OPINION:IT IS likely that in a year or so the collective memory of how the last government crippled the economy will have become blurred. Anger will have subsided or, more likely, been redirected towards the present Government, which has taken over the poisoned chalice of economic management.
The 2007 general election was the one to lose. Look at how the victors were decimated by subsequent economic events. The recent election may not prove to be quite as costly in political terms, but the Government will nevertheless find itself on a sticky wicket for years to come. Stresses are bound to appear and the recent “successes” in amending the EU-IMF programme will lose their lustre.
It doesn’t really matter how talented or well-meaning the Government may be. The economic problems remain so severe as to be beyond the capacity of any administration, however enlightened. The main reasons for this are as follows: There is no control over interest rates, the exchange rate or the domestic money supply. Fiscal and incomes policies are almost completely being run by the EU troika. It will be virtually impossible to bring about the kind of radical reform needed in the public sector; indeed if industrial relations problems break out we might well see a significant diminution in the quality of public services.
There is very little any government can do to get the banks lending again, or to encourage entrepreneurship or boost consumer spending. The Government on its own will not be able to persuade the ECB to make bank bondholders pay instead of Irish taxpayers. Greece may be allowed a “restricted” default but not Ireland.
In general, the government of a small open economy that is a member of a monetary union and is also in an EU-IMF programme has little or no effect on that economy. (Even in the US, which suffers from none of these constraints, President Obama’s stimulus package has not worked very well.) Therefore, as recession continues we should not blame the Government.
This may sound surprising but there really is very little they can do about it. The trouble is that is not how the electorate sees it. And they can hardly be blamed since the Government repeatedly gave foolhardy assurances that, if elected, they would fix the economy. The Government led with its chin and in this country we know coalitions have a glass jaw. Already there has been much talk of failure to deliver on pre-election promises.
Naturally, the Government will have to make a few relatively minor decisions about how the fiscal adjustments are to be made. For example, the troika prescription of property taxation can be achieved in a number of different ways, ranging from site valuation to flat charges to household charges, for which the Cabinet, as of yesterday, has opted, possibly as an interim measure.
It is this kind of operational choice that will fall to the Government. In other words they will have to decide, not on the overall level of austerity, but on which groups in society should bear the pain. While these are small tactical rather than strategic decisions, they nevertheless can have important political implications.
Moreover, the Government will suffer from “visibility”. Every strategic decision will be attributed to it by the electorate, even if the decisions are taken elsewhere. For example, it is the ECB which decides on interest-rate increases. But most mortgage-holders in the country will probably blame the Government.
The fact that fiscal austerity will last for several years will put pressure on the existing Coalition. The Labour Party, fearful of losing its faint left-wing hue and going the way of the Greens, will try to distance itself from decisions that appear harsh or regressive. During the election they showed little stomach for discussing tough measures.
Already we have seen Labour Party members express unease about tampering with Joint Labour Committee pay arrangements and prospective sales of State assets. They are likely to be equally squeamish about higher taxes – unless really progressive – water charges, health and social welfare cutbacks, and public sector reform which will need to be much more radical than anything envisaged under the Croke Park agreement. If the trade unions fight against the termination of social partnership, Labour will also find itself in an acutely embarrassing situation.
In general, left-of-centre parties find it difficult to embrace austerity. Labour Ministers can blame much of the hardship on the last government and on the EU-IMF programme but these “excuses” will begin to wear thin after about a year or so, especially, as seems likely, the recent jobs initiatives fail to deliver the goods. (For example, it does not seem as if the VAT reductions are being passed on to consumers.)
It is also likely the €800 billion saving on interest-rate payments, following the recent EU summit meeting, will raise hopes of less fiscal austerity. Politicians are claiming credit for this “result”, whereas two months ago the Minister for Finance had belittled any saving that could be made on the interest-rate front. This indicates that Ireland got lucky and that the saving fell into our laps.
Nevertheless, the more our politicians boast about it, the more the electorate will expect an easy budget. This will be a source of further political tension.
In about two years from now, cracks in the Coalition will probably begin to appear. These fissures could be repaired if the labour market were to improve. But this seems unlikely. Even if foreign direct investment continues on its present rising trend, it is likely to be less labour-intensive. SMEs will be hit by austerity in the UK and sluggish demand at home. ECB interest rate hikes will ensure that consumer demand stays on the floor.
The cracks could be papered over for about another year but unless a deus ex machina appears, the present Coalition might well hit white water. The Labour Party will begin to fear the “junior partner bug” that saw off the PDs and the Greens in no uncertain terms. The Labour Party may bail out before it suffers irreparable damage. It will opt for the relative peace of opposition rather than the cut and thrust of governing at a time of economic crisis.
What political configuration may occur at that stage is anyone’s guess. It is hard to imagine the electorate being satisfied with the same old faces and the same old rhetoric. Fianna Fáil may recover somewhat, but will still be a shadow of its former self. A new party may emerge or we may see a multiplication of Independents. Or we may witness the rise and rise of Sinn Féin whose younger members are clearly not letting the grass grow under their feet.
Michael Casey is an economist and author. His recent book, Ireland's Malaise, was published last year by the Liffey Press