Open Dissent (20 page)

Alaska and Hawaii are the forty-ninth and fiftieth states in the US. Both of these states are geographically and, it could be argued, culturally further away from Washington, DC than Ireland. Just for a moment let us question why our hands are tied at this time as a member of the EU. If we are in search of a solution and Europe finds it difficult to accommodate the needs of the Irish electorate, should we look elsewhere? Although because of geographic proximity we are associated with Europe, previous generations of Irish emigrants have chosen the US as their home, perhaps because we have never been strong linguistically. We have a special place in US history and society, but maybe we could take this further and become the fifty-first state. Fifty years from now, out of the new fifty-first state could come a young, ambitious Irish person with the potential to be the new President of the United States.

We might consider this option unthinkable but fifty years ago we may have thought membership of a European Union or United States of Europe to be impossible. Whatever route we take, the country has and will have to make sacrifices in the context of its sovereignty. Surrendering our independence would never be palatable but that's what we have done through our membership of the EU. This may be the wrong time to put forward a negotiated plan that could result in a form of economic and political surrender. However, if we cannot make a decision on the financial aspects of our economy without referring to the EU or the ECB then we have done just that. This being the case, if there was an alternative to the EU, should we not examine the benefits of it as well as the negative consequences? This is not an exercise in futility if such consideration would open our eyes to the advantages of being associated with the current world economic power. In this time of crisis, every avenue open to us as regards our recovery and associated dependencies must at least be entertained. The possible consequences of political and economic association with the US would be a massive influx of foreign direct investment, a link to the US dollar, a reduction in unemployment and, who knows, maybe an annual payment for a number of years to get our finances back in balance. Of course, there are obvious downsides to this route, including the massive disapproval of our closest neighbours. In any case, our advances could easily be met with rejection by Uncle Sam. While, politically, the US might see us as a foothold in Europe, what would be the cost?

As I proffer ideas for a domestic recovery in this book, I am aware that the global recovery will be fragile. The numerous sovereign problems that need remedying throughout Europe, together with the potential political and economic backlash of the German electorate, may pose quite serious problems for the EU in the not-too-distant future. As a nation, we must stay focused on those issues we can control while trying to influence those that are outside our remit but can affect us negatively.

We find ourselves in a strained partnership with Europe that needs massaging. There is a need for open dissent by both our European partners and ourselves. This openness will lead us to an acceptable solution that requires honesty and clarity in our discussions that may also demand a reappraisal of the EU and what its aspirations are and the price that needs to be paid. Will the political agenda outmuscle the economic one, leaving social discomfort and unrest on the sidelines of the field of progress? If there were only one or two countries within the union suffering a crisis then perhaps a solution would be more easily achieved. What, in effect, we are faced with is a lack of political leadership.

The major players in Europe that have diligently moved towards a United States of Europe have done so against relatively weak opposition. Political opposition due to the loss of economic sovereignty or the perception of being treated as a second- or third-tier member of this great union prevails in some quarters. But the political juggernaut will not be stopped in its quest for a unified Europe. If only a couple of the major players have the financial strength and
political will to continue on the unification road then they must answer the challenge in terms of the costs.

Are the major decisions on the future of Europe made from an economic perspective or in the context of a strategic political long-term vision? Between the IMF, ECB, EU and Germany, are there sufficient resources and political ambition that will insist on taking a long-term view of the political status of Europe? Will the current situation and economic sovereign weaknesses force referenda to be taken on the question of the viability of a united Europe one more time? The electorate in Germany would be entitled to ask what the process of unification has cost them and if it will continue to do so. If the fulfillment of some economic and political vision creates nothing more than a loose confederation of dysfunctional members in a union, would Germany be better off withdrawing from the original vision and re-establishing itself as a strong central neighbour?

We have looked at the option of a two-tier euro, which I believe gets to the heart of resolving the economic difficulties of many of the ailing economies in Europe. Resolutions that put the interests of the investors and the markets before those who should be protected (the taxpayers) lead to suffering and social unrest. Many market observers want instant decisions, preferably wrapped in a couple of succinct sound bites that will help people understand more easily the need for swift, callous financial decisions. Those who influence the market and call for certain decisions to be taken with regard to the various troubled
economies are unlikely to feel the consequences of their recommendations. Is it possible that we can call a halt to this continuous spiraling foreign debt that plagues not just Third World developing countries but major countries from the US to European states such as Spain, Greece and Ireland?

Whatever about the EU having a coherent plan, what about Ireland? What domestic steps could be entertained by Ireland to see us out of the current crisis? I feel I have identified many of the problems that the country is going to face over the coming years in terms of economics, banking and politics. I have tried to offer solutions to these problems, some straightforward and others far-reaching and complex. Whatever the decisions that are ultimately taken to resolve the problems we are faced with, we would be best served by a recovery plan and a clear vision of how the country should look after a couple of years of its implementation. We must establish a time frame within which we will consider our decisions and achieve our objectives, in line with the agreed financial protocols of Europe. I believe it would be a lot easier to take the economic and fiscal medicine to reduce our debt-to-GDP ratio and run a fiscal deficit of less than 3 per cent if we had a clear national plan. There would be nothing preventing us adjusting this plan if we are faced with further challenges domestically or from the international markets.

