EXIT STRATEGY - ECONOMICS:Competitiveness is just the most pressing of the issues which must be tackled if we are to exit the recession, while also building for sustainable long-term growth

WHILE A FEW green shoots of recovery have been spotted in the US and some EU countries, they have not yet appeared in Ireland. What may have appeared here is a slowing down in the pace of economic decline. This, at a stretch, could be interpreted as a sign that we may be reaching the floor.

But we don't know how long the economy will remain on the floor, or what shape the recession will take. A V-shaped recession - one with a quick bounce back - is unlikely. A U-shaped one is perhaps the best we can hope for, while the Japanese L-shape must be avoided at all costs.

The precise mechanisms of recovery can vary from country to country and across different time periods. But the usual model is that unsold stocks are finally run down, retailers then have to re-order from wholesalers, who in turn have to order from the manufacturers (or importers).

Production then gets going again - credit permitting - and unemployed people are re-hired.

A lot of unused capacity will have been built up during the recession, so that the increased orders can be readily filled. Cashflow and profit make welcome reappearances. Some plant and equipment may have depreciated during the recession, and new investment may be needed. This adds to the recovery.

There seems to be a general consensus that since Ireland is a very open economy, these mechanisms won't come into play until recovery is well established in other countries with whom we trade. The US is perhaps the most important one since, as well as providing demand for Irish exports, it also provides foreign direct investment here.

Much of the latter produces exports for continental Europe. Consequently, the US also plays a major role in Ireland's export performance. In recent years, US multinationals accounted for up to 80 per cent of Irish merchandise exports. This degree of dependence is not healthy, but there is nothing to be done about it in the short term.

Partly because of the US stimulus package and the (risky) quantitative easing - ie, money creation - the US may well begin to recover early next year. The EU, which is more conservative in its policies, will take a little longer. Ireland could see a recovery in 2011, and the ESRI (Economic and Social Research Institute) scenario of a 5 per cent bounce-back could occur on the basis of under-used capacity being quickly brought back into production.

But there are a number of pitfalls which must be avoided if we are to exit the maze of recession successfully, while providing a good platform for sustainable longer-term growth.

The most important issue to be confronted is competitiveness. The ESRI is under no illusion that unless we regain competitiveness, their favourable "5 per cent" scenario will not materialise. There is some encouraging evidence that wage costs are being realigned with productivity in Ireland. But this is also happening with our trading partners, and it is not clear as yet whether competitiveness is being restored here. It is worth noting that the recent IMF report put Ireland's recovery growth in 2011 at a mere 1 per cent.

Non-wage costs are still too high - and the upward reviews of rents are an almost suicidal form of self-sabotage. The social partners should be much more proactive in relation to competitiveness. They are so concerned about looking for subsidies and hand-outs from the taxpayer that they may be turning a blind eye to the basic problem of competitiveness.

The dollar (and sterling) could fall further against the euro, especially if China alters its investment strategy. This exchange-rate risk should be factored in to the issue of competitiveness, and not swept under the carpet.

The banks must be fixed, and normal credit flows resumed. No one knows how Nama will work out in practice. If there are legal challenges, for example, it will take years for credit flows to be normalised. We should hope for the best but plan for the worst. Companies should build relationships with each other and with lending agencies in other countries.

Irish banks have not traditionally been particularly helpful in lending to businesses other than those relating to property in one form or another - developers, builders, auctioneers, publicans, etc. The banks have not kept up with the credit needs of more sophisticated companies which have moved into the information economy. This may remain a problem, even if recapitalisation and the sale of toxic assets prove successful.

Interest rates may begin to increase sooner than we realise. This is because the US and EU have both created money, and will be determined to offset any inflationary effects as soon as their economies begin to recover. Unfortunately, it is probable that interest rates will rise well in advance of an Irish economic recovery. This could be an elephant trap for mortgage holders and consumers.

The public finances represent another potential pitfall. The government has to perform a complex balancing act between restoring order to the public finances and helping the economy. To date, the balance is not optimal. Excessive reliance on taxation will not only depress consumer spending in the short-term, but will undermine incentives to work and production in the longer term. This problem will be compounded when interest rates start to increase again.

It is likely that the rise in interest rates will coincide with the announcement of a property tax here. This will postpone a recovery in construction for years to come.

More should have been done to eliminate wasteful forms of public expenditure. A little more borrowing could also have been undertaken; it turns out the National Treasury Management Agency (NTMA) - which is very experienced - is not encountering major difficulties in accessing funds at reasonable cost. In fact, as a member of the euro zone, Ireland is in a relatively good position to borrow, as long as the funds are used for productive purposes.

Fiscal policy so far has been equitable. But the middle class is taking most of the burden of adjustment. This could produce adverse effects in the long term. In a worst-case scenario, we could see capital flight and a brain drain. Middle-class people don't demonstrate as a rule - but they vote with their feet.

The Government needs to be careful not to break the back of the wealth-creating sector, which already contributes the vast bulk of tax revenue. The danger is that the Government may be distracted by more visible forms of unrest in other parts of the community, and remain unaware of the exportation of human and physical capital.

Following the international recession and the spectacular failure of capitalism, it is possible that the prevailing economic model will change - but how exactly we don't yet know. Certainly there will be more regulation and state intervention, and this will reduce productivity and lower potential growth rates around the world. Ireland may have to be content with a long-term growth rate of less than 3 per cent per annum.

Recent global upheavals may also imply major shifts in production. It is likely, for example, that the provision of sophisticated and risky financial products will decline. Financial sectors as a whole may become much smaller. This will have implications for the provision of financial and related services which have been growth areas in Ireland.

We will have to quickly accommodate such sudden shifts in global demand, and ensure that skilled people can be transferred to other growth areas.

There are many pitfalls to be avoided in exiting the recession. It will be far from easy, and it is extraordinary that the Government has not invited talented economists and other experts to study these matters - which are of unparallelled importance.