more apparent, it would then be possible perhaps to raise further money through voluntary contributions from participating communities.

One of the negative side effects of market based activity - based on quantitative criteria amenable to monetary measurement - is that qualitative considerations can thereby be easily devalued. Thus the all important social "glue" that cements communities through a shared common purpose can become significantly lost.
So from this perspective proper recognition of this non-market activity could even help to revitalise communities thereby lessening the alienation and futility that can sow the seeds for serious crime and social disturbance.

Also through focusing on the inherent value of work - presently accepted as non-market - that opportunities to convert many of these later into market form would thereby arise. In other words an alternative type of enterprise culture could be fostered.

Realistically however even with the support (that presently is so greatly lacking) these could only hope to ameliorate some of the problems caused by unemployment. They are not meant to replace existing approaches but rather to supplement them to a certain extent.

In a time when employment opportunities are few, work sharing practices again make sense with the hope of spreading out what is available in a more equitable manner.
Again too much should not be expected an in any case they are already taking place to some extent.

For example many college students - rather than seeking to directly enter the labour market on obtaining a primary degree - are staying on to do postgraduate work. Likewise early retirement schemes in the public sector and the threat of possible pension reductions in future years are enticing many to retire before the mandatory retirement age. In addition facilitating those who might be happy - say for family reasons - with a 3 day or 4-day week - could also reduce the pressure to cut costs in the public sector through better deployment of labour.

In the current circumstances therefore the Government should further facilitate such practices through modest additional financing of extra college courses, further early retirement options and encouragement of more flexi-time in the public sector.

However though in theory work sharing seems a very simple concept, in practice there are many difficulties with its implementation (especially in the private sector).
So though possibly making some contribution, in itself it does not offer a solution to the problem.

Though I am well aware of the perilous financial situation of the country at the moment, I would also recommend some special purpose investment by the Government that would stimulate economic activity while providing much needed jobs.

I have suggested before an acceleration of the school building programme as one appropriate way of achieving this goal.

Unemployment is particularly high in the construction industry. Also favourable social and political benefits would arise from decisively tackling the issue, where lack of sufficient action in the past has caused widespread frustration.
Also the Government would be in an ideal position to enforce very strict terms ensuring that such work would be done at very low cost.

Now one could argue that this would increase Government expenditure. However there would be several compensating benefits to the exchequer from additional economic activity, associated multiplier effects throughout the economy and reduced unemployment. So the net cost of such investment could be surprisingly modest.

Meanwhile it would make a valuable contribution in terms of social infrastructure, providing much needed hope at a difficult time.

Though performance here did indeed appear very impressive during the Celtic Tiger years, it was built on artificial conditions that cannot be repeated.

Unfortunately the legacy of the Celtic Tiger years is that we have now created a high cost economy with unsustainable work practices (where unions still enjoy considerable power).

Though of course it may not appear popular (or even compassionate), the key guiding principle for long term recovery should be the desire to restore a level of competitiveness (stronger than most of the developed economies with which we deal).

This indeed involves much more than wage costs. However the fiction - still unconvincingly maintained by union leaders - that wage costs are somehow not important with respect to sustaining competitiveness, needs to be challenged. Hopefully, the present testing environment in the economy will bring about a much needed conversion in mentality.

Workers of course have rights that need to be respected by employers. However the long term interests of both are in fact best served through a mutual commitment to competitive work practices.

Just to give one example. SR Techics who employed more than 1100 skilled aircraft maintenance personnel at Dublin Airport - left in the end largely due to the high costs that pertained here. It also did not help that this strongly unionised group of workers had been involved in the past in damaging industrial disputes leading to the loss of valuable contracts.

Now suddenly in the changed environment Michael O'Leary - formerly the "bete noir" of unions - is receiving total support from these now unemployed workers in his attempt to create 300 jobs at Dublin airport!

