Well done, Ireland, but now the heavy lifting must begin

THE troika made its first three-monthly report saying “well done, Ireland” and releasing the next tranche of the bailout loan, but made it quite clear now that the decisions had been made, the heavy lifting would have to begin.

The arrangements have been put in place to resolve one of the world’s worst banking crises, but the country must settle down to paying for it — by cutting wages and costs, increasing taxes, and spending less on state services.

It’s a delicate balancing act and almost anything — inflation, interest rate increases, slow growth — can knock it off course.

Up to now people have taken the medicine, but the going could get rough once the Government’s spending review is published and the income protection enjoyed by workers is lifted.

The Croke Park agreement is also on the line and those working in state and semi-state enterprises are in for a tough time.

“A jobs-rich recovery” was a phrase repeated several times by the members of the troika — EU, IMF and ECB. A “jobless recovery” has been the fear of every country that has suffered such a crisis and much of the structural reforms spelt out in the loan agreement are designed to get business investing and people back to work.

Two of the main tools are cutting wages and ensuring that a person is better off in work than on social welfare, which means cutting welfare supports. Studies show that for every cut in nominal wages of 0.6%, there is a 0.3% increase in employment and a 0.2% increase in GDP.

In the past Ireland was held up as one of the better countries in terms of having a flexible labour market, meaning it was easy enough to hire and fire people and trade unions were not seen as an obstacle to investors.

Now, however, centralised systems of wage setting are being targeted and were mentioned by the troika. One of these is the sectoral wage agreements, where the Labour Court can set higher minimum wages for some normally lower-paid workers.

This will affect 170,000 workers, according to ICTU, which has been fighting to retain it. The argument for getting rid of it is that it sets a minimum for wages in the sector and consequently for other jobs, raising business costs.

What is referred to as income protection for unemployed workers is considered to be an unemployment and poverty trap.

One of the changes the European Commission report suggests is to reduce unemployment benefits the longer a person is out of work, as happens in most EU countries. More stringent job-search conditions should also be attached to benefits, they suggest. They cite studies showing that by cutting unemployment benefit by 5%, total employment increases by 1% after 10 years and by 1.8% for low-skilled workers.

Raising the retirement age by two years — it will increase by one to 67 soon — helps depress wage rates and increases employment by just over 2% over 10 years, the estimate.

Other aspects are to reduce the cost of services and supplies, including the legal and medical professions, and the state-owned gas and electricity providers. A cut of 1% in the cost of services increases employment by 0.1% and GDP by 0.5% over 10 years, according to the European Commission.

Prices in Ireland, even after the crisis struck, were 27% above the EU average, making it the EU’s second most expensive member state. This, the troika argued, shows there is not enough competition in many areas, which has been driving up costs and taking from the country’s generally competition-friendly business environment.

The Irish Competition Authority made several recommendations that should now be implemented, especially in sectors such as the legal and medical profession.

They also propose making it easier to take legal action against people and businesses to discourage them engaging in what the EU calls anti-competitive behaviour.

Getting growth back into the economy is vital and analysis shows this is the most sensitive issue for getting the country’s debt below a sustainable figure. For instance, if growth is just 2% lower than the current projections, then the debt will still be at 124% of GDP by 2030 instead of 65%.

An interest rate 2% higher than the 5.8% would see debt at 85% by 2030.

Using €24bn instead of the allowed for €35bn to restructure the banks will help in keeping debt repayments down, but with the ECB due to increase interest rates again all the hardship will not necessarily make Ireland master of her own destiny.

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