Thursday, February 18, 2010

Problem Solved?

The Govt. could be forgiven for thinking that things were starting to improve for them. The recent bounce in the opinion polls and a fairly deft treading on water over the last few months saw them apparently pull through a difficult period.

And although today they did have the embarassing situation of defending a perjurer they did seem to be stabilising a bit.

The reason for that stability I contend is their success in defining the debate on the economy so narrowly. Successful economic policy today is not defined by how many people are in employment, wealth creation etc. but by how much our borrowing requirement can be reduced. The only criteria for success is the often arbitrary opinion of the the sovereign debt market.

And how successful they were in defining that as the yard stick of success. The budget, the McCarthy report, savage and sectional in their targeting went through without any real opposition.

The issue of budget deficit was a substantive one and no party could shy away from it, certainly SF did not and sought to tackle the structural deficit in a non-deflationary way. Sustantive as it is its not the only issue to be handled.

When Brian Lenihan went on RTE yesterday to state that Ireland was out of danger and commented we had found our own solution to our problems he was to some extent stating the truth. Indeed we have managed to avoid the situation whereby we undergo soverign default. But at what cost to our medium term economic prospects and societal cohesion. And while no one is arguing against avoiding an unsustainable deficit many are arguing against the deflationary measures of the Govt, even from the pages of the Wall street journal. And what about Michael Casey the former chief economist with the Central Bank and currently board member of the International Monetary Fund who commented that:

Our Government and the EU Commission have sold out to the rating agencies, none of whom cares about unemployment or emigration.
For a govt. which has defined our economic problems as being under the control of foreign lenders and money markets this is a worrying shift back to real world concerns.
The govt. have skilfully turned fear of default into one of its success criteria and having avoided such a default and created the illusion of stability it has managed to stabilise its own position in the polls. However I suspect that rather than this marking a come back for the govt. they now face a new danger. The narrative of fear surrounding debt default is receding and the more Lenihan claims we are out of the woods the weaker it gets.
Its been a successful diversion but with nearly half a million unemployed its becoming less possible for the govt. to sideline the issue.
Ultimately the govt. will have to face the issue of job creation. And job creation will not be easily managed or manipulated in the media since the govt. record is extremely poor on this issue.
According to Forfas in the years 98 to 08 less than 4000 net new jobs were added by foreign and irish-owned firms in the international tradable goods and services sectors.

Yet in retail, constructions etc up to half a million jobs were created. Likewise
in 2006, 83,000 new jobs were added to the economy but yet direct job creation in the export sectors was less than 6,000.

Clearly the capacity of the Irish economy to create jobs on its own is tiny, or is it more that the capacity of the economy to create jobs has been simply ignored. Considering that in 2007 the Irish invested €13.9 billion in European property deals but the Irish-owned business sector got under €200 million in venture capital investment is it surprising.

The SME sector has been sorely neglected by the govt. over many years and these difficult times are showing how. The number of corporate insolvencies in Ireland has soared to 1,406 in 2009, according to

The govt. would love people to think that with the cost of Irish debt stabilising that they have saved us.

Yet we now have an economy that has very little demand in it and very little investment (now at 1998 levels) - the 2 pillars that created most jobs in the tiger era. People are saving like crazy and shops and construction are flatlining. But at the same time the lack of vision of the govt. is now catching up with the neglected SME sector and jobs are being lost.
Brian Lenihan may be happy thinking that its problem solved. However there is only so much treading water this govt. can do and as the debate switches away from bond spreads to job creation and the need for real reform on the structural deficit then the govt. will be once more vulnerable on the economic front.

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