Fianna Fail’s distress; Labour’s opportunity?

It’s no surprise that the thread arising from Thursday’s post on the Irish Times’ poll result quickly resiled to the state of the Republic’s economy and what might be done about it. As Stephen Collins noted on Saturday, Fianna Fail’s support is collapsing at the same rate as the economy.However as Noel Whelan notes, Fianna Fail misfortunes (and the Opposition party’s good fortune don’t all come down to the events of the last week:

It’s not the events of recent weeks, however, which have shaped this results but the public view now of the policies pursued for the last five years. The reasons for the economic crisis are complex and many are international.

The two previous Fianna Fáil-led governments were responsible for some of the policies which have rendered Ireland’s difficulties more intense. They unwisely put or left in place too many tax reliefs which acted as an accelerant on an already overheating property market. They also drove bloated public expenditure without putting in place a sufficiently broad tax base to sustain it. In addition, the soft touch approach to banking sector regulation, while it may have been in accordance with international norms, has left our banking system even more exposed.

As Gerard O’Neill noted in the first of our recent economy focused podcasts, “it’s like defusing a bomb when you are not sure whether to cut the red wire?

And the Irish government is not alone in facing the same conundrum. Established incumbents everywhere are facing problems on an unprecedented (in modern times at least) scale.

Having dumped their government of long standing, Iceland is now contemplating entry to the EU, no doubt on whatever terms Brussels cares to offer them.

In the UK, despite a lot of sound and fury both government and opposition flounder (check out David Cameron’s poor performance on the Politics Show to see what I mean) in trying to face a crisis that even the established experts have no useful model to help them predict how different interventions might produce.

In the US, and despite his unassailable majority in both Houses of Congress, President Obama has come through with a stimulus package (protectionism and pork compris) that has several greybeards shaking their heads and saying it is simply not enough to pull the financial cat out of the fire.

What Friday’s poll figures suggest is that it is not good enough just to be ‘not the government’; you need to have a plan, or at least a big idea that’s invulnerable to simple counterfeiting by your opponents. And the very volatility of the situation means that formulating a coherent plan is difficult. When the opposition do produce an idea, like cutting TD’s expenses, the Government simply raises them and looks for the credit.

In this respect, you can see that Fine Gael have something of a problem. A problem volubly demonstrated in a fractuous exchange between Brian Hayes and Willie O’Dea on last week’s Saturday View (about 16 minutes), when Willie asked his Fine Gael counterpart how his party was going to raise the €850 million in public expenditure cuts they had proposed. The whole thing breaks down very quickly into a verbal scrap largely because, in essence, Fine Gael’s analysis of ‘what must be done’ is pretty much the same as the Government’s.

And that is reflected in the polling. Outside Fianna Fail loyalists, Fine Gael supporters are the most supportive of the government’s cuts package:

In party terms Fianna Fáil voters were most supportive with 46 per cent saying it was about right, 20 per cent not tough enough and 27 per cent too tough. However, Green Party voters took a very different view with 42 per cent saying it was too tough, 26 per cent not tough enough and 22 per cent about right. Labour voters took a very similar view to Green Party voters while Fine Gael voters were closer to Fianna Fáil in their view of the measure.

Which puts Labour in a very interesting position. For once in the Irish political cycle policy matters. And there is no convenient place across the water to go and grab and a tried and tested, off-the-shelf solution, as both main parties were wont to do back in the Thatcherite day. It also happens that Labour is in a position now to criticise the government from a space that is clear and discrete from Fianna Fail’s own fading PD coloured positions.

Their instincts tell them that cutting jobs in time of recession is both regressive, and part of the same pro-cyclical pattern that got the country into the mess it is now. For once, that’s a popular message too. It puts them, as Willie might put it, on the side of the angels, with a populist proposition that opposes in principle as opposed to specific practice.

And Labour is taking the opportunity to begin to find ways of narrating the crisis, something which has eluded both Enda Kenny and his analogue in Britain, David Cameron. It seems their leader, Eamon Gilmore, is taking a leaf out someone else’s book:

I think [the poll] is measuring a very fundamental shift in political thinking for this country and reflecting a view that there is more to life than the economy. There is such a thing as society. We need each other. [People] are looking for a sense of hope, of optimism, that we can get through the recession.

Later this month they are hosting what they are calling a State of the Nation Economic Summit. Pulling in independent expertise, the emphasis is on framing questions and pulling in answers. It also emphasises that the event is open to everyone; although everywhere you look on Labour’s online real estate is the invitation to become a member.

Cute stuff. And better than issuing policy statements that will likely have to be revised and revisited in a matter of days or weeks never mind months. Still, it’s a long way from here to the Taoiseach’s office. But at least they have a plan; which is more than can be said, at this moment in time, for the two old Civil War parties.

Whelan rightly notes that the short to medium term gains for Labour are likely to be thin enough in the European elections. The more important shift may come at Council level, where, as Dan has noted before, broad oppositional gains may have much more dangerous, and generational implications for the once impregnable Fianna Fail.