It is not alone high costs but also frequently the poor quality of service delivered that constitutes a major problem. Again this is a legacy of the madness of the Celtic Tiger years when for example in construction, demand was so buoyant that little attention was often given to acceptable quality standards! So this is another horror that is likely to surface in the coming years as more and more residents experience fundamental structural problems with their expensively acquired properties! Another recent example of the same problem is provided by the dreadful state of so many roads that are now full of dangerous pot holes following the freeze up in January! Though the cost of building these these roads was excessive to start with, councils are now faced with heavy bills in the attempt to provide a temporary patch-up solution. So even when recovery begins to take place in the Irish economy, it would make eminent sense to deliberately maintain cost increases below growth for some time so as to enhance competitiveness. Indeed this should be the real boast of the Government in years to come in being able to sell Ireland as the most competitive place to do business (in Western Europe)!

As regards more specific suggestions, while accepting that the multinationals will play a considerable role here for some time to come, we need to develop indigenous strengths that will give us an international competitive advantage.

Agriculture and the food industry have traditionally been extremely important to the economy. With consumers increasingly fussy regarding health standards, we should trade in on our traditional "green" image, guaranteeing quality food produced to the highest standards available. In particular we could greatly enhance the role of the organic sector (which has been comparatively neglected).
Considerable opportunities also exist perhaps for activity abroad with Irish food companies offering financial support to organise food production in less developed economies. For example the Ukraine at present offers great opportunities here, so potentially this route could lead to a much greater role for Irish food multinationals.

Tourism likewise has been an important industry historically here (with high employment potential) that unfortunately has suffered a relative decline in recent years.
Much of the problem here is due to the high costs that now pertain. So cost competitiveness is vital in terms of restoring this sector.

And Michael O'Leary is right! The present Government policy on air travel is very misguided. As an island economy on the fringe of Europe it makes eminent sense to encourage more visitors here through an especially low airport cost regime. Indeed I see no reason why we should not aim to market the economy on the basis of the lowest airport charges in Europe! However achieving this would require a major sea change in current policy and its protection of high cost operators (such as the DAA). So easy and cheap access with respect to air (and sea) travel could significantly enhance both tourism and business flows alike.

The most prominent high tech sectors in Ireland are IT and chemicals/pharmaceuticals. It is perhaps here that the best possibilities in future years arises for generating employment. In fairness the indigenous IT sector has already achieved notable successes. However opportunities are still being missed. One obvious problem is the slow pace of broadband provision. Again this is an area that should have achieved priority years ago. However even at this late stage much could be done to quickly improve the situation. Another problem is the lack of sufficient IT skills generated through the educational system (reflecting a lack of emphasis on science and mathematics at the earlier secondary school stage).

One interesting example of what could be done was raised on Frontline last night where we were told that Ireland has already - unknown to most - acquired a prominent position with respect to online gaming. The suggestion was that some major tax incentive such as total remission on profits generated in this area here could help to greatly increase such activity and consolidate our pre-eminent position.

And the varied opportunities provided by internet related applications are unlimited.

Here is a suggestion that I would make. At the moment we have far too many overpaid special advisors to Ministers (essentially acting as spin doctors). The number here should be greatly reduced and replaced by a mixture of advisors and travelling ambassadors with respect to new employment opportunities that could be opened up by the Internet and other technologies.

I was reading last week that Ireland is now the largest exporter of medical products in the world (though the figures here may be somewhat artificial). So once again it makes sense to specialise at an indigenous level in medical research and development. Indeed there have been several impressive research breakthroughs here already with potentially huge commercial implications. So it seems to me that this is an obvious area of specialisation in future years (with enormous potential).

Though Ireland is a member of the EU, indigenous trade with EU countries (apart from the UK) still remains quite limited. Indeed it is no accident that our strongest ties are with the UK and the US (two English speaking countries).
So in many ways we are limited by our inability to speak other languages.

Therefore I think it should be a goal of policy to encourage from an early age in school studying at least two other European languages. Personally I would suggest removing any compulsory requirement for Irish. Present policy has not worked with negative consequences for further language involvement. Paradoxically with a more open approach, genuine commitment to Irish could actually be strengthened! With better language skills we would naturally better assimilate ourselves with other European countries (and cultures) which could greatly enhance trade and employment opportunities. Even in the most direct sense, many jobs in the call centres require multilingual skills which at present cannot be provided by Irish workers.

