The Government announced yesterday that the referendum on the Fiscal Compact will be held on May 31. Here, Tom Healy of newly established think-tank NERI argues that if economic recovery is the aim, we need to seriously rethink our approach.

HIGH, ENDEMIC YOUTH unemployment remains the biggest challenge facing Europe.

Across Europe a new generation has been betrayed. In many cases locked into debt, unemployment or casual employment young people are experiencing the full force of the economic crash of 2008. It is important that all generations work together and build a solidarity that crosses boundaries. Trade union and civil society organisations are well placed to contribute ideas and press for meaningful social change. New thinking is needed and new leaders from among the younger generation can lead that process of transformed thinking for effective social change.

The time to invest is now – not later. There are critical needs in all areas of social and economic infrastructure. Various agencies and commentators, including the National Competitiveness Council, the OECD and the European Commission, have identified telecommunications, energy and water infrastructure as key weaknesses for the economy of the Republic and sources of high cost for businesses. To this may be added the provision of a public, universal service of early childhood care and education, lifelong learning and health.

Here in Ireland the newly established Nevin Economic Research Institute has been set up with the support of many trade unions. Our aim is to provide the research, analysis, facts and policy alternatives needed. This comes at a critical moment in history when everything seems to be ‘up for grabs’ – institutions, values and alternative economic visions.

I very much endorse the following statements in the New Era document published by Fine Gael over two years ago:

We believe that the economic crisis provides us with a unique opportunity to invest in Ireland’s strategic infrastructure. There is huge spare capacity in the economy, with a large pool of skilled and un-skilled unemployed workers. (Fine Gael, NewEra, 2009: 3)

We believe it is economic nonsense, when unemployment is so high and private investment has collapsed, to cut back on productive public investment. We cannot keep chasing the economy down by simply focusing on raised taxes/decreased Government spending. (Fine Gael, NewEra, 2009: 4)

The NERI proposal is for a targeted, frontloaded, strategic and temporary investment of €20 billion over five years – €15 billion in the Republic and €5 billion (=£4.2 billion) in Northern Ireland – to begin to reverse the negative impacts of fiscal austerity.

It is not suggested that this policy initiative would solve the problem of unemployment immediately or that it would secure full economic recovery. However, together with other policy measures, it would help to re-start domestic economic activity, meet vital long-term infrastructure needs, give people greater hope and make serious inroads into long-term, structural unemployment. This is the surest way in the long-term to restore confidence – in countries that flourishes economically and socially and that can trade and pay their way in the world.

The funds for such a stimulus can be sourced from a mix of public, private and European/International sources with no additions to General Government Debt and with a likely lowering in the public sector deficit as a result of higher revenues and lower payments as unemployment falls.

The Nobel prize winning economist, Joseph Stiglitz, has appropriately summarised the recent coordinated European austerity measures as a ‘mutual suicide pact’. I agree with the view that Keynesian economics demands flexibility for Governments to coordinate in such a way as to sustain aggregate demand and address trade, capital and public finance imbalances. The wrong time to impose greater austerity through fiscal or monetary tightening is when there is a large output gap and deficiency in demand across the major European markets.

Future generations will not thank this generation of leaders and policy makers if there is a failure to address the inter-related problems of debt, unemployment and economic stagnation. Courage, imagination and innovation are called for in meeting the biggest economic challenge in generations.

Tom Healy is the director of the Nevin Economic and Research Institute, which welcomes a debate on these questions and issues. For further information go to NERInstitute.net.