When you walk up one of Ireland’s deserted main streets, it is difficult to reconcile the talk of Ireland doing well and being the model for other European countries to follow with the reality of living here. The reality here is that retail sales have collapsed and are not recovering. Anyone dependent on the domestic economy is just about surviving. No credit is being made available to anyone and unemployment is devastatingly high, while emigration continues apace.
That is what is going on in the “Real Ireland”.
Contrast this with the “Invented Ireland”. In the Invented Ireland, we are, supposedly, showing the rest of Europe the way out. We are the poster boys for austerity and the one indicator that the supporters of Invented Ireland obsess about is the bond yield on Irish government debt, which has fallen from 14% to 8% in recent months. This is significant but as we are not active in the market because we have been locked out of it, there is not that much value in this figure. However, in the world of Invented Ireland, the economy has “turned the corner”, where the skies are blue and Ireland is the star pupil of the EU. This is despite having the second highest level of unemployment in Europe – but in Invented Ireland unemployment doesn’t matter as long as the figure for GDP is increasing.
The figure for GDP is rising because the contribution to the economy from multinationals is rising as exports from the same multinationals rise. It is worth noting that multinationals — while accounting for over 90% of Irish exports — employ less than 7% of the Irish workforce. This is why the increases in GDP don’t filter down, because there is no way for it to filter down in any meaningful way.
Do you remember the 1980s? How did it feel? Did it feel like a decade when the economy as measured by official statistics grew in every year bar one? This is true. In the 1980s, GDP — the preferred figure of Invented Ireland — only fell in one year yet unemployment averaged 16% plus and 450,000 people emigrated.
Today, we see the same pattern. The disconnect between the Real Ireland of people’s mortgages, negative equity, dole queues and empty shops on main streets and the Invented Ireland of the selective economic statistics, is growing by the day.
For example, talk to anyone in the main banks and they will tell you that arrears are building and that most people on “interest only” mortgages will be coming off those interest only mortgages this year and next. This is because most of those products were five to seven year products and as a consequence, the first time buyers of the top of the boom will have to go on interest and capital deals from next year. A significant proportion of these people will not be able to afford these new higher mortgages. This will prompt a second wave of mortgage defaults.
Armed with these observations about the Real Ireland, let’s head to Brussels and today’s “Save the Euro” negotiations.
But before we do, let’s understand that the only way Real Ireland will recover is if its debt burden is reduced. There are two ways of doing this. We can seek to reduce it slowly or quickly.
The slow way is the government’s chosen way. This means that ordinary people pay off all this mortgage debt — for houses that will never be worth what they paid for them – over the next twenty years. The more they pay out of their take home, after tax wages, the less money they will have to spend in shops and the more depressed retails sales and domestic demand will be. This is a recipe for permanently higher unemployment. So we can go down this “deleveraging” path, which is one of profound economic stagnation.
The other way is to look for a “me too” deal and ask for the same treatment as Greece.
Today Greece got 50% of its debt written off (looked for 60% initially). The world realizes that Greece needs massive debt forgiveness to recover. It simply can’t shoulder this debt on its own. Sure there will be lots of shouting and roaring, but ultimately Greece will end up with a much lighter debt burden next week than it has this week.
The big fear in Europe is that we would ask for the same type of deal. And why wouldn’t we? After all, we are locked out of the market and we are encumbered with huge bank debts which will take years to pay off , all incurred in order prevent contagious bank defaults across Europe two years ago. In addition, every cent we pay for the likes of Anglo, AIB or Nationwide, the less we will have to spend on the Real Ireland economy and the longer the stagnation will be.
There is a direct connection between the debt deals in Europe today and Ireland’s empty shops and high unemployment. Imagine if we had a 60% write down on our debts like the Greeks. Our total national debt is â‚¬170 billion. So the figure would be â‚¬102 billion written off. So imagine a scenario where we decide to be good boys and suggest that although we are “entitled” to such a deal based on equal treatment for all the Eurozone’s members, we would only aim to have all the rogue banks’ debts cancelled. The figure on debt cancellation would be in the region â‚¬50 billion. This would be just over 32% of GDP. Imagine how much breathing space this would give us? And we wouldn’t even be asking for equal treatment with the Greeks.
But France and Germany are particularly keen to break this link and to ensure that Greece is a special case because French and German banks are on the hook here to Irish banks. This is why President Sarkozy has gone on a smarmy charm offensive.
Last Sunday, ahead of the Eurozone negotiations, Sarkozy a man who had tried to kick us when we were down a year or so ago, adopted the new approach of Gallic Flatterer, when he publically said Ireland was the model economy that all of Europe’s other weaker economies should follow. How pathetic. And do you know what? We lapped it up.
We are being killed by flattery and rather than taking this enormous opportunity to clean up our balance sheet, we are succumbing to cheap flattery because we are insecure.
The government tells us that they are paying all the bank debts in order to get back into the bond market but anyone who knows anything about the bond market will know that we would get back into the bond market quicker with a better balance sheet. And debt write offs make the balance sheet stronger — that’s the point of the exercise.
But yet again the lack of real self-confidence and an absence of logical analysis means that we will not use the crisis to our own ends. Today is a huge opportunity but it will be forsaken. This reinforces the perception that in this economic crisis, when it comes to dealing with Europe, national insecurity means that the Irish establishment never misses an opportunity to miss an opportunity.
David Mc Williams hosts Ireland’s only economics festival www.kilkenomics.com from November 3rd. See www.davidmcwilliams.ie