We had better cut our own cloth or the great bogeyman will do it for us

THE spectre of the bogeyman has re-entered Irish politics. The bogeyman is the International Monetary Fund (IMF) with which we were threatened last during the 1980s. The IMF is the lender of last resort, the place where a country goes for money when it can’t get it anywhere else.

The price extracted for this money is huge: it is not merely high interest rates that must be repaid on top of the capital, but what has to be done, under instruction from the IMF, to make sure the flow of repayments is consistent.

The State would be forced to cut its costs dramatically. The Government would have to sack loads of public servants and reduce pay whether it wants to do so or not. This would not happen under the auspices of social partnership. There wouldn’t be the discussion and negotiation that’s going on at present. We would lose the remaining control we have over our own economy.

A whole new generation learned about the IMF this week because of a bizarre sequence of events that, unfortunately, is somewhat typical of much of what’s going on. Dan Murphy, a trade union official representing public servants, wrote a letter to his members that simultaneously promised to defend them from cuts while warning things could get so bad the IMF would be called in.

Taoiseach Brian Cowen, typical of his absent communication skills, fudged his response to a question on this during a press conference in Japan. Suddenly an erroneous report was broadcast on RTÉ that appeared to quote him as confirming he had raised the spectre of the IMF at his talks with the unions.

This contributed to a sudden panic, a fresh fall in the stock market (after a scarcely acknowledged new year rally) and a fall in the value of the euro against the dollar by a cent — although, in fairness, much of this would have happened anyway because of other international events.

Cowen scrambled to deny his apparent confirmation, Murphy clarified that Cowen or his officials had not raised the topic of IMF control over our economy, and RTÉ backtracked.

But much of the damage had been done. Fragile confidence in the ability of the Irish economy to recover from the economic disaster had been undermined. Yet it may have done us no harm to face up to the possibility of falling into the abyss. The likelihood of losing control to the IMF may be low and nowhere near imminent, but it is not impossible.

If the bank guarantee provided by the Government over all deposits in six financial institutions has to be honoured at even one of them, for example, then the financial consequences will be disastrous. Even if it isn’t, the cost of recapitalising the banks could be ruinous if it exceeds the Government’s conservative estimate of no more than €7.5 billion. Another crisis emerges when you add in the problems with our escalating imbalance between the Government’s annual spending and income. This is forecast to reach a deficit of €12bn this year that must be borrowed on top of the €8bn earmarked for capital investment.

No wonder the cost of borrowing has become more expensive. Already, we pay 4.7% for our debt whereas Germany pays 3.2% even though we are part of the same monetary union. This should not be happening, especially as we have a relatively low government debt (although it would be a lot lower if we hadn’t wasted the temporary proceeds of the boom on politically motivated populist spending to benefit the parties in power).

The influential Lex opinion column in the Financial Times (FT) on Wednesday raised the issue of how this country’s debt ratings — along with those of Portugal, Spain and Greece, the other members of the group known as PIGS — were downgraded by international credit agencies this week. This is important. It means there is a judgment that the repayment by the State of its loans is not guaranteed, that there is a risk of a failure to repay. The three main ratings agencies have agreed on this.

Economist David McWilliams this week raised the possibility that the country might end up defaulting on its sovereign debt. The likelihood of that particular disaster may be slim, given that the other members of the Economic and Monetary Union (EMU) probably would bail us out to prevent the damage that would be done to the currency, but the price they would extract for such support would have to be huge. Merely ratifying the Lisbon Treaty meekly would not be enough. The terms demanded would be along IMF lines.

How others see our position at present is interesting not just because it allows us the opportunity for better critical self-analysis. The FT properly focused on our loss of competitiveness.

The newspaper reinforced something that many here have been saying for years — to be shouted down as unpatriotic by politicians, trade unions, business leaders, banks and their economic cheerleaders — that the low cost of money brought about by low interest rates was not necessarily a good thing.

Not only did it unleash the credit boom and the surge in asset prices to unrealistic levels, but it contributed to a rise in wages. (How else could people afford the price of property, even with low costs of borrowing, if they did not receive big pay increases?). Since 2000, Ireland’s relative wage costs have risen by 20% against Germany, whereas Greece’s, for example, went up by just 5%. “Export performance has been further hurt by the weakening currencies of two of its major trading partners, the US and the UK,” the FT noted. “The quick solution would be for Ireland to devalue too. As a euro member, it cannot.”

This is the great problem at present that is getting little airing. During the economic crises of 1986 and 1993 we helped ourselves enormously by devaluing our currencies because it helped our exporters enormously. In a small country like this, where we cannot depend on domestic demand, we have to export.

Unfortunately , the strength of the euro against sterling and the dollar — with Britain and America remaining our main markets — is killing exporters. They, and farmers, want a compensation fund but where can the Government find the money for this, even if it was allowed by the European Commission to provide such State support?

BUT the FT has an answer: “Instead, it (Ireland) has to deflate”. This means that to accompany falling asset prices, “wages have to fall in absolute terms”.

This is nearly impossible politically, without being forced upon us by either the IMF or EMU. It will happen to an extent in the private sector, where many nervous employees are accepting pay reductions for fear of losing their jobs, but the unions are much stronger in the public sector and will do anything possible, including striking, to prevent this.

The public sector may argue that reducing its wage rates will do little to help competitiveness, but this isn’t true: public sector companies would be able to supply cheaper services and products if their own costs were reduced. In addition, there will be a need to increase taxes on the productive economy if there is a failure to reduce the public sector pay and pensions bills, especially now that borrowing is more expensive and harder to arrange.

So there may be the ultimate choice: look after our own economic destiny by reducing costs and protecting jobs to help exports or call in the IMF to cut and cull. It’s a real case of better the devil you know which was probably the intent of Dan Murphy’s now infamous letter to union members in the first place.

The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.