THE GLOBAL ECONOMY finds itself yet again at another significant inflexion point. After five years of unprecedented monetary and fiscal efforts to stick the global economy back together, we are slowly starting to move away from some of the more experimental policies. Results have been mixed at best –but in the case of Ireland, mercifully, we have been able to find our feet after a pretty hard fall.
As has been well documented, Ireland’s ‘recovery’ has been based almost entirely around the export and the international markets. Thankfully, it was Ireland’s economic openness that afforded these opportunities for recent growth – opportunities which several other troubled economies didn’t have. However – and in common with every other ‘recovering’ Western economy – this recovery has been an incredibly uneven and inequitable one. Rising global Gini coefficients (inequality levels) clearly demonstrate this. If it’s any consolation to the majority of people in Ireland, pretty much everyone else across the western world feels just as disillusioned.
The past five years have clearly shown that no matter which policy or approach you favour – be it the printing of money (US), the austerity route (EU), or varying combinations of the two (UK) – the real structural problems which got us into this mess in the first place remain largely unaddressed. Worse still, a host of new and potentially more dangerous problems have appeared – witness for example the impact on the emerging markets recently of the mere talk of the US tapering their money printing or the growing youth unemployment problems in Europe.
Looking back at all of the major economic crises of the last 150 years or so, we can learn the most valuable lesson that any Irish mother would have told us growing up: “Prevention is better that cure.” Translating economically into: “Don’t let the crisis happen in the first place.” It’s beyond comprehension how almost every central banker and politician across the globe has missed this tiny piece of invaluable common sense.
Ireland is right now facing another serious crossroads. Alarmingly, we have become a bit of a one-trick pony once again. This time, instead of an over-reliance on the construction industry, we are heavily reliant on strong international tailwinds and unsustainably low interest rates. The Irish domestic economy is far too fragile to absorb any new crisis from abroad. Our over-reliance on the global economy is very real, very current, and very, very urgent to address. Any country over-reliant on just one economic driver almost invariably invites future crisis.
The imperative to rectify this serious failing in our economy is critical. If the current global experiment in economic policy does not work out as planned, Ireland could suffer dramatic economic consequences once again. Given the historical precedents of the results of these types of quantitative easing and austerity policies we should, at best, be incredibly wary. And given the track record of the institutions pushing these policies (many of the same people who got the global economy into such a mess in the first place), I am personally extremely cautious.
And here to the critical point: arguably the most dangerous roadblock to sound economic decision-making is politics. One disastrous decision after another has been made on behalf of the people of Ireland by politicians driven by anything and everything but good economic analysis and judgement. As a nation, we pander to everything from myopic electoral cycles to vested interests – both national and international. Ireland has been pushed from pillar to post over the last decade on everything but good sense.
A frightening case in point is the energy policy being pursued by the current Government. Under a 2009 EU Directive, Ireland is obliged to increase its share of gross final energy consumption produced from renewable sources to meet a 16 per cent target by 2020. Current Irish Government policy envisions achieving that target by doubling amounts of onshore wind power production. To facilitate that production, the Government will spend €3.2bn to crisscross the country with hundreds of pylons carrying wind power from turbines with over a thousand kilometres of high-voltage overhead lines.
A report today from BW Energy, commissioned by RethinkPylons, suggests that figure is closer to €4bn. Which will spent in the name of … what exactly? We currently have plenty of excess energy capacity thanks to the recession. There are also many more economical ways of achieving our 2020 CO2 targets. So why exactly is Ireland leading the charge in this potentially dangerous policy – dangerous both in economic but also, incidentally, in network stability terms?
Will this policy help lift the economy outside of already resurgent central Dublin? Will it create much-needed real domestic investment? Will we ever actually export this excess energy to the UK? It will clearly not create significant jobs; it will not create any real economic multiplier for the domestic economy; and for many reasons, the UK is highly unlikely to want to purchase this expensive energy supply. The policy will, however, add to our already lofty national debt; and it will for sure land increased energy bills on the doorsteps of our already-suffocating domestic economy. Add a couple of percentage points to our interest rates in a few years’ time and see how that noose around our economy’s neck gets that bit tighter.
There are several areas in drastic need of attention. To reference but a few, we need more SME business with access to credit at reasonable rates, and we need to refocus on the skills our education system is promoting, thereby investing more in the biggest competitive advantage we have – our children. Ultimately this can only be driven by a growing domestic marketplace – so let’s sort out the tracker mortgage issues, let’s get energy bills down (not up) through a comprehensive national insulation programme, and let’s reward work with lower taxes and employer benefits.
After years of favouring the public over the private sector, rebalance is imperative. Painful decisions will have to be made, but the return on investment for the people of Ireland should be a driving force behind this decision-making process.
Ireland has until now had a very effective and successful energy policy – one that the UK can only envy. However, we absolutely do not have a competitive advantage in producing energy – our energy costs are already 25 per cent above the European average. So why exactly are we putting this forward as part of any economic policy? We have already (even if it doesn’t feel it for most) been extremely lucky with external forces pushing our economy out of reverse. We cannot assume for one minute that ‘the boom will get boomier’ in western stock markets, so it is imperative that where we do invest, we build real economic multipliers in the domestic economy.
Let’s leave the politicians’ egos and legacy projects behind once and for all. Ireland’s economic future is in our hands once again; let’s learn from the past and not mess it up this time.
Steven O’Hanlon is Head of Asset Management at ACPI Investment Managers LLP focusing on Global Fixed Income and FX market investments. Steven has worked in the fields of fund management and economics for over 18 years in Dublin, New York and London. He has previously studied Economics and Finance at Trinity College Dublin and the Michael Smurfit Graduate School of Business.
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