Ireland, where to now?

Ireland is looking down the barrel of a gun. With its banks looking increasingly fragile, a housing market in precipitous decline, and a political establishment lacking coherence and vision, the gun is fully loaded. The Irish economy has grown by promoting its reputation as a knowledge based economy with access to the European Union. It has fostered enterprise with a liberal, indeed in hindsight far too liberal, doling out of credit and it has sought to ease social tensions with a series of “social partnership agreements”. These policies are rapidly coming undone.

Ireland’s desire to project an image of itself as a knowledge based economy could be in danger, due to the government’s plan to raise third level fees. A possibility loudly decried by recent student protesters. While there is a chronic need for an increase in funding for Irish third level institutions, a need exemplified by the budgetary difficulties currently facing University College Cork, the government’s proposal to increase the student registration fee is a regressive and superficial response to a deep seeded problem. As Michael Moran discussed in an earlier post (link) the notion of increasing the cost of third level education should not be dismissed outright. However, a solution is needed which will equitably distribute the burden of this increase in costs while also providing more than the €35 million envisaged by the government’s proposal. Unfortunately the government’s education strategy, which also includes an increase in primary class size, seems to lack any real vision for the future.

The banking system which fuelled the supply of easy credit has collapsed. Anglo Irish has been nationalised and any lingering confidence the international markets may have had in the others has taken a beating following a string of revelations regarding highly unethical trading practices and accounting manipulation. The nationalisation of Allied Irish and Bank of Ireland may only be a matter of time. Meanwhile an Irish economy starved of credit is slowly grinding to a halt and the central bank predicts a 4% decrease in GDP in 2009.

The State, whose own finances are looking increasingly fragile, has belatedly realised that it must act now if it hopes to salvage the possibility of a return to growth within the next five years. Brian Cowen and co. have finally acknowledged that the public sector pay roll and pension commitments are severely bloated. While private sector pay and pension payments have been forced downwards by the financial crisis and its impact on global markets, public sector workers have been protected under the terms of the national wage agreements and the fact that their pensions are indexed to the job rate! The editorial of the Irish Times on the 14th February stated that there is now a gap of 20 percent in comparable pay between the two sectors. In an attempt to redress this issue the government proposed a pension levy for workers public sector. The unions have labelled this measure as unjust and last Wednesday 120,000 public sector workers took to the streets of Dublin to manifest their discontent. David Begg general secretary of the Irish congress of trade unions (Ictu), which organised the protest, claimed that the burden of economic adjustment was being shared neither equally nor fairly. This protest and the squabbling in the Dail (the national parliament) set a worrying precedent for the governments saving plan of €2 billion.

So the situation doesn’t look rosy. Our economy is shrinking and as unemployment grows tax revenues will decrease and social welfare payments will increase. The reality is that Ireland is going to need to borrow approx. €20 billion this year and that our sovereign credit rating is set for a downgrade. What can be done? Greater unity in the Dail perhaps in the form of a national government or grand coalition would create a firmer base from which action could proceed. Acceptance of the fact that the pay of the public sector must be realigned with that of the private sector would facilitate a move towards greater fiscal responsibility. However, the most crucial step is the formulation of a coherent recovery plan which makes the hard decisions immediately. A plan that must be adhered to and that maintains the most vital services provided by the state such as healthcare, and education while cutting down on other spending. We must ensure that Ireland does not find itself submerged under a mountain of debt. Rather we should improve the fundamentals of our economy, notably our skill levels and our cost base.

A long term vision must take presence over our craving for short term comfort. Although I would like to avoid the Charlie Haughey-esque “tighten your belt” speech it seems rather difficult to promote any other approach. We must position Ireland to benefit from the inevitable, if seemingly distant, resurgence of the global economy.