ECONOMICS:Given all the financial and economic chaos this year, the wonder is that things on the ground are not even worse
GOOD RIDDANCE to 2010. It has been a year to forget, if forgetting such a rotten 12 months is even possible. Teetering banks, and the millstone they have placed around everyone’s neck, have weighed ever more heavily on confidence and economic activity. Fewer people have jobs. Europe and the euro are in crisis. Emigration is back. More people have even more worries about paying their mortgages. Fewer companies are in business, and many more are just clinging on. Taxes are up, and going higher. Many welfare benefits are down, and going lower. And we have been bailed out – an event of real historical significance in this State’s nine-decade existence.
Given all that has happened over the course of the year, the real wonder is that things on the ground are not worse still. That so much continues more or less as normal is testament to the resilience of the real economy.
Employment is one example. Though the focus is usually, and quite rightly, on jobs being lost, the year ended with 87 per cent of a (shrunken) workforce at work. This is far too low, of course, but it demonstrates that the overwhelming majority has been able to remain productive despite everything. The resilience of businesses internationally was also much in evidence in 2010. The process of globalisation re-accelerated after spluttering in late 2008 and 2009 as a result of the international financial crisis.
Ireland’s decades-long success in tapping into the types of global capital flows that pour into the production of goods and the provision of services (as opposed to the more recent disaster of attracting capital flows that inflate property bubbles) is well known.
IDA Ireland said before Christmas, as it compiled its annual figures for the number of jobs created by its foreign client companies in 2010, that numbers were well up on 2009.
When so many parts of the public sector are deservedly pilloried for their failings and inadequencies, it is important to acknowledge those entities which are effective, professional and driven. IDA Ireland’s long record of achievement continued in 2010. At a time when shrill voices on the right blame fatcat bureaucrats for the mess we find ourselves and shrill voices on the left blame businessfolk for all our woes, the way the IDA works with some of the world’s best companies demonstrates how the public and private sectors can be strongly mutually reinforcing.
The other big positive from 2010 has been the much- discussed success of Ireland-
based exporters. From a recent low-point at the end of 2009, sales of goods and services to foreigners picked up across the board, with some sectors – notably pharmaceuticals – storming ahead. Export earnings hit an all-time record high in the second quarter of the year, before setting yet another record in the third quarter.
Exporters benefited from solid, often stimulus-fuelled, growth in our major trading partners as well as a whittled down cost base at home, as the price of almost everything – wages, goods, services and property – fell.
That the cost base fell reflected the weakness of the domestic economy. Although there were signs that it was beginning a tentative recovery in the early months of 2010, the pick-up petered out by mid-year. With lower economic growth and the costs of the banking bubble growing almost by the month, international confidence in Ireland drained away. Ministers and officials spoke repeatedly of a “manageable” situation. It proved unmanageable.
By late summer, yields on Irish Government debt were ratcheting up relentlessly. At the end of September, Brian Lenihan declared yet another final cost of the banking crisis. Having got it wrong so many times before, he convinced nobody.
Nor was a massive upward revision in the size of the austerity package for 2011, and every year to 2014, enough to convince the markets that Ireland could drag itself back from the brink. The tax-and-cuts package for the December budget went from €3 billion in the summer to €6 billion in the autumn.
But just as it was being finalised in early November, the European Central Bank decided – very suddenly – to intervene. The pre-emptive EU-IMF bailout, which the Government attempted to repulse until it became clear that resistance would be futile, was unprecedented, and indicative of the loss of faith other Europeans had in the ability of the Government to manage the banking crisis. This failure of the Government, and indeed the State, is profound. It is likely to have many significant implications for a long time to come.
Ireland’s sad and painful year coincided with Europe’s most serious crisis since its states started throwing their lot in together in the middle of the last century.
The crisis began early in the year when the bond market belatedly woke up to the revelation by a new Greek government at the end of 2009 that its predecessor had been cooking the books. Greece’s budget position suddenly appeared much less manageable. A stampede to sell off its debt ensued. By early February European governments were forced to abandon the “no bail out” clause that had been a cornerstone of the entire euro project.
A delay in setting up a bailout mechanism contributed to uncertainty. Contagion spread. By early May the situation was spinning out of control. In response, a huge €750 billion package was put in place, one third of it provided by the IMF. But even this was not enough to restore calm. By November, Ireland became the second of 16 euro area countries to be rescued, and others look certain to follow soon.
The euro crisis and Ireland’s burst property bubble are part of the same tectonic shift that caused the collapse of Lehman Brothers and the massive losses on US mortgage-backed securities – a financial system that under-priced risk over many years and caused a massive and unsustainable build-up of debt. At year-end, the consequences of the failure of our financial system continue to cause the ground to shake.
