Hamish McRae: The Irish have got some luck left in them yet

Economic Studies
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The Independent Online

So what can the new Irish government actually do? It has, or will have once the Coalition has been brought together, a powerful popular mandate to renegotiate the terms of the recent loan bailout as well as making changes to the previous government's austerity programme.

But it will be playing a weak hand of cards, and one that will get progressively weaker as its initial authority fades. Meanwhile, the position of the European authorities is difficult because they face, maybe quite soon, the prospect of arranging a similar bailout for Portugal, with the possibility of further rescues in the future.

Start with some very simple numbers. You can see strong moral and practical arguments for seeking to reduce the interest burden of the EU loans, for the costs of borrowing at 5.8 per cent seem steep when compared with the cost that Germany has to pay for ten-year money, which are now 3.2 per cent.

You might say that the European Financial Stability Facility, for which Germany is the largest contributor, is making a healthy return on its investment. On the other hand, the market rate for Irish debt is around 9 per cent, so in narrow financial terms it does not appear such a bad deal after all.

But this is not just about money. It is about multiple relationships. There is the relationship between a member state and the European Union, and especially Germany. There is the relationship between an elected sovereign government and the world's investment community. There is the relationship between the Irish people, its government and the many international companies that have invested in the country. And so on.

The interwoven nature of these relationships makes any negotiation more complicated, but in a funny way makes the outcome easier to see. The new government has democratic authority and it is powerfully in the self-interest of the EU authorities not to be seen to be unreasonable in the way they treat the country. Ireland has done very well out of EU membership, so there is a fund of goodwill there, but other member states will watch closely at the way any renegotiation unfolds.

Ireland, for its part, had red lines. One is the much-commented-upon 12.5 per cent corporate tax rate. Some argue that it is unfair for Ireland to seek to maintain this competitive advantage over other EU states, but predictable and competitive tax rates are crucial to the relationship Ireland has with companies that have invested there. If Ireland were, so to speak, to shore up its relationship with Europe by increasing the tax rate, it would undermine its relationship with companies established there.

As for the relationship with the international investment community, well, countries can and do default on their loans. There have been some calls for that. Caveat emptor – if investors buy bonds from countries that can't service them, it is their fault for being gullible. You hear a lot of this in relation to the sub-prime crisis in the US. Everyone should have known that these were not really AAA bonds when they bought them, shouldn't they? But of course there are huge costs to default that may last a generation.

Put all this together, though, and the outcome seems quite simple. There will probably be a deal on the EU support package, for you can see a bit of wriggle room in there, but there will be no substantial re-writing of the package. Other issues, such as tax rates, are not on the table. And the key to Ireland's revival will be its export sector, which is currently doing very well.

So how long before Ireland is back in robust health? Enda Kenny spoke in the election campaign of it being a ten-year task. In one sense that must be right, for getting the excessive debts cleared will take a decade. But I am more optimistic about the general tone of the economy, for three reasons.

First, the world economy is still in the very early stages of recovery and an open economy such as Ireland will have seven years, maybe more, of global growth into which its export industries can sell their wares. The fundamental forces driving real growth are intact.

Second, we are beginning to catch some sort of feeling for the scale of the property lending catastrophe. The news is depressing and the half-finished building sites more so. I tramped round one near the Dublin ring road just over a month ago, and if Dublin is suffering from its overhang of unfinished office blocks I worry how much worse it must be away from the country's capital.

But Lloyds Bank (which is sorting out the property loan portfolio of HBOS) now thinks it knows how much it is down the slot and once you know the bottom, at least you have something solid to go on. Once values turn up everything looks brighter.

And finally the country's overall financial situation can flip fast. Once debt is starting to be paid back, rates come down, growth picks up.

Ireland experienced a fiscal disaster in the second half of the 1980s and the reforms then enabled the country to embark on its great growth run. So yes, expect several years of slog. But the base from which Ireland starts is vastly more favourable than it was in 1987. One statistic: Ireland's unemployment rate is now 13.5 per cent, horribly high. In 1987 it was 17.5 per cent.







Two-speed Britain is as divided as ever



It is a two-speed world, with the developed countries still wrestling with their debts but the emerging world charging on. But it is also a two-speed Britain, as some figures yesterday remained us.

The manufacturers purchasing managers' index – which tracks whether companies expect an increase or decrease in activity – stayed at the highest level since the series started in 1991. But figures from the Bank of England about mortgage approvals remained at a very low level in January, and 5 per cent down on the depressed level of a year earlier.

It is worth noting too that the parts of the country that are in exporting generally, including the tourist industries in the south as well as manufacturing elsewhere, are coming through in much better shape than the parts of the country dependent on public spending – a division that will surely get worse.

It would be nice to be able to report a narrowing of geographic differentials and on a long-view some things are happening that may work in that direction. But right now there are clear winners and clear losers and these tensions are likely to remain.



h.mcrae@independent.co.uk

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