A major change with respect to traditional energy policy is now required in Ireland. At present we are greatly dependent on both oil and gas for the great proportion of our energy needs (most of which is imported).

A significant opportunity now presents itself therefore with respect to the development of alternative energy sources (especially with respect to renewables such as wind and water). Again if we truly committed ourselves to this, there is no reason why we should not aim at becoming market leaders in the future (in at least some of these energy market niches).

At a general level a lot more needs to be done in Ireland to foster a true enterprise culture. Though significant strides have been made in recent years unfortunately the bulk of such enterprise was associated with unsustainable property development. If more of this enterprise was directed at providing necessary infrastructure it would have helped better with future development. Unfortunately - greatly assisted by misguided Government incentives - we have created a huge surplus of unwanted commercial and housing development leaving enormous negative financial implications.

I have no doubt that the Irish have inherent entrepreneurial abilities well suited for imaginative new proposals.
The secondary school curriculum needs to be revised in a more practical direction with entrepreneurial studies introduced at an early stage. Also competitions that foster and regard new ideas should be increased. In this respect I welcome very much the recent presidential initiative "Your Country your Call" which is creating a nationwide competition to come up with entrepreneurial ideas that have the potential to create significant numbers of jobs. Finance and assistance will then be made available to bring the two best ideas to commercial reality. And perhaps others ideas not considered as potential winners will in fact provide the real success stories of the future.

Monday, February 15, 2010

Michael O'Leary - again in the news

A major issue has arisen at Dublin Airport with Michael O'Leary once again centre stage.

It appears that 200 aircraft maintenance jobs have been lost to Prestwick Airport due to the inaction of The Minister for Enterprise Trade and Employment (Mary Coughlan). Cleverly, by highlighting that these jobs have already gone with a further 300 still up for grabs he has considerably raised the political stakes with respect to the Government's response.

The background to the dispute is as follows. For many years a large skilled base of aircraft maintenance engineers existed at Dublin Airport formerly known as Team Aer Lingus and more recently as SR Technics. However due to the pressures in the airline sector SR Technics (a Zurich based firm) announced in early 2009 that it was to cease operations in Ireland with the loss of over 1100 jobs (citing the high costs of doing business at Dublin Airport as a major factor).

The Dublin Airport Authority (DAA) which is responsible for the running of the airport is a state owned monopoly lacking any true business initiative. Michael O'Leary for years has been looking for the opportunity to open up an alternative terminal at Dublin that would have offered just the kind of competition for the DAA that was needed. But the Government - operating from no sensible commercial logic - persistently refused the idea.

Then when former head Willie Walsh acted decisively to rescue Aer Lingus from imminent collapse he was so frustrated by the then Taoiseash Bertie Ahern regarding his (i.e. Walsh's) future plans for the airline that he decided to leave. Then more recently the Government in a deep recession has imposed a nonsensical travel tax (which can only act to further reduce airline traffic at a difficult time).

Unfortunately the DAA if anything is even worse. In its previous incarnation as Aer Rianta it had a stranglehold over the decisions taken at the other major airports (Cork and Shannon) until Seamus Brennan, who in fairness was always supportive of competition, ended this practice.

However things have not improved much at Dublin Airport with the DAA acting as a typical monopoly always ready to take the easy option in making decisions. So rather than properly tackling costs and inefficiency it has simply sought to raise revenue initially through their "Customs Free" Operation, then from excessive parking fees and from rapidly increasing airport charges. Even their attempt to build a second terminal (in preference to facing competition from one financed by Ryan Air) has proven a largely botched affair with significant delays and increased costs during the construction process. And now when it has come on stream, airline traffic has dramatically fallen off due to the recession.

And of course DAA's high cost strategy is hardly likely to boost business. Rather it will seek to keep raising airport charges even higher in future years so as to recover the cost of its investment.

