Over the past year, Dan O’Brien has provided a pragmatic and rational analysis of the plight facing the Irish economy. With cutbacks and tax hikes being the flavour of the month, I questioned O’Brien on whether he believes that the budget strategy adopted by the Government is feasible. As expected, his response was far from optimistic.
“That remains to be seen. This is a huge fiscal adjustment, with a very weak economy. We are in unchartered territory and the upcoming budget will hold the key as to whether the Irish economy can survive without an EU/IMF bailout.”
However, O’Brien is quick to point out that he does not expect to see the same street violence that gripped Greece earlier in the year. “Ireland has a very different social infrastructure to that of Greece. Here in Ireland, we are much more socially calm. Aside from the extreme nationalist movement, there has never been a history in Ireland of social tension boiling over from peaceful protest to violence. I would be reasonably optimistic that we won’t have severe social unrest here regardless of what happens economically. Having lived in six different countries and having spent most of my career studying how they work, I believe that Ireland has the political and social structures to get through the current crisis without the severe violence that occurred in Greece earlier in the year.”
Key to the economy recovery is a strategic plan to reform the public sector. I asked O’Brien if he believed measures enacted by the Government, such as last year’s Croke Park agreement, were enough to address the flaws in the sector. He admits, “If the Croke Park agreement is to be believed, and the dignitaries are to be believed, then it is an acknowledgement that change needs to take place.” However, he is not optimistic that there is the will on both sides to realise the aims laid out in the agreement. “In the past there have been a number of agreements between both the government and the unions which have failed, simply because the government was not willing to push for an implementation of the agreement, while the unions were not willing to accept the terms they had previously agreed to. Although public service reform is imperative, I think there’s a good chance that the Croke Park agreement will be thrown in the shredder.”
Of late it has become apparent that much of the growth in the later years of the Celtic Tiger was funded by unsustainable property speculation. Given that the bubble has now burst, O’Brien downplays the prospect of a return to growth in the short term. “In the next few years, it’s very difficult to see growth in the economy at all. The property bubble bursting has done enormous damage to the economy. The public sector is bust, a large part of the private sector is bust, and many firms have seen their balance sheets destroyed by the recession. In the short term, there is going to be a huge debt hangover which is going to weigh heavily on firms and households. It is going to have a huge impact on their willingness to spend. Also, given that the government is on the brink of bankruptcy, a stimulus package is out of the question.”
Yet, he does allude to the fact that Irish exports have performed strongly in recent times and harbours hope that the export sector can be the vehicle to drive a return to economic stability. “If you look across the different export sectors, both the merchandise and the services sectors, Ireland is a world leader, and there have been some big successes in those fields. One would hope that as the world economy recovers, growth in exports would spill out into the other sectors of the economy.”
In the long term, O’Brien is confident Ireland can see out the current plight. “If households can pay down their debt, then growth can be generated through domestic consumer spending. There will always be domestic spending; the only question is at what level. Consumer spending depends on levels of personal debt and income. At the moment those factors are not very favourable, but, over a 10-year period, I think consumer spending will pick up and this will sustain growth in the economy going forward.”
Many commentators have been quick to place the blame for the economic crisis on our membership of the euro. Although he admits the euro did have a role to play in creating the current predicament, O’Brien is unequivocal in his belief that leaving the euro is not an option for the government. “One must remember that, if you join a single currency, the only way to get out of it is to crush your economy. If Ireland decided to leave the euro, it would have to relaunch its own currency. The new Irish currency would be designed to be weak, and as such would be worth much less than the euro.
“Invariably, people would transfer their money to a different currency to avoid making a loss when the punt is reintroduced. This would in effect constitute a run on the banks and the whole banking system would be destroyed. In effect, leaving the euro would have disastrous consequences.”
I ask him whether such consequences would be a price worth paying for having the ability to devalue our own currency in order to help kick start the economy. “Devaluation is not a guaranteed solution to our problems. Look at Iceland for instance. Iceland devalued its currency in order to ease the economic hardship but it could not prevent a massive contraction in GDP.
“The UK is another example. The Bank of England devalued the sterling recently and we have only seen modest increases in British exports.
“I would be very wary of the idea of leaving the single currency. The costs and potential consequences of such a move far outweigh the benefits of doing so.”
