Internal strife undermining economic hope

THE internal strife threatening the stability of the euro is starting to undermine the hope that the worst might indeed be over in terms of the global economic outlook.

As soon as the OECD published its modestly optimistic forecasts for next year, they were dismissed by Britain-based analysts, apparently smug in the belief that the euro project is turning out to be a basket case that will not last for much longer in its current form.

A huge fear exists that the slash and burn measures now being demanded of Greece and other weaker euro states including Ireland, will in fact worsen the crises because of the impact the corrective measures will have on economic demand and on tax revenues vital to stabilising the economies of Europe.

That fear was raised on Bloomberg TV yesterday. The key point raised was that if governments get too heavy handed they will kill off any prospect of recovery and make a bad situation worse.

For its part the OECD offered some glimmer of hope earlier in the week forecasting the Irish economy will grow by 3% this year after contracting 0.75% in 2010.

While the 3% figure is good news, the bad news is that most of this expansion, if it happens, will be export led.

In essence that means less job creation and less taxes generated than if internal economic activity was the driver of the growth.

As a small open economy, exports are the lifeblood of both domestic firms and the foreign owned crop of companies who have provided a backbone to this economy for many decades.

The problem for us has been however, that even when the multinational sector is booming, weaknesses in the indigenous sector, as is the case at present, results in serious unemployment.

That was our experience in the 1980s when a multinational-led export boom was accompanied by seriously high emigration and high unemployment.

On the bigger stage the concern surrounding Europe is that the cutbacks now being demanded by the EU Commission will inevitably slow the growth of the eurozone quite significantly.

Several issues need to be addressed in that context, not least the dominant presence of Germany as Europe’s leading exporter.

The other side of that coin is the serious lending Germany has done to its European neighbours, and if the Greeks or the Spaniards start to default on their debts, Germany could end up getting hammered as well.

The real difficulty facing Europe right now is that the European single currency might have to be reduced back to core member states with the likes of Ireland, Spain and Portugal being left to fend for themselves.

OECD forecasts could be undermined and talk of a further reversal into recession in Europe or possibly a full global recession is starting to emerge.

For the time being the OECD is forecasting growth of 2.8% across its constituent states and 1.8% in the eurozone.

If we manage to achieve the 3% target next year that will offer some breathing space to us and give a clear signal to the markets that we can mange sharp cutbacks and deliver growth at the same time.

Hopefully by then the banks will be better capitalised and they might be able to get back to some real lending to support indigenous Irish industry.

We cannot survive indefinitely on the contribution of exports alone and we badly need consumers to get back spending.

Right now the mood music is hard to read and despite the reasonably upbeat projections of the OECD, the markets are extremely edgy. There is also a fear that another attack on the euro or further bad news from Greece will lead to economic chaos.