Since the loss of the SR Technics operation, apart from Ryan Air there have been various proposals as to how perhaps some of these skilled jobs could be saved. At present Hangar 6 (which Michael O'Leary considers ideal in terms of his proposal) is leased on to Aer Lingus for line maintenance on their aircraft with somewhat vague proposals for the creation of about 250 jobs over 5 years. However one could hardly be excited at this prospect, as Aer Lingus' heavy maintenance is already carried out abroad and given the present state of the airline market one could validly question whether Aer Lingus will even still be in existence in 5 years time!

On the other hand we had the Ryan Air proposal to create 500 jobs immediately (now 300) with the prospect of further growth in future years (through continual expansion and other airlines perhaps switching their maintenance requirements back to Dublin).

So from this perspective it seems a no-brainer. However with Michael O'Leary things are never quite that easy. For one thing he refuses to deal directly with the DAA (which is responsible for addressing any such proposal). Now this is a clearly deliberate tactic by O'Leary whose business approach would represent a total polar opposite to that of the DAA.

In fact in this regard I would support O'Leary. If he negotiated with the DAA, while pretending to be supportive, it would probably attempt to tie him up indefinitely in red tape before pleading that it cannot accept his plans in their present form. And then a weak Minister, afraid to overrule the Authority, would meekly accept its decision. So by appealing directly to the Minister, he is removing this convenient line of cover and highlighting what he sees as the central issue i.e. in a deep recession with unemployment so high, that the airport's needs would be better served by a highly competitive company like Ryan Air than a self serving monopoly such as the DAA!

But in the world of crony politics, which still infects the way decisions are taken at every level in Ireland, O'Leary knows quite rightly that the issue will never be addressed unless he can cause considerable embarrassment for the Government.

Another possible barrier that has been raised with respect to O'Leary's proposals is the fact that Hangar 6 (which clearly is his favoured site for operations) is already leased out to Aer Lingus. However this is perhaps a red herring. One must remember that Ryan Air and the Government are the two principle shareholders in Aer Lingus. Therefore if they both agree that it is now preferable that Ryan Air take control of Hanger 6 (with Aer Lingus being adequately facilitated elsewhere), there really should be no issue.

However there are other problems that are likely to arise. Michael O'Leary is notorious for driving a hard bargain. So even if in principle a decision is taken to go along with his plans, the aircraft maintenance workers may be in for a rude awakening with respect to their new work conditions.

This was a continual problem in the old days both with Team Aer Lingus and SR Technics. Though in fairness the quality of their work was recognised, the heavily unionised approach under which they operated led to a high cost operation and disastrous industrial stoppages. In a cut throat business this was certainly not geared to ensure their long run survival. Even Aer Lingus, who one might of thought would have been most anxious to remain at Dublin, had already under Dermot Mannion moved abroad to carry out its heavy aircraft maintenance.

Indeed listening to Live Line yesterday, it was remarkable to hear what seemed like 100% support from former SR Technics workers for the Ryan Air proposals. One would have imagined that these same people would have been bitterly opposed to Michael O'Leary (and everything he stood for) under the old unionised regime. However faced with the loss of skilled jobs and no realistic prospects of future employment their attitude has changed utterly.

And there is a lesson here! For the very same plight facing these now could well face Aer Lingus workers in the not too distant future. So perhaps they may recognise that O'Leary probably offers them the best chance of maintaining their jobs in the long run.

Of course if the Government does finally bow to the strong public pressure over the possible loss of these 300 jobs, the DAA will indeed have every reason to be concerned. For one thing is certain. Michael O'Leary's campaign against it is likely to greatly intensify once he gets a foothold in Hangar 6. I would imagine the decision to maintain these jobs on an on-going basis at Dublin will be made dependent on all sorts of changes at Dublin Airport that will be anathema to the DAA.

So Michael O'Leary might get his wish and end up effectively running an airport terminal in Dublin after all.

Then again, we cannot be quite sure that he is even truly serious about these maintenance jobs. He is very shrewd and might have already judged that there is no realistic prospect of his plans now being approved. Meanwhile however he can score a wonderful public relations success posing as the worker's champion while causing acute embarrassment for both the Government and the DAA.

And who would have thought it for if this current trend continues he could wind up even more popular than George Lee!

