Desperate measures bear own dangers

The EU/IMF sentence imposed on Ireland should be replaced by conditions conducive to our growth, writes Stephen Kinsella

TIME does not heal all wounds. It is a year on from our bailout by the EU, IMF, Britain, Denmark, and Sweden. Ireland is effectively a client state with little power to decide anything of importance in the search for a path out of our present difficulties.

The decision to raise VAT is a case in point. The choice Michael Noonan had was to increase it by 1% a year over two years, or to increase it by 2% in one year.

The decision to increase VAT was actually made by the EU/IMF in 2010, and the minister was obliged to carry it through. Neither the minister nor the cabinet can make any substantive changes to the agreement with the EU and the IMF, and their role really is to execute a plan of controlled descent for the Irish economy as it returns to a roughly balanced budget from year to year, with a large level of government debt relative to the country’s national output, a high level of long-term unemployment and personal indebtedness.

The EU/IMF programme has three main pillars:

* First, to restore balance to the State’s budget by cutting current and capital expenditure by €3.9 billion in 2011, and by increasing taxes by €1.4bn in 2011;

* Second, to reduce the size of our banking system and its bloated balance sheets by deleveraging, which is French for selling assets, getting rid of old loans, and not giving out any new ones, while trying to attract deposits;

* Third, there are a series of structural reforms to the labour market mooted, where the Government will introduce legislative changes to remove restrictions to trade and competition in sheltered sectors such as the legal, pharmaceutical, and medical professions.

The scale of the changes to society cannot be underestimated, but we must consider the alternative to these policies. Doing nothing clearly is not an option, because we cannot spend more than we make unless we have our own currency.

We must begin to pay down our debts, and this process has begun. Leaving the eurozone would be much more costly than the austerity policies we are engaged in because introducing a new currency (which I vote we call the “Anglo” so we never forget the mistakes of the recent past) would almost certainly damage long-run growth prospects for our economy.

Almost all the private bondholders have been repaid, with the only game to play for in terms of debt relief being the “promissory notes” worth €31bn, written to cover the losses in Anglo and INBS. This debt is to be repaid over 10 years.

The repayment schedule for this debt could be changed to 20, or even 50 years, and the debt servicing costs reduced. Debt relief, of a sort, is still possible.

The National Recovery Plan is based entirely on export-led growth. Export-led growth relies on two pillars. First, we have to make our stuff cheaper than our competitors’ stuff. Second, there has to be someone willing to buy our stuff. With world growth prospects looking increasingly dubious, the strategy of export-led growth may not work. This would undo, at a stroke, all of the efforts of the Government, the EU, the IMF, and most importantly, the Irish people.

Finally, I feel it is a mistake to assume Ireland will return to borrowing on the private bond markets this year or next year. Europe is so volatile that sovereign debt markets are all but frozen. Even if the economy were healthy enough to take on more debt, no one would be willing to hold it.

Also, the true test of fiscal sustainability is not the ability to borrow but the ability to attain a high standard of living without borrowing. The primary objective of the EU and IMF authorities and their Irish subordinates should be the attainment of a large positive primary balance in government expenditure, coupled with a positive current account balance, where we sell more to the world in services than we receive.

This will allow us to pay down our debts quickly and ensure the economy is robust to the inevitable shocks the world economy will experience in the future.

* Stephen Kinsella is an economics lecturer at the University of Limerick.