LARGE SWATHES OF economies across Europe have collapsed, or are teetering on the brink of collapse. Ireland is no different. Aside from the public health consequences, Covid 19 has done untold economic damage.
That ‘world turned upside down feeling’ is familiar to most of us. Just 12 years ago, Ireland and most of the world experienced a similar epoch-defining calamity in the form of the global financial crisis. This crisis is similar in some respects but different in others.
The 2008/09 crash is usually remembered as being a severe financial and banking crisis. After all, the banks massively over-extended themselves with property loans in the 2000s.
When these loans subsequently went bust, it was clear that the banks were insolvent. A monumental bank bailout was enough to save the most important institutions, but lending, the oil that greases the wheel of a market economy, froze afterwards. This, coupled with some harsh austerity, led to a protracted economic downturn.
This is not the same
It is not that this story is wrong, but it overplays the importance of the financial crisis per se. The downturn was in the first instance a result of lost demand due to the collapse of the property bubble, which is not quite the same thing. In 2006 around 93,000 houses were built.
This fell to just 4,911 in 2012 and returned to 21,241 in 2019. Similarly, 13% of people in work were employed in the construction sector in 2006. This fell to 4.4% in 2012 and was back at around 6% in 2018, which is around average by international standards. And these are just the direct effects. Auctioneers, estate agents, retailers selling housing goods, and indeed the rest of the economy all experienced large knock-on effects.
In other words, there was massive overbuilding of housing as a quick buck could be made by building now and selling shortly after at a higher price. This fueled the economy through direct and indirect employment, and through greater consumption.
Even if there had been no financial crisis where, say, the banks were saved by the EU, Ireland would have still experienced a very large recession. There were simply too many houses, which people did not need. Absent a large fiscal stimulus, double-digit levels of unemployment were on the horizon.
The crisis that besets us today is different. Obviously, it did not originate in financial or housing markets, but through the spread of a global pandemic. The shock to the economy today is also more severe. The hospitality and retail sectors combined are much larger employers than the construction sector and its offshoots. And that’s to say nothing about the childcare and entertainment sectors, and the other industries that rely on face-to-face interaction. In the space of less than a few weeks, unemployment is set to increase to or past the level that it took four years to reach after the previous crash. And that’s just the beginning.
A new social and economic structure
Moreover, people are not spending today not only because many have lost their jobs, but also because they are prevented from doing so through social distancing. Even those who have seen no reduction in income are hoarding their cash. Add to that the general fear and uncertainty about what the future might bring and it’s easy to see why the economy has come to a standstill.
That situation however is quite different from what we had during the financial crisis. Back then, economic activity was depressed as even many wealthy people had lost a lot much of their income and because there was no need to build new houses, the most important purchase a person makes over a lifetime.
The point is that economic activity is primed to resume when fears about the public health crisis dissipate. It is crucial, however, that the government maintains economic activity to the fullest extent possible.
One consequence of the austerity years was that when the recovery did begin, the economy lacked the capacity to fully capitalise. Arguably the biggest factor in the property crisis of recent years has been a labour shortage as there have been insufficient numbers of construction workers to ramp-up supply. Training apprentices all but stopped post-crisis.
Political strength is vital now
The government needs to commandeer the full resources of the state to prevent a collapse of economy and ensure a speedy recovery. The latest measures announced by the Government are, by and large, correct.
Increasing unemployment and illness payments to €350 and paying workers 70% of their salary makes sense. This compares to the now widely-discussed Danish model where the government has picked up 75% of the wage tab and employers paying the remainder.
Still, the Irish system maintains the employment contract and allows the worst hit, a disproportionate number of whom are low paid, to weather the storm. The ban on evictions is similarly welcome. Whether viable businesses can survive without further supports, such as credit guarantees, is an open question.
When the crisis subsides, the economy will require a significant investment stimulus, not just income supports. The ability to implement the current and subsequent measures on a sustained basis will depend on factors significantly beyond the government’s control – how long the crisis lasts, and whether the ECB or European authorities choose to provide finance and lower borrowing costs.
In the meantime, it’s about survival.
Dr Robert Sweeney is an economist and policy analyst with TASC
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