Sunday, February 14, 2010

Bank Despair

Attempting to follow the litany of problems faced by the banking system here in Ireland would lead one almost to despair!

Though we knew more than a year ago that they faced horrendous difficulties, the continually evolving situation reveals them as much worse than originally anticipated.

In September 2008 following the Lehman crisis the Government took the unprecedented step of guaranteeing bank deposits to the sum of €400 bl.

At first we were assured that this move was due solely as a result of a temporary liquidity crisis in the banking system (triggered by the international financial upheaval at the time).

However it quickly emerged that one of the banks Anglo Irish - with no branch network - had accumulated huge losses on loans mainly to the commercial property and would need to be nationalised (costing the taxpayer countless billions).

Then it became apparent that the other banks were all very much under capitalised (thereby requiring the State to pour in additional billions of taxpayers money).

Next when it became clearer regarding the extent of the bad loans extended to the property sector by all of the major banks, the Government proposed a highly expensive rescue plan NAMA (National Asset Management Agency) whereby it would buy up the larger loans on the banks' books at a discount. However this discount of about 1/3 was still much higher than current market value with once again the taxpayer funding the difference.

However we were assured at the time that this step was indeed necessary to get the banking system lending quickly again.

It now appears that the banks will also be suffering large losses on many loans not included in NAMA (e.g. on mortgages that were being thrown like confetti at unsuspecting house purchasers during the height of the boom).

Also it is already apparent that the losses on NAMA loans will in fact be much greater than originally anticipated.

This therefore means that the Government will now have to put in large additional sums in fresh capitalisation into the banks.
Meanwhile it is being slowly conceded - in what was apparent to many of us all along - that in fact there is no realistic chance of the banks being in a position to restore liquidity for some time.

So with respect to the banks we seem to be getting the worst of all possible worlds.

Then last week it was announced that Bank Of Scotland (Ireland) was closing down its Halifax Bank operation entirely here with loss of 750 jobs (in an opening move that seems to herald an eventual total close down here).

Now it was this Bank in particular that offered a breath of fresh air when it entered the Irish market in that it - perhaps for the first time - stimulated some real competition in the consumer banking market.

However since the crisis it appears that all the overseas banks are rethinking their commitment and likely therefore to significantly scale down operations with every likelihood of further job losses.

Also the domestic banks (such as AIB and BOI) who are desperate to cut losses are likely to reduce job numbers to a significant extent. So the banking sector will contribute hugely to the already very high unemployment figures in the coming months.

Not alone is this very bad news for the workers employed but likewise for bank consumers.
As the market inevitably contracts (with fewer institutions remaining) the degree of competition will fall. Therefore again with a view to repairing large losses, the surviving banks are likely to operate effectively as a cartel whereby they will extract high profit margins from consumers. So not alone do we face the prospect that many firms and consumers will be unable to obtain credit but bank charges could steeply rise steeply with those successful in obtaining credit paying excessively for the privilege.

And this understandably is likely to lead to further disillusionment and anger among the wider public who have already contributed massively to to cost of cleaning up the banking mess.

There is a deeper problem here which goes to the very heart of the capitalist system in that it fails to properly recognise a collective aspect to all profits.

During the good times bank profits are narrowly associated with shareholders. However during recessionary times, such as we have now, losses are associated more widely with the general public. Though not directly responsible therefore for the bad decisions taken, in effect it is required to substantially bear the losses (resulting from such decisions)

Market Economics as we know it has been built on an unduly limited individual notion of identity. However rightly, there is also an irreducible collective dimension involved in all economic decisions.
So ultimately this whole crisis is pointing to a need to redefine our economic ideas at the most fundamental level.

Tuesday, February 9, 2010

Exit of George Lee

So George Lee has left Fine Gael after just 9 months in the party.

How much things have changed since the heady heights of his sensational by-election triumph last May! In the eyes of many he was seen as the new political messiah for Fine Gael bringing the promise of fresh economic thinking and future electoral success. However it has all turned sour so very quickly.

