The Irish Economy

The September Live Register figures show a decline of 5,400 on a seasonally adjusted basis. The seasonally adjusted unemployment rate declined from 13.8 percent in August to 13.7 percent in September. The average unemployment rate for the third quarter was 13.73 percent compared with 13.2 percent in the second quarter.

The Irish Times carries an important op-ed by Michael Walsh of Mercer on the crisis in the defined-benefit pension system.  Compared to the fiscal, banking and employment crises, the DB pensions crisis is largely below the radar — but still hugely important.  

The focus of the article is on the need for policies to ease pressures on sponsoring businesses, and to prevent the more radical response of winding up existing schemes.  Of course, the proposals have potentially huge implications for a key component of the wealth of many Irish workers.  Unfortunately – but perhaps inevitably in an 850 word article – the actual reforms being proposed are less than clear.  I hope the diverse readership of this blog can provide some clarifications and perspective. 

There are two proposals:

First:

The Society of Actuaries and the Irish Association of Pension Funds have put a proposal to government to address this issue. It would involve insurers being allowed to sell, and pension schemes being allowed to buy, a new kind of annuity. These so-called sovereign annuities would be directly linked to Irish government bonds. They would therefore be much cheaper than conventional annuities. This would increase the chances that pension schemes can continue to operate and make good current funding deficits over time.

How exactly would these sovereign annuities work?  That they lead to cheaper annuities immediately suggests a reduction in the present discounted value of the expected benefit stream – that is, a loss in wealth. 

And second:

Our proposal at Mercer is that pension schemes that wind up be permitted to pay lump sums to pensioners instead of buying annuities. The lump sum would be the capital value of the person’s pension calculated on a prescribed basis. The calculation would allow for current life expectancy and expected future mortality improvements together with a specified long-term rate of interest or a rate linked to average euro-zone bond yields. Pensioners could then put the money in an Approved Retirement Fund from which income could be drawn down. Alternatively, they could use the money to buy an annuity, although if this is done at the current time it would likely be for a lower amount than their previous income from the pension scheme.

The proposal as written comes across as relatively painless.  But as Michael says, the devil is in the details.   What exactly is the “prescribed basis”?   Again, there is a presumption that any reduction is the contingent liability of the sponsor is also a reduction in the contingent asset of the member.

Michael Walsh may well be right that, all things considered, such reforms are warranted.  But the stakes for many individuals are such that a public debate is crucial, notwithstanding the complexity of the issues involved. 

I had decided last weekend to ignore Brian Lenihan’s comments about Irish economists being a cosy cartel unwilling to debate each other. We’d been here before: Recall Lenihan’s “national mediocrity” moment in which he implied that pro-NAMA academic economists were too scared of people like me come out and admit their views in public. And frankly, I’m more inclined to believe the Minister is engaged in PR spin with this kind of thing rather than expressing his true opinion.

However, I must point towards Fintan O’Toole’s discussion of Lenihan’s speech because whatever about being accused of being part of our national mediocrity or being part of a cosy cartel aimed at suppressing debate, I do feel compelled to clarify that I do not work for Trinity College Dublin but for Ireland’s leading Economics department, the UCD School of Economics.

Last winter saw some of the most dramatic floods in Ireland’s history. The rainy season is about to start. Will we see half the country under water again? We don’t know what the weather will be like. We do know, however, that everything else is much the same as last year.

It takes time to build or reinforce flood defenses. Monies have been allocated to the OPW to do that, and we’ll see the results in years to come. Other matters should take less time, but our dear leaders have been otherwise occupied.

An Oireachtas committee concluded that too many agencies were part-responsible for flood management. They still are. The same committee argue that a single minister should be in charge in case of an emergency. He is still not. Last winter, it was not clear who should call in the army and when. It still is not.

One of last year’s problems was that there was no early warning system. There is still no national one at either floodmaps or flooding, and the county councils do not seem to have put anything in place either. Hydrometric data are still incomplete and out of date. Last year, ESB filled up its reservoirs just before the rainy season. Did they do so again? The latest data I could find on the river Lee are from 2008, and do not cover the reservoirs.

The ESB is still in charge of these reservoirs. In last year’s panic over potential dam failure, the dam operators did not warn the people in Cork. Do the authorities now have automatic access to data on water levels and releases? If they do, they have kept silent about it.

So, Ireland is still as vulnerable to flooding as it was a year ago. Let’s hope it won’t rain as much.

The government’s latest strategy document is Trading and Investing in a Smart Economy. Apparently, the strategy is going to create 150,000 jobs directly and a similar number indirectly. Sounds good, though how exactly it’s going to achieve that was a bit unclear to me. Admittedly, my persual of the document was a bit brief as I’m suffering from glossy strategy brochure burnout.

Two weeks ago, the Irish Times reported that MoneyPoint regularly breached its IPPC license but failed to inform the EPA. I was waiting for a follow-up article, like “Plant Closed, Chief Engineer Jailed, Company Fined”, but then I realized that I’m in Ireland still.

If a coal-fired boiler runs in steady state, it emits little more than water vapour (white smoke) and carbon dioxide (invisible). However, if it is starting up or winding down, combustion is incomplete and smoke turns black. Black smoke contains a mix of chemicals which not only twist your tongue but also cause respiratory problems, cancer, degenerative diseases, and other mayhem. Such emissions are therefore strictly regulated, and rightly so.

The report and the lack of follow-up is disconcerting for a number of reasons. First, the ESB knew but did not tell the EPA. Second, the EPA got into action after complaints by locals. This does not help against nightly emissions or invisible ones. Third, there were two more incidents after the ESB was audited (and presumably warned) by the EPA. Fourth, there is no sign of remedial or punitive action.

