ECONOMIC FUTURE:The optimistic assumptions in the official view have resulted in alternative, and sometimes radical, proposals being put forward by academic economists

ONE OF THE WISE maxims of the late Dara McCormack was that “there are no costless policies”. While all economic policies are designed to do good, they invariably involve some costs. The trick is to find the policies which have the lowest cost-benefit ratios over time.

In reviewing the various policies proposed for solving or alleviating our debt crisis it is important to bear this maxim in mind. There is no perfect solution to this appalling mess. The best we can hope for is the least of all possible evils.

The first solution – “approach” might be a better term – is the status quo where the Government is implementing a bailout package with the European Union and International Monetary Fund, where the bank bondholders have been over-generously treated, the banks are being lent €160 billion by the European Central Bank and the Irish Central Bank, and Irish taxpayers are paying billions to recapitalise the banks.

Despite severe fiscal adjustment the debt to gross national product ratio is likely to reach about 120 per cent – and possibly more.

The authorities believe that debt of this magnitude is manageable, especially if economic growth is reasonable (3 per cent per annum) and the bailout package with the EU and IMF can be renegotiated with respect to the interest rate.

The Government will not compromise on the 12.5 per cent corporate profit tax rate. (It should tread very carefully with regard to the common consolidated corporate tax base as well, because this could be almost as important as the rate itself.)

The authorities, no doubt, also hope something can be done about bondholders even at this late stage and that the looming problems of other EU countries may result in an “amicable” form of debt restructuring. There may also be a view that Ireland could benefit in time from some kind of reasonably priced eurozone bonds.

It is obvious that there are a lot of optimistic assumptions in this scenario and that is why alternatives are being proposed, mainly by academic economists. Some of these alternatives are radical and imaginative.

One of the alternative approaches involves terminating the EU-IMF bailout, converting the ECB’s €100 billion loan to Irish banks into capital (thus passing most of the problems of bank debt on to the ECB).

The putative advantages would be that Ireland may then be able to manage its residual debt and would not suffer the reputational damage that would flow from national bankruptcy. This approach has much to recommend it. But there are also serious disadvantages.

Without the EU-IMF bailout, the fiscal deficit of €18 billion would have to be eliminated in a single year. Such front-loading would have massive effects on public sector pay, the Croke Park agreement, welfare benefits, Government services and taxation.

There would be major deflation in the short-term which would seriously worsen unemployment since many domestic businesses are hanging on only by their fingernails.

The recent Government strategy for job creation would probably be stifled at birth. Higher taxation would probably drive skilled young people out of the country. So, even though the absolute level of debt would be a lot lower, the relatively poorer performance of the economy might make it almost as difficult to service.

A variant of this approach would be to accept an IMF programme on its own; that is, without the EU. It is clear that the IMF was favourably disposed to burden-sharing with bank bondholders whereas the EU team would not hear of it. IMF money is also considerably cheaper. The downside here is that since Ireland’s quota in the IMF is less than €1 billion it is unlikely that we would get the quantum of resources required. The potential effect on relations with the EU would also have to be factored in.

A third approach would be to withdraw from the euro and devalue the Irish pound. This would restore competitiveness and help domestic exports of the job-creating kind.

The other side of the devaluation coin is an increase in the Irish money supply which would help the debt problem by allowing us to substitute cheaper and longer-term debt into the total finance mix.

Some economists also believe that we could pay off much of our existing debt in “cheaper” Irish pounds. This, however, depends on whether the debt was denominated in euro or not.

The major risk in this scenario is the possible adverse effect on foreign direct investment from the United States. Many US multinationals invest here because Ireland is the only English-speaking member of the euro zone. They find it very convenient to use this country as a platform for exporting into Europe.

The other downside of devaluation and easy money is, of course, future inflation. This scenario does not offer a clear balance of advantage either. Part of the problem is that many of the factors are simply not measurable, for example, how much FDI (foreign direct investment) would we lose if we left the euro? We simply do not know. Nor can we measure the adverse effects on Irish-EU relations in the future.

A fourth “solution” is to restructure debt now in an orderly way, rather than be forced to do so later on in a disorderly way. Proponents of this view argue that this may merely involve a lengthening of maturities and would not be like the aggressive Argentinian “take-it-or-leave-it” approach.

The big imponderable here is how even a “polite” restructuring would affect the markets – or indeed the EU-IMF. Some economists take the view that for a country like Ireland any form of debt restructuring would be demeaning and bad for inward investment.

Other individual proposals have been put forward, such as the sale of domestic assets which still have value; the issuance of domestic bonds to Irish people through An Post to replace the rather unattractive 10-year recovery bond; tapping into the Irish diaspora and so on. All of these ideas have advantages and disadvantages.

But again the trouble is measuring these and finding the least worst options.

The proposals set out above are not, of course, self-contained and could be combined in different ways. For example the rescinding of the EU-IMF bailout deal could be done in conjunction with an orderly restructuring of debt and a programme of asset sales, for example. But the problem still remains.

It is not possible to assess accurately the costs and benefits. The empirical research has not been done; a major programme of research should have been put in hand at least two years ago. Unfortunately, we are all flying blind. It is to be hoped that some analysis and quantification of the different options is going on behind the scenes, but that may be too optimistic. What seems to be happening is that we are simply taking instructions from the EU and the ECB and are not in a position to provide our own analysis.

For the time being, the most practical approach, faute de mieux, may be to stick with the status quo until we have more information about renegotiations , the state of play of other peripheral countries in the eurozone, and firmer forecasts of domestic growth. But we should not regard the present approach as being set in concrete; it is a work in progress, and one which may need to be radically altered if it becomes apparent that the favourable assumptions are not materialising.

What is indubitably true is that prevention is infinitely better than cure. The reason financial regulation failed has been soft-pedalled in both the Honohan and Nyberg reports. It had little to do with deference, diffidence or hesitancy. The fact is that the decision-makers involved had no intention of intervening at any stage. But that is a matter for another day.

Michael Casey is an economist and writer. His book, Irelands Malaise, was published by Liffey Press late last year