Frankly I was surprised when Lee left his influential post as RTE's revered economics correspondent, a role for which he was clearly designed and in which he excelled. Apart from correctly alerting listeners regarding the flawed nature of Celtic Tiger policies, the reports gained additional credibility through his communication skills and a sincere emotional engagement with the issues involved. So in this respect he did not fit the stereotype of the detached economics observer and was all the more loved for that very reason!

However on the negative side, Lee's reports rarely displayed great detail or originality. Rather, they were of the "broad brush" variety which was very effective in communicating economic matters to a non specialist audience.

I would be more impressed with Richard Bruton in terms of ability to forensically investigate the details of economic policies. Then in relation to imagination and originality - though I do not always agree with his proposals - I would find David McWilliams to be a much more interesting commentator.

Due to the failure of politicians in 2008 to foresee both the financial crisis and property slump, people were looking for a new type of hero among those economic commentators who had correctly warned of the crisis. And chief among these was George Lee who thereby enjoyed enormous popularity.
And I am afraid George began to bask somewhat in this warm glow, developing perhaps an exaggerated view of his political potential. And when the main rival party came hunting for him he couldn't resist the invitation believing that somehow he had the magic formula to cure the country's ills.

Even at the time I thought that his decision did not make any sense.

For one thing Fine Gael were in opposition and despite the very low political ratings of the Government likely to remain there for some time.

Secondly, the most talented people in Fine Gael already filled key economic positions in the shadow cabinet. Richard Bruton as the Finance spokesperson is a highly respected and able politician of 30 years experience whereas the Enterprise Trade and Employment spokesperson Leo Varedker is the most promising of the younger generation. So there was no obvious economics position that George could immediately fill and he was always likely therefore to be used as a "poster boy" offering an invaluable marketing opportunity for the party.

Then on a few occasions when he did engage in debate he displayed his political naivete and - perhaps - lack of detailed economic understanding of policies. In a couple of exchanges in the Dail and at a Summer School (attended by the Minister of Finance) he came out badly when his "sound bite" approach was exposed as inadequate in the light of more comprehensive questioning on issues.

It is all very well railing against the deficiencies of the political system (which indeed are many), but surely he should have been aware of this before entering politics. For once that line is crossed, he no longer was representing just himself, but also the party and the many people who gave him support and voted for him in the by-election. And of course his political neutrality, so valuable in an economics commentator, has been forever sundered.

It is very mistaken in any case to think that one must enter politics to have a real effect on economic policy.

In fact in the present climate the, opportunities have never been greater for outside commentators (such as George Lee) to exercise a marked influence.

I mentioned already another popular economics contributor of the moment David McWilliams who has had a key impact on recent economic debate through his books, newspaper articles and many radio and TV performances.

The most important economics decision ever taken in Ireland was the bank guarantee scheme undertaken by the Government in September 2008 where the State decided to underwrite bank assets to the value of €400 bl. Well that was a scheme that was being proposed at the time - among others - by David McWilliams. And as he recounts in his latest book, McWilliams was consulted in his home by Brian Lenihan, the Minister of Finance shortly before it was implemented.

And then another respected economist Alan Ahearne, who likewise had warned about the dangers of Ireland's property bubble, was subsequently appointed as special advisor to the Minister of Finance.

And finally yet another very respected economist Patrick Honohan was recently appointed as the new Governor of the Central Bank. So if one is interested in influencing current economic policy, surely these examples suggest better options than as a backbencher with an opposition party!

Thus George Lee was perhaps in a more favourable position than any other economist here in Ireland to potentially influence current economic events. He may have been required to eventually vacate his position as RTE's economics correspondent in order to speak out more freely. However he would have remained greatly in demand by the media, with ready access to any important figure he wished to consult with a view to disseminating his economic viewpoints.

However for me this is really the nub of the whole issue for I have seen little evidence that George can truly offer fresh thinking on contemporary economic issues.
He was privileged to be filling the very post which maximised his talents and influence but somehow failed to properly recognise that very important fact.

Sunday, January 17, 2010

Water - too much, yet too little

It has been very strange living In Ireland in recent times.