(There is a side issue. Power plants should not do this. The boilers are either in much worse condition than their age suggests, or the engineers in charge are not doing their job as they should.)

Regulation is only as strong as its enforcement. For a plant the size of MoneyPoint, the EPA (and the public) should be able to monitor emissions in real time. We should not rely on voluntary disclosure or complaints. The EPA should have the right to intervene in the running of the plant, and shut it down if necessary. The owners and operators of the plant do not have the right incentives.

IPPC licenses were put in place to please Brussels, but they in fact protect our health and environment.

A guest post by Donal Ó Brolcáin

The property-induced economic crisis has given us an opportunity to scrap Metro North and the proposed Dart Interconnector, and instead expand the Luas system in Dublin. Within the next few weeks, the Railway Procurement Agency (RPA) will open the Luas Green line extension to Cherrywood. This includes two fully equipped stations that will not be used. Recently, Iarnrod Eireann said it will not open a newly built station on the Kildare line. In both cases, the reason is that expected property development did not take place.

Metro North and the Interconnector are also predicated on development assumptions that no longer hold. Meanwhile, the government has dropped plans to link the two existing Luas lines for passenger services. This perpetuates the folly of the decision made in 1998 to build two separate Luas lines.

To meet the aims of government transport policy - to ensure the provision of a well-functioning, integrated public transport system that enhances competitiveness and contributes to social cohesion - I propose an integrated Luas, which would create an on-street loop around the central business district; access Dublin airport from all parts of the network, including a link to Dart; and fill the transport void in north Dublin with three Luas lines, all on the surface and cheaper per kilometre than Metro North.

Luas cannot be a network without integrating the Green and Red lines. This means a full interchange at the O’Connell Street-Abbey Street junction. This is no more radical a suggestion than the RPA-Iarnrod Eireann proposal to uproot St Stephen’s Green as part of their plans for two lines (Metro North, Dart Interconnector) underneath that part of Dublin.

Integrating the Green and Red lines needs two tracks on-street from Stephen’s Green to Broadstone, as RPA proposes. It would transfer to the unused line that joins the Western line (Maynooth, with the new Dunboyne line) at Broombridge.

Last Friday, An Bord Pleanála was due to hold a preliminary hearing on RPA’s application to build another Luas line, one that will not connect the existing lines for passenger services. The plan includes a bridge across the Liffey, joining Marlborough Street and Hawkins Street. This is silly, as it ignores the Samuel Beckett bridge, designed to take Luas vehicles. Why build yet another bridge that does not extend the Luas catchment area? Such a proposal goes against the notion of cost-effective improvement of public transport in the built-up parts of the capital.

The Docklands loop that I am proposing would use the Samuel Beckett bridge to integrate this new city quarter. Running on-street, it would connect the catchment areas of the Green line (Sandyford- Cherrywood) to the docklands, linking up the newly opened National Conference Centre, O2, Busaras, Connolly station and the Abbey theatre. It would connect the Red line (Tallaght-O2) to the south docklands, allowing easier access to the Grand Canal theatre, Shelbourne Park, the Aviva stadium, the Eye and Ear Hospital and National Concert Hall. It would require a new Dart interchange at Barrow Street on the southside, complementing Connolly Station on the northside.

The North Dublin loop would start from the joined-up Luas lines in O’Connell Street, run up Dorset Street, Drumcondra, Whitehall, Collins Avenue/DCU to Ballymun, onto the airport and back through Finglas to join the extended Green line at Broombridge. The airport can be linked to the Dart at Clongriffin, with a Luas line taking in Coolock, Beaumont Hospital and the North Fringe. That would put Dublin airport on a loop connecting it to the central business district from two directions. The airport can be also linked to the Dart at Clongriffin, with a Luas line taking in Coolock, Beaumont Hospital and the North Fringe.

Our governing classes love grand gestures, usually involving the feuding public-sector baronies of CIE companies, the RPA, National Roads Authority, local authorities, government departments and the newly created National Transport Authority. They refuse to learn from the mistakes made when railways were first built in Ireland.

Spin, hype and bluster cannot disguise the fact that quiet competence is missing. Dublin needs an integrated Luas network to show the “joined-up thinking” of which we have heard so much, and to get us out of the crisis caused by reliance on property development.

This article appeared in the Sunday Times of September 26.

so writes a group of European academics and former policy officials in this FT op-ed.

Peston reports on his interview with Brian Lenihan in this piece.

While it is an interesting piece, a regrettable feature of the article is that he cites the BIS aggregate number to capture the level of international bank exposure to Ireland without fully explaining the limited relevance of this number, in view of the high degree of ‘offshore banking’ that has nothing to do with the local economy.

A number of media commentators have drawn a comparison between the present debt crisis and the ERM crisis of 1992/93.  Then, the authorities assured markets there would be no devaluation; but the high interest rates needed to defend the peg against sceptical currency traders proved too painful and the government eventually succumbed.   Today, sceptical markets are demanding a high risk premium to hold Irish bonds.   There is concern that the pain of high interest rates and their impact on debt dynamics will, once again, make market expectations self fulfilling. 

I believe it is a mistake to take this comparison too far.   The combination of long average maturity, liquid reserves, and the back-ups of the NPRF/EFSF make a forced default in the short to medium run unlikely.   Moreover, a cost-benefit calculation for sovereign default for a country that clearly has the capacity to repay suggests a voluntary default is also unlikely.   (more…)