The real cost of Ireland’s bank bailout

(We need a latter day “Marshall plan”.)

Central Bank - Dublin

Ireland’s National Treasury Management Agency (NTMA) has estimated that the total cost of the bank bailout to the Irish state will be €62.9 billion. Forget all the other numbers that are being thrown around, this is the crucial one. By any standards, this is a lot of money. Half of this is effectively financed by promissory notes relating to the former Anglo Irish Bank. The apparent need to save Anglo from default was greater for the European Central Bank (ECB) than for the Irish Central Bank.

With budget deficits running well into the negative and the costs of borrowing prohibitive, it looks fairly impossible for Ireland to manage itself out of the present financial crisis through austerity alone. The reason that there has been so much emphasis on austerity is an attempt to make the Irish economy more competitive by significantly reducing expectations. However, the unwillingness by successive Governments to restructure the public service is a very real problem. It is perhaps time for a “Benchmarking II”, process.

To deal with Ireland’s economic woes in the longer term, a three step approach is needed as follows;

1. Making Ireland’s economy more competitive.

2.  Restructuring our debt so that it becomes possible to repay it.

3. A latter day Marshall plan for Ireland. (NewEra?)

The third step is the most important one and has not yet emerged from the waffle and the spin following on from the 5 point plan that saw Enda Kenny and his Fine Gael party sweep to power in 2011. At the time of writing, the Government seems to be working hard on the first two steps but without any obvious flair or panache. There is very little sign of anything real happening with NewEra or the “Smart Economy” as the previous Government called it.

It was so easy for Enda Kenny to stand up in opposition and promise to create 100,000 new jobs, largely in the green tech sector. It is much harder for him to actually deliver them in Government. In fairness he is being constrained somewhat by his coalition partners the Labour Party who will do nothing to upset the sacred cows in the existing semi-state companies. However, if anything is to really be achieved then some sacred cows will need to be slaughtered.

Take Energy and Communications for example. Many of the promised jobs are in these sectors. No semi-state company is realistically capable of doing anything ambitious from a financial point of view or from an organisational point of view. They simply won’t be able to borrow the required capital as their finances are too entangled with Government finances. They are set up organisationally to manage their existing business and not to start anything new. New semi-states might be capable of doing something but the private sector provides a much better option to get things done. We need a vibrant private sector with ambitious new projects to boost the economy and effectively bail us out of our “bail out”.

Boosting private enterprise can be achieved by the Government taking a very proactive approach and backing major projects in the green tech and high tech sectors. It is more important that they back them by facilitating them and by removing obstacles rather than by throwing public money at them. The lack of progress with high speed broadband is one example. The slow rate of progress in connecting our electricity supply to the European super grid is another.

There is private funding available if the stranglehold of vested interests in the semi-states is reduced by Government. To be fully effective though, the Government has to make sure that the existing business of the semi-states is not damaged in the process. However, huge gains can be made by targeting areas of new business such as the export of renewable energy or by allowing a privately funded rail link to be built from Dublin city centre to Dublin airport.

The advantage of a Marshall plan or NewEra approach over austerity is that it will achieve three major objectives rather than one.

·         It will increase GDP, thus reducing the debt to GDP ratio.

·         It will provide employment, thus reducing the dependence on the state.

·         It will further reduce the budget deficit by increasing tax revenue.

Austerity only succeeds in reducing the budget deficit. It has largely negative impacts otherwise.

It is hugely ironic that the German economy was rescued from the abyss after World War II by the Marshall plan. Its current politicians and institutions appear to be favouring the austerity approach for its wayward partners in the Euro zone. That approach led to the rise of the Nazi party and caused the war in the first place. That’s myopia for you.