I give my views in this IT article.
Category: Fiscal Policy
The new government’s difficult navigation through the crisis took significant steps forward last week with the stress tests and strengthened lender of last resort commitment. While we can hope for some easing of the bailout terms, the next milestone is likely to be the upcoming “jobs budget”. For a new centre-right/centre-left coalition government, this will be an opportunity to demonstrate political capacity on the fiscal side. Unfortunately, market assessments of Ireland’s chances of avoiding default are less favourable than we might have hoped when the EU-IMF programme was agreed (see Colm McCarthy’s post and article below). With this inescapable reality in mind, it is worthwhile considering case for sending a strong signal on adjustment capacity by accelerating some of the planned deficit reduction.
I do not make this suggestion lightly. As Karl Whelan has emphasised, Ireland has already engaged is a truly massive discretionary adjustment (roughly €20 billion euro, or about 13 percent of GDP), involving huge sacrifice. I have also no doubt that the austerity measures have deepened the recession. Additional austerity is thus doubly unwelcome. However, a demonstration of adjustment capacity by a new government that is still being assessed by markets and official funders could be a well-timed “investment” at this stage. This could be combined with the planned improvement in the mix of policies designed to spur growth and employment, though realistically these measures would probably only the edge off any accelerated austerity. A “jobs and creditworthiness special budget” (it clearly needs a better name) would allow the new government to show it is taking control of the situation, rather than passively following a course laid down by its predecessor, and build the sense that the adjustment-with-assistance strategy provides a clear path to exiting the crisis.
In today’s Irish Times, Garret Fitzgerald dons the green jersey and bravely confronts Public Enemy Number One: Celebrity economists who “talk down the economy” and “scare the horses”.
The conservatism of the assumptions that underpin this study certainly ought to command the respect of the markets. It remains to be seen, however, to what extent it actually does so.
Factors that could work against this include last year’s undermining of confidence in our banking system; the lack of any specialised knowledge of the Irish economy both on the part of those who rate our debt and those who buy sovereign bonds; and the damage done to our financial reputation by some of our more vocal domestic commentators.
Part of our problem has been, and regrettably still is, the fact that “the markets”, (ie the international firms which evaluate credit risks as well as those which buy bonds issued by sovereign states), lack the capacity to assess adequately the financial situation of smaller states like Ireland. It is only in relation to larger sovereign borrowers that these firms employ specialists with detailed knowledge of the economy of a particular state.
For smaller states like Ireland they depend on second-hand information. This includes often ill-informed media reports, which in our case have involved reports of some of the “celebrity economists” who have been seeking publicity by claiming that our problems are so great that we will eventually have to default.
Some have indeed proposed that we should take that course now despite the impact this could have on our only current source of future borrowing – the EU-IMF bailout.
The damage to our standing abroad by such irresponsible statements has been incalculable. It is difficult enough for our own people to distinguish between serious economic commentators in Ireland and irresponsible voices – it is impossible for foreign observers of our finances to do so.
Frankly, I have no idea why Dr. Fitzgerald thinks that “the markets” lack capacity to assess the Irish financial situation. This has not been my experience over the years when dealing with ratings agencies or financial market investors: I have come across many international market investors who have a detailed knowledge of the Irish economy and financial situation.
And indeed, it’s not too hard to figure out why this is. Ireland’s gross government debt is over 100% of GDP, so the stock of outstanding debt is now over €150 billion. At current exchange rates, this means that the stock of outstanding debt is now larger than the market capitalisation of Microsoft or IBM. Does Dr. Fitzgerald think that financial markets consider these companies too small to bother collecting information on?
Over the last few years, Irish economic policy has been based on systematically overly-optimistic premises and Dr. Fitzgerald has supported these premises throughout. That Ireland’s debt situation is now extremely serious is simply undeniable. Attacking those who believe Ireland will default as trouble-making publicity seekers is pretty risible.
The Department of Finance has released this paper.
This morning’s WSJ notes that Portugal’s 2010 fiscal deficit will likely be revised upwards due to a shift in Eurostat’s rules concerning the accounting treatment of problematic assets. The March 16 Eurostat guidance note is here.