European Commission to recommend a more cautious financial approach for our next Government

In the eyes of the European Commission, Ireland is both star performer and naughty boy. But its warnings ought to be heeded, says Kyran Fitzgerald

Expectations at home are soaring, but the storm clouds are gathering overseas.

Could our recovery fizzle out? As the general election campaign gets underway, there is a strange air of unreality.

We have an economy that is delivering big time — for an, as yet, fairly narrow group of people.

The Irish economic recovery is tangible.

It is starting to be felt in people’s pockets, although for a distinct group the impact in terms of rising accommodation costs is actually negative.

However, few can deny that the jobs’ market is now buoyant and that this uplift can be felt in many urban areas beyond the greater Dublin region.

It is largely driven by foreign direct investment and by a series of factors which up to now, at least, have been working to the benefit of Ireland.

We should be familiar with these at this stage: Falling commodity prices and in particular, falling energy prices; lending rates at low levels;a weak euro that is helping to boost exports, particularly to Ireland’s core markets in the US and the UK.

The country is also reaping the benefits of a foreign direct investment boom that has been gathering pace since Ireland fell off the eurozone critical list around 2013.

Credit, in part, should go to the European Central Bank president Mario Draghi for his efforts in steadying a listing eurozone ship.

European Commission to recommend a more cautious financial approach for our next Government

His pledge to ‘do what it takes’ to save the euro combined with his ability to face down the German austerity junkies within the bank has proved critical.

Recovery is underway in several peripheral countries, including Spain.

There are of course flaws in the ‘easy money’ strategy that has been pursued by central banks, but right now, the eurozone is benefiting.

Mr Draghi has called it right.

As commodity prices plummet, the central concern is that deflationary pressures could be unleashed across the global economy, with a weakening Chinese currency acting as a key driver.

Credit too must go to the Finance Minister Michael Noonan for his central role in making Ireland a good place in which for people to do business once again.

In this he has had the backing of the Taoiseach, the Tánaiste, and her predecessor Eamon Gilmore.

One of Mr Noonan’s key tasks has been to engineer a recovery in the property market and in Irish asset prices generally.

As a result, the National Asset Management Agency has begun to secure decent prices for many of the assets in its portfolio.

There are few political brownie points to be gained from this, but if we do not start making big inroads into the mountain of debt inherited at the end of the bubble years, we can wave goodbye to any prospect of a sustained recovery in public investment and public services.

The Labour Party has played a big part in steadying things for which it has received little in the way of thanks.

That’s politics for you. Recovering asset prices, in fact, have highlighted the fact that investment, public and private, has fallen behind badly since 2008.

The shortfall in housing supply and in investment in key infrastructure including water treatment and flood defence is now coming home to roost in the form of rising rents, hitting the young the hardest.

Ironically, the European Commission, according to a report in last week’s Irish Examiner, will soon wrap the Government on the knuckles over the manner in which it loosened its collective fiscal belt in the dying months of 2015.

Ireland is star performer and naughty boy.

Goodbody Stockbrokers economist Dermot O’Leary believes the commission, in its upcoming review, may criticise Mr Noonan and colleagues over the continuation of shortfalls in spending on investment projects.

The concern is that such under investment leaves us with capacity constraints that ultimately hits competitiveness and strangles the recovery.

The commission has a strong case if you view matters from a purely economic perspective.

Its contribution to the debate and the prospect of its fiscal rules being applied from this year on, is something that should be welcomed.

The Government, however, must deal with an electorate which is desperate for an easing in its circumstances over the long years of austerity.

That means lower taxes and looser constraints on public pay.

Whoever emerges at the head of the country from next March could be facing into a scenario where expectations have been ratcheted up but where the global economic climate has darkened.

The prospect of four days of strikes this month on the Luas line may be something of an outlier in industrial relations terms, but it is reflective of a certain ‘grab while you can’ attitude that threatens to re-emerge.

Siptu, in unveiling a claim for a wage increase of over 50% appears to have drawn inspiration from the British transport union the RMT.

London train drivers have regularly brought the London underground to a halt. It is an approach that has served them well to date.

There is a suspicion that the Luas demands are connected to the upcoming election.

At the same time, Siptu official Owen Reidy has hinted at compromise.

Caving in to the demands would spark an unravelling in the deal with the Luas operators and ignite other demands across the transport network, particularly among rail drivers.

It would also raise questions as to whether the state should rely on support for continued investment in rail projects whose operation is susceptible to blackmail.

Of course, union militants can point the finger at top management.

Salaries for senior executives are on course to rise by around 10% this year, at a time when ordinary employees look set to settle for a more modest 2%.

Is that real leadership, one wonders?

The remuneration of top global executives, in particular, has reached obscene levels.

The growing wealth disparity is being driven, in part by the ongoing technological revolution and the displacement effects of which are only beginning to be felt.

Meanwhile, the financial tectonic plates are shifting.

China, weighed down by debt approaching 300% of GDP, is shuddering.

Few trust its government statistics.

Commodity producers are facing plummeting prices and energy companies are in freefall. All of this leaves the financial system exposed to new waves of bad debt.

An estimated 15% of loans to energy firms are now in default.

A more cautious approach may be in order. Brussels is suggesting that the Government put a lot more aside for the rainy day at least by paying down some of our public debt mountain.

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