Solution lies with SMEs, not debt forgiveness
The economy was very competitive, foreign direct investment was pouring into the country, and exports were growing very strongly.
These activities provided the support for the rest of the economy, particularly consumer spending and the construction sector.
Unfortunately from 2000 onwards, we lost sight of the importance of exports; we allowed our competitiveness to deteriorate dramatically; exports tapered off as a consequence; and our economy became increasingly driven by an unsustainable construction boom and a credit-fuelled consumer spending binge. That model ended abruptly in 2008 and we have been struggling to pick up the pieces ever since.
At the moment, one has to think long and hard and become quite inventive to build a case for recovery in the economy in the short to medium-term.
The banking sector is probably the biggest imponderable. Credit has dried up; the foreign-owned banks are not particularly interested in increasing their exposure to a country that has cost them billions over the past four years, and domestic banks are too bankrupt to lend. It is hard to see how this situation might change over the next couple of years.
The other imponderable is the unsustainable public and private debt burden overhanging the economy. A lot more fiscal tightening will be required for quite some time to come.
The one really bright spot in the economy at the moment is the export sector. In the first six months of the year, exports totalled an impressive €46.9 billion, a 6.1% increase on the first six months of last year. Detailed data is only available for the first five months of the year, but they show that exports of food and live animals are up 19%, with dairy products up 47%. Exports of medical and pharmaceutical products expanded 14%, and organic chemicals are up by 7%.
This is very impressive and reflects the stronger global economy over the past year and the enhanced competitiveness of the Irish economy. Furthermore, these figures just relate to merchandise goods and do not include services. Data on services is not yet available, but all evidence points towards a very strong export performance. For example, the number of visitors to Ireland increased by 15% in the second quarter.
Clearly Ireland’s export model is back in business, but one has to have some concerns about the impact that the slowing global economy might have. The only thing to do is continue to push down the costs of doing business and the cost of living in the economy.
The impact of the booming sector is, to date, having only a limited impact on tax revenues and employment. Much of the growth is being driven by productivity improvements rather than increased employment. This will eventually change, and we must hope the booming export sector will eventually generate employment and give a much needed boost to domestic demand, as in consumer spending and business investment.
Over the past couple of weeks, we have seen increased calls to implement mortgage debt relief in order to boost consumer spending. The estimated cost of such relief is put at €6bn. Unfortunately that is money we simply do not have as a country.
Even if the €6bn were available, I believe that the economic and employment impact would be significantly greater if that money was used to provide badly needed credit to small businesses.
Meanwhile, banks should just continue to deal with those in mortgage trouble on a case by case basis, as is happening at the moment.
In an environment of very scarce resources, careful choices have to be made and I believe that providing credit to the SME sector would be much more beneficial for the overall economy than mass mortgage debt relief.