Recovery is likely to find its roots in those sectors of our economy where we have skills, interest and experience. Outside of an immediate injection of liquidity into the SME
sector, plans should be put in place to foster and grow the technology, agriculture, financial services, media, and arts and entertainment sectors. Selective and considered investment into these sectors should produce positive returns and increase employment. Whatever national strategy plan is put in place, it would be folly not to find room for a modest revival of the construction industry. Our future is dependent on the export sector but we must avoid exporting our most valuable asset – our educated and ambitious youth.

Hopefully, whatever recovery plans are put in place, the Government and opposition will find it in their best interests to work together with a common objective. It is easy to argue that national mismanagement has placed us where we are today, but recriminations are not going to fix our problems; they are only going to add to them. There are a number of prerequisites to our recovery: the successful implementation of NAMA, a robust solution to the fiscal deficit, a substantial reduction in the number of people unemployed and strong measures to ensure the enormous public sector cost base is reduced.

If a fairytale ending to the current financial crisis is preferable then perhaps Hans Christian Andersen might take a better shot at writing this episode. Unfortunately, it is clear that no solutions can come without pain for every sector of our society. Another suggestion would be that the working week be increased to 5.5 days. Everyone in the country would be expected to increase their working week by some 10 per cent with no corresponding increase in wages or
salary. The economic benefits of this action would be substantial. It would automatically increase production, reduce our cost base and very quickly get us on the road to recovery. However, the social implications would be substantial and the effects on quality of life would be harsh. While many will argue against increasing the working week on these grounds (and the EU might well have something to say about it too), it may be the single best way to demonstrate to ourselves and the rest of the world that we can take difficult decisions to protect and preserve our economy.

The Government has made it clear that its preferred method for recovery is to get the balance sheets of the banks cleansed and, through this, enable the banks to put more liquidity into the market. If the banks can manage to start putting liquidity into the market then one of the outcomes would be a controlled infusion of inflation into the system, in cooperation with guidance from the Central Bank. If this was managed in the right way we would see a steady increase in asset prices. For those who have been caught in the negative equity trap, this would be an avenue that would lead to an easing of the implied constraints therein. It should not happen overnight but be controlled over a three- to five-year period. This slow but perceptible increase in the price of assets would inject an air of hope and possibly renewed confidence into the economy. I cannot stress enough the need for control in the adoption of an inflation-driven recovery, for the consequences of uncontrolled inflation would be catastrophic.

If one of the key imperatives for the country is to reduce or erase the Government's liabilities, in turn achieving an improvement in the country's sovereign debt rating, then the sale of the cleansed banks to international investors must be a consideration. Perhaps getting the banks into a ‘ready for sale' state should be considered in preparation for the possibility of new capital being injected into the banks or some major financial entities wishing to expand their European footprint into Ireland. However, giving up control of domestic banking would have negative effects, as the case of New Zealand demonstrates (discussed in
Chapter 7
). After twenty years New Zealand's four major banks remain in foreign ownership. Since the late 1980s, the income per capita in New Zealand has been close to the bottom quartile of the OECD (Organisation for Economic Co-operation and Development) ladder. Giving up control of our banks may carry too high a price. One other option on the banking horizon might be a once-off offer to customers to exchange retail deposit interest for warrants or shares in the banks, which would be a voluntary commitment.

The old banking model is broken and a new one needs to be developed. The two major banks have an uphill battle over the foreseeable future and, with the sale of some of their best-performing assets to strengthen their capital bases, large dependable cash flows will have been eliminated, leaving both institutions dependent upon the Irish market to repair their balance sheets. If both banks are now going to focus on Ireland then investors must wonder
when they'll see capital growth, dividends and earnings per share return to acceptable levels. The future for these banks is about survival for the next few years. Due to the enormity of the problems in the commercial property sector there has been little focus on the potential losses of the SME sector by investment analysts. Mounting provisions will be required to offset the losses from the growth in insolvencies that were up 27 per cent on the 2009 figure for the first half of 2010; the year 2009 saw insolvencies increase by 80 per cent up on 2008.
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Looking over the financial landscape of Ireland as it appears today, I am saddened (others may simply be outraged) when I observe the destruction of the national financial services system.

Do the boards of the banks know what caused the downfall of their institutions and, if so, have steps been taken to avoid a recurrence? It is fair to say that the Irish banks were reckless in their credit management and, worse still, they were nowhere near prepared for the liquidity crisis that has occurred. I have no doubt as to the level of incompetency that has prevailed at management level within the banks.

The ongoing discussion on fairness and who in reality has to pay for the mistakes of executive bankers and politicians has led to the very political system being questioned. Have the political parties in the country adjusted to the changes in our society? Will the current crisis be the catalyst for political parties changing their policies for a new and better society? If the mainstream political parties in Ireland are seen to be failing the electorate, might this
create a void into which more marginal, and perhaps less desirable, political parties will step? What are the alternatives to the current system? What, in effect, would be a ‘better society'?

On a recent visit to Russia I learned about the changes that occurred in both the political and social environment over the past twenty years.
Perestroika
(restructuring) and
glasnost
(openness) were the two principal pillars of change. The centralised Soviet Union was dissolved in 1991 to make way for a loose confederation of states. The adoption of capitalism was painful in the early days. Private ownership was established through the passing of property that was once part of a collective to individual ownership. The history of callous decision making in Russia continued in the period of transition from socialism to capitalism, with the weak and poor paying the price for change. Only the strong would survive and this was the order of the day.
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