This is an unedited version of my Sunday Times article from 1/4/2012.
After four years of the crisis, there are four empirical
regularities to be learned from Ireland’s economic performance. The first one
is that the idea of internal devaluation, aka prices and wages deflation, as
the only mechanism to attain debt deleveraging, is not working. The second is
that the conventional hypothesis of a V-shaped recovery from the structural
crisis, manifested in economic growth collapse, debt overhang and assets bust,
is a false one. The third fact is that Troika confidence in our ability to meet
‘targets’ has little to do with the real economic performance. And the fourth is
that exports-led recovery is a pipe dream for an economy in which exports
growth is driven by FDI.
Restoring growth requires structural change that can
facilitate private companies and entrepreneurs search for new catalysts for
investment and consumption, jobs creation and exports.
For anyone with any capacity to comprehend economic reality,
Quarterly National Accounts (QNA) results for Q4 2011, showing the second
consecutive quarterly contraction in GDP and GNP, should have come as no
surprise. In these very pages, months ago I stated that all real indicators –
Purchasing Managers indices, retail sales, consumer and producer prices, property
prices, industrial turnover figures, banking sector activity, and even our
external trade statistics – point South. Yet, the Government continues to
believe in Troika reports and statistical aberrations produced by superficial
policy and methodological changes.
The longer-range facts about Ireland’s ‘successes’ in
managing the crisis, revealed by the QNA, are outright horrifying. In real
(inflation-adjusted) terms, in 2011, every sector of Irish economy remains
below the pre-crisis peak levels. Agriculture, forestry and fishing is down
almost 22%, Industry is down 3%, Distribution, Transport and Communications
down 17%, Public Administration and Defence down 6%, Other Services (accounting
for over half of our GDP) are down 8%. In Q4 2011, Personal Consumption was 12%
below Q4 2007 levels, Gross Domestic Fixed Capital Formation was 57% down on
2007. The only positive side to Irish economic performance compared to
pre-crisis levels was Exports of goods and services, which were just 1.2% ahead
of Q4 2007 level.
Meanwhile, factor income outflows out of Ireland – profits
transfers by the MNCs – were up 19% relative to pre-crisis levels. Despite a
rise of 0.7% year on year, Irish GDP expressed in constant prices is still 9.5%
below 2007 levels. Our GNP, having contracted 2.53% year on year in 2011, is
down an incredible 14.3% on the peak. All in, Irish economy has already lost nine
years of growth in this crisis, once inflation is controlled for.
We are now three years into an exports boom and the recovery
remains wanting. Here’s why. Between 2007 and 2011 exports of goods rose €2.5
billion or just 3%, while imports of goods fell 31.3% – a decline of €19.6 billion.
Over the same period, exports of services rose €5 billion, while imports of
services increased €5.5 billion. All in, rising exports of goods and services
accounted for just 35% of the increase in Ireland’s trade surplus. Almost two
thirds of our trade surplus gains since 2007 are accounted for by collapse in
imports. Taken on its own, the dramatic fall-off in imports of goods amounts to
91% of the total change in trade surplus in Ireland.
Both the Government and the Troika should be seriously
concerned. Taken in combination with accelerating profits transfers out of
Ireland by the MNCs, these numbers mean that Irish economy is struggling with
mountains of private and public debts that exports cannot deflate.
Remember all the noises made by the external and domestic
experts about Ireland’s current account surpluses being the driver of our debt
sustainability? Last week, the CSO also published our balance of payments
statistics for 2011. In 2010, Irish current account surplus stood at a relatively
minor €761 million. In 2011, current account surplus fell to €127 million. If
the entire current account surplus were to be diverted to Government debt
repayments, it will take Ireland 579 years to bring our debt to GDP ratio to
the Fiscal Pact bound of 60%.
The immediate lesson for Ireland is that we need serious
changes in the economic fundamentals and we need them fast.
