Interest-bearing debts have been used in Europe since ancient Greece, but Mario Draghi's latest response to the euro zone's woes means the cost of money has never been lower in the 2,500 years since. The wall of cheap money in Europe and elsewhere will have significant implications for households, businesses and governments. While it is a symptom of a very sick euro- zone economy, it presents the opportunity to invest wisely.
Ireland’s demographic outlook is unique among high- income countries. The Euro- pean Commission expects our population to grow by half in the next 45 years as Germany’s falls by a fifth and Japan’s shrinks nearly a third. We will need more homes, schools and healthcare, and improved transport and environmental infrastructure.
Over the past seven years cutbacks have meant the public capital investment programme has been merely a care and maintenance effort. The current social housing crisis is the most striking consequence. It’s also an example of how cheap finance now offers a solution to multiple challenges.
Infrastructural
projects Europe's money needs a home, Ireland needs more homes and tens of thousands of construction workers need jobs. An off-balance-sheet bond issuance through a reformed housing association governance structure could
do the trick. Similar solutions, such as public-private partnerships, could also be put in place for a range of other infrastructural projects. A stimulus programme that builds stuff you don’t need with money you don’t have clearly makes no sense. Ireland, however, has substantial infrastructure needs for its growing population. If we don’t take advantage of historically low interest rates and invest now, economic recovery will be choked off by a series of bottlenecks.
The European Central Bank hopes its latest efforts will enhance credit provision for business and support a recovery in private investment. Irish SMEs’ access to credit has improved over the past year or so but the cost remains very high in a European context. ECB data shows the interest rate charged for small-business loans here, at more than 5 per cent, is much higher than the euro zone average of 3.75 per cent. This is a significant competitive disadvantage and one that must be addressed urgently.
The new Ireland Strategic Investment Fund can play a role but the Government could help by improving SME investment schemes. It is vital, too, that we have a competitive banking market.
Bond yields
Another striking feature of recent money-market developments has been the collapse in Government bond yields. Ireland’s 10-year bond yields are at a record low. Last Friday, as two-year bonds turned a negative yield for the first time
, investors were prepared to pay to lend Ireland money. Just four years ago two-year money cost Ireland 23.5 per cent.
We now have a great opportunity to lock in low rates and reduce the future interest burden of the national debt. The ECB and European governments must facilitate this immediately.
The lower cost of government borrowing should also force a re-evaluation of the widely held view that our post-crisis national debt could constrain growth for years to come. It is the flow of interest repayments rather than the stock of debt that really matters and low rates will mean fewer tax euro will go in annual repayments.
While EU fiscal rules will require Ireland to reduce its debt ratio over time this can be best done by delivering on our annual potential growth rate of between 3 per cent and 4 per cent. Well-chosen investment projects that enhance future productive capacity will help.
Cheap credit, foolishly deployed, was at the root of our great recession. There is no reason, however, to shun the opportunities record low interest rates offer for a prudent, investment supported economic recovery. Fergal O’Brien is Ibec head of policy and chief economist
