To survive, we must invest in sustainable growth
Meanwhile, a new Ireland Strategic Investment Fund has been set up to invest potentially up to €6.4bn of the National Pension Reserve Fund into the economy.
Both developments are freighted with risks and potential rewards.
The banks cost this country its economic sovereignty. A €64bn bailout of the sector forced the government to accept a humiliating IMF/EU programme in Nov 2010.
The troika wanted the stress tests to be completed before the country exits the programme in November. A compromise has been reached: An asset quality review will be done before the end of the year followed by the stress tests next year.
Unless the asset quality review throws up unexpected results, it will not be known until next year whether the banks need more capital. This may seem like another case of kicking the can down the road. After all, the state of the banking system will be the biggest concern of the banks.
But there is an upside in the delay.
As it stands there is no political agreement to use the ESM to recapitalise banks. If Ireland had completed the tests this year, which exposed a capital shortfall, it could have created a huge problem for the Government. Where would the capital come from? Surely not the private sector, which would have put added pressure on an already stressed sovereign.
At least now Irish banks will be tested at the same time as EU banks, which means if there is a shortfall, it will have to be part of an EU-wide solution.
The importance of the strategic investment fund is very much linked to the state of the banking sector. The economy is starved of credit. Because banks have to comply with tough new capital requirements known as Basel III by 2019, the credit environment will remain constrained for the foreseeable future.
Alternative sources of capital are badly needed. The fund could play an important role in the economic recovery if it is used properly. But then again, there is always the danger that it will become a pre-election gift voucher for the Government used to fund “key infrastructure projects” in certain constituencies.
Does the country really need more new roads or rail links? Big infrastructure projects announcements might make good PR but the economic impact can be very underwhelming. Apart from housebuilding they do not create huge amounts of employment and they require very long lead-in times, which means they might not be completed for up to a decade.
What is badly needed is investment in areas that will provide a platform for sustainable growth in the future. These include the education, energy, and telecoms sectors among others.
But what is needed to put a dent in the unemployment figures is to get the domestic economy really again. This means an effective way of transmitting credit to the SME sector. In the US, companies raise 85% of their capital needs through non-bank funding. In Europe, the opposite is true.
There are massive amounts of money sitting on the balance sheets of pension funds and insurance companies. The Government should be commended for using the EU presidency to examine how this money can be funnelled to SMEs.
So far there has been little in the way of concrete proposals, but that has to change soon. The stakes could not be higher. If the eurozone is going to survive, it needs growth.
