THE OPENING session of the Kenmare economic conference last night consisted of three papers focused on “the macroeconomic way forward”, a topic more challenging now than at anytime since the 1980s.
Joe Durkan, Ireland’s leading economist in the 1970s and 1980s, set the scene with a penetrating assessment of the 1987 recovery and the subsequent bubble. In so doing, he debunked the popular notion that the social consensus model was key – 20 years later, leading politicians and policymakers remain scared to ditch it. Then he ruled out the inelegantly named “expansionary fiscal contraction”. This rather academic notion holds that cuts in public spending, à la Ray MacSharry, can have a positive expansionary effect. If only that were true, Brian Lenihan’s job would be a lot easier.
Mr Durkan concluded that the recovery was due to factors already in place in 1987, such as the Lawson boom in the UK and, importantly in the context of the current situation, competitiveness gains. Mr Durkan is sceptical about the future, holding that there will be no recovery effect from the bubble collapse. He recommends reversing benchmarking, implementing “An Bord Snip” recommendations, cutting welfare payments in line with the fall in the consumer price index and widening the tax base.
Prof John FitzGerald of the ESRI, Ireland’s best-known economist over the past decade, analysed the two major policy failures that contributed to “the current Irish economic disaster”. He concluded that the collapse in the domestic financial system could and should have been prevented by the Financial Regulator while accepting that the economics community, including the ESRI, devoted little or no attention to it until after the event.
The second major policy error was the failure to prevent the property bubble. Here Prof FitzGerald is in a good position to comment as he was the main author of the ESRI’s medium-term reviews over the past decade. He listed the various warnings that went unheeded. However, while no one expected the property bubble to continue, it is equally true that no one forecast the crash that has occurred. I do not, for example, recall anyone forecasting that house prices would fall by more than 20 per cent, at least not before 2007, by which time the horse had well and truly bolted.
Reetta Suonpera of Ibec charted the parallels between the Finish and Irish crises, though ours looks like being deeper. A 30 per cent devaluation was key to the Finnish recovery. As we cannot devalue given our membership of the euro, we will have to lower wages and costs instead. This makes Prof FitzGerald’s recommendation for a 5 per cent wage cut look somewhat tame.