First, Ireland needs debt restructuring. We must shed
banks-related debts off the households and the Exchequer. In doing this, we
need drastic restructuring of the banking sector. Simultaneously, an equally
dramatic reform of taxation and spending systems is required to put more
incentives and resources into human capital formation and investment. Income
tax hikes must be reversed, replaced by a tax on fixed and less productive
capital – particularly land. All land, including agricultural. Entrepreneurship-retarding
USC system must be altered into a functional unemployment insurance system.
Policy supports should shift on breaking the systemic
barriers to domestic firms exporting and restructuring dysfunctional internal
services markets that are holding companies back. Public procurement changes
and markets reforms in core services – energy, water, transport, public
administration, etc – must focus on prioritising facilitation of inward and
domestic investment, entrepreneurship and jobs creation.
Delivery of health services must be separated from payment
for these services, with Government providing the latter for those who cannot
afford their own insurance. Private for-profit and non-profit sector should
take over delivery of services. Exports-focused private innovation, such as for
example International Health Services Centre proposal for remote medicine and
ICT-related R&D, should be prioritized.
In education, we need a system of competing universities,
colleges and secondary education providers. A combination of open tuition fees
plus merit and needs-based grants for domestic students will help. We should
incentivise US universities to locate their European campuses here, and shift
more of the revenue generation in the third level onto exports. In the
secondary education, we need vouchers that will encourage schools competition
for students. In post-tertiary education we need to incentivise MNCs to develop
their own corporate training programmes and services here.
This will simultaneously expand our skills-intensive exports
and provide for better linkages between formal education and, sectoral and business
training – something the current system is incapable of delivering.
One core metric we have been sliding on is sector-specific
skills. This fact is best illustrated by what is defined as internationally
traded services sector, but more broadly incorporates ICT services, creative
industries and associated support services.
Eurostat survey of computer skills in the EU27 published
this week, ranked Ireland tenth in the EU in terms of the percentage of
computing graduates amongst all tertiary graduates. Both, amongst the 16-24
years olds and across the entire adult population we score below the average
for the old Euro Area member states in all sub-categories of computer literacy.
Only 13% of Irish 16-24 year olds have ever written a computer programme –
against 21% Euro area average. Over all survey criteria, taking in the data for
16-24 year old age group, Ireland ranks fourth from the bottom just ahead of
Romania, Bulgaria and Italy in terms of our ICT-related skills.
Not surprisingly, at last week’s Digital Ireland Forum 2012
the two core complaints of the new media and ICT services sector leaders were: lack
of skills training domestically and draconian restrictions placed on companies
ability to import key skills from abroad.
The Irish economy and our society are screaming for real
change, not compliance with Troika targets and ego-stoking back-slapping
ministerial foreign trips.
On the foot of my last week’s questions concerning the role
of securitizations and covered bonds issuance by the Irish banks in restricting
banks’ ability to control the loans assets they hold on their balancesheets,
this week’s move by Moody’s Investors Services to downgrade the ratings of RMBS
(Residential Mortgage-Backed Securities) notes issued by two of the largest
securities pools in the country come as an additional warning. On March 26th,
Moody’s reduced ratings on RMBS notes issued by Emerald Mortgages and Kildare
Securities on the back of “continued rapid deterioration of the transactions,
Moody’s outlook for Irish RMBS sector; and credit quality of key parties to the
transactions [re: Irish banks] as well as structural features in place such as
amount of available credit enhancement.” The last bit of this statement
directly references the concerns with over-collateralization raised in my last
week’s note. Although Moody’s do not highlight explicitly the issue of
declining pools of collateral further available to shore up security of the
asset pools used to back RMBS notes, the language of the note is crystal clear
– Irish banks are at risk of running out of assets that can be pledged as
collateral. This, of course, perfectly correlates with the lack of suitable
collateral for LTRO-2 borrowings from the ECB by the Irish banks, other than
the Bank of Ireland last month. As rated by Moody’s, half of the covered RMBS
notes were downgraded to ‘very high credit risk’ or below and all the rest,
excluding just one, were deemed to deteriorate to ‘high credit risk’ status.
Surprisingly, the Central Bank’s Macro-Financial Review published this week
makes no mention of either the RMBS, covered bonds or the impact of
securitization vehicles on banks’ balance sheets. See no evil, hear no evil?