Ireland is a country which even at the best of times experiences a great deal of rainfall. And during summer 2009 we had one of the wettest Summers on record.

Then in November the country experienced some of the worst floods in living memory.
This was followed - starting in mid-December - by a long spell of snow and ice.

Yet after all this we are experiencing great problems with our water supply. For example in Dublin many houses have been cut off for several days. In many others water supply has been greatly restricted.

What on Earth is happening?

Unfortunately heavy rainfall does not necessarily translate into a properly functioning water supply.

Like so much other infrastructure, insufficient attention has been paid to the maintenance of the water system in Dublin and elsewhere in the country.

Most of the underground piping that serves Dublin was laid in the late 19th century (when the population of the city was just a fraction of present levels). Though this served well for many years, the lead pipes are now very old and cracking in many places. So a considerable amount of water (instead of flowing through to household taps) leaks out earlier in the process.

Though some limited upgrading of this system has taken place in recent years, it was apparently done in a slipshod and careless manner (as so much construction work during the Celtic Tiger). Though local councils are slow to admit as much, it seems that regulations with respect to laying of new pipes during the housing boom were frequently ignored. Many have been inserted far too close to ground surface and have shown little tolerance therefore for the prolonged cold weather (such as we have experienced in recent weeks). So ironically it is in newly built areas that many of the worst problems are occurring. So this clearly points to pipes being laid "on the cheap" far too close to ground surface.

So it will now perhaps require extensive excavation to find the many leakages and breaks with this new piping (arising from the job not being properly done in the first place).

Another contributory problem in recent weeks has been the fact that many residents - in the desire to avoid pipes freezing over - have allowed taps continually run. However I do not honestly think that this problem has been as bad as the authorities are claimimg (who in many cases are deflecting attention from their own negligence).

There is another huge in-built problem. Dublin has grown enormously in recent years with the streets now very congested with traffic. Therefore proper upgrading of the system has been continually delayed to avoid the major disruptions that would thereby inevitably affect business. Though it should have been done many years ago (when conditions were much more favourable) this did not happen. And now because of the fear of ever increasing disruption, the issue is now continually put on the long finger.

Another problem relates to the financing of local authorities. In recent years Central Exchequer funding has been restricted with councils required to raise revenues from their own operations (such as waste collection). However the councils are always claiming that they are underfunded in an attempt to get Central Government to bear more of the costs.
So as it stands now there seems little chance that major infrastructural works will be instigated by the councils!

It has also to be said that in other parts of the country, water supplies in recent years have suffered increasing contamination (from slurry and chemicals draining from landfill dumps). For example this has been a persistent problem in Galway with many residents still having to boil their water before use.

However there are opportunities also arising from the present situation. The days of unrestricted water usage (even in a rain rich country such as Ireland) have come to an end.

The time is now ripe to install water meters in all houses. A certain minimum amount could be granted free with charging applied above that limit. This would create an incentive for people to economise on usage. It would also provide a big short-term business opportunity in an economy gripped by recession.

However all these problems represent a huge lack of forward planning.

We see frequently in the business press Ireland promoted as an ideal location for companies (needing a plentiful supply of water). However the fact remains that several businesses in recent weeks had to close down (for lack of water).

The same lack of foresight was in evidence in relation to our promotion of Ireland as a premier IT location where the basic need of building an adequate broadband infrastructure was never tackled.

However on a deeper level, problems with water shortages worldwide are likely to grow significantly in future years. My own belief is that we are finally beginning to witness "the inherent contradictions of capitalism".

The very nature of the capitalist system tends to foster short term opportunities for the private pursuit of profit over longer terms concerns with sustainability of physical and social resources.

Because of the - literal - exploitation of nature, key resources such as oil and gas are becoming increasingly scarce. Also climate change in large part, accentuated through unsustainable economic growth, is likely to create basic shortages with respect to food and water in many regions of the world. This is then likely to lead to significant problems of migration from affected countries creating huge political and social tensions.

A major change in attitudes is required. Though I would be optimistic that this eventually will occur, in the short-term major economic and social crises are inevitable.