, , , ,

  • Paddy McEvoy

    Great piece Mick. I’ve been watching Gilmore’s rise with interest. Many former FF/FG heads I know are defecting in droves to Labour. However, I think Labour has a demographic problem. First, it is without doubt the most middle-class ‘socialist’ party in Europe. With Trinity Law Professor Ivana Bacik and multi-millionaires like Ruairi Quinn in the ranks, it is hard to project a populist message, skinny latté in one hand and law brief in the other. Not exactly Keir Hardie/Arthur Scargill. This is confirmed for me by the overwhelming number of law graduates, solicitors and barristers I know interested in Labour. These votes will of course help them south of the Liffey, but may not induce the laid-off workers of Cabra or Tallaght to unite forces in a show of class solidarity with Bacik, Willie Penrose and Alex White, barristers all. This is not to say that I do not foresee huge gains for Labour (I do) but just speculating about a limitation in their appeal.
    Labour’s second demographic problem is that they are virtually unknown ‘down the country’. Just look at the map on their website of TDs countrywide. http://www.labour.ie/peopleandplaces/irelandmap.html
    Barely anyone outside the Pale. My country cousins just don’t understand the urban sophistication of Labour and I expect that they will inevitably revert to the two Civil war rural parties or just not vote at all.
    Of course this is a crude analysis and suggests that Irish people vote on a tribal/demographic/family basis as opposed to policy but that has been my overwhelming experience.

  • Paddy I think you are confusing Ruairi Quinn with his brother Lochlain. I don’t totally agree with you about the party’s profile. I see the Labour still as a pretty traditional party of the left. Its biggest challenge will be to broaden its base and I agree there are many now switching from FG and FF.

    Labour’s problems stem right back to 1918 when it surrendered much of its working class rurual base to the then Sinn Fein. Times have changed though and it will be interesting to see if they are capable of putting enough candidates behind these kind of poll ratings in order to transform an increased vote into a maximum number of seats.

    Conall

  • Harry Flashman

    I’m surprised neither Mick nor any other poster has mentioned this little horror:

    Ireland’s bust

    No, seriously they’re fooked

  • Dave

    Harry, if it looks like borrowing was out of control, it’s because it was. Borrowing was out of control by default and by design since the Irish government gave control of its monetary policy to the ECB. When people borrow too much money and your economy begins to overheat, you increase the cost of the surplus money supply by putting up the interest rate to decrease the borrowing and cool the overheating. Since the Irish government could not increase interest rates, it could not stop the economy from overheating. The expansionist monetary policy of the ECB has destroyed the Irish economy. Ireland serves as a textbook example of what happens to an economy when monetary policy is forsaken. The Irish, however, being essentially brainwashed europhiliac muppets, will continue to delegate more of their sovereignty to third parties and thereby have ever-less control of their economy (what remains of it after we joined the Eurozone).

  • Dave

    By the way, the shock in this for the Irish is that they expected their Central Bank to regulate domestic monetary policy and thereby keep borrowing under control. They thought that the Central Bank had the power and was using that power to ensure that all was well. They didn’t understand that sovereignty over monetary policy was transfered from the Central Bank to the ECB and that, therefore, there was no domestic control over it. They still don’t understand that.

  • Mack

    Harry Flashman

    The source of that article was this blog post by Simon Johnson

    http://www.rgemonitor.com/globalmacro-monitor/255556/the_g7_needs_to_act_this_weekend_on_ireland

    It’s discussed on the Irish Economy blog here –

    http://www.irisheconomy.ie/index.php/2009/02/14/cds-spreads-again/

    Philip Lane provides some counter weight in the comments .e.g

    While the Irish fiscal and economic situation is severe, Ireland does not require any external assistance. It has a low public debt, an asset-rich sovereign wealth fund and plenty of capacity to raise taxes and cut public spending after a decade of rapid fiscal expansion.

    I found this report far more insightful –

    http://www.timesonline.co.uk/tol/news/world/ireland/article5733823.ece

  • Mack

    Dave

    You are misrepresenting the facts. The Irish Central Bank and Irish Financial Regulator maintain the right to regulate Irish financial institutions and to tighten or loosen credit standards and to modify the capital requirements for Irish banks (as the Spanish Central Bank tightened capital requirements, thus insulating the Spanish banks from the current storm despite a bursting property bubble and unemployment approaching 15%).

    Real interest rate = Base rate – inflation
    You also repeatedly focus only one side of the monetary equation. You ignore that interest rates alone are meaningless – what matters is the real interest rate. The rate at which money can be borrowed minus inflation.

    Monetary causes of inflation
    Monetarists believe that inflation is always and everywhere a monetary phenomen. I.e. Increasing the money supply – perhaps by borrowing heavily on external wholesale markets – leads to high inflation.

    Fiscal causes of inflation
    Others, (e.g. Roubini here) believe that infaltion is always and … (etc) a fiscal phenonemen. I.e. If you increase prices at state owned / partner bodies (ESB, Bord Gais, National Toll Roads etc.) or give huge pay public sector pay rises (benchmarking) or increase public spending, or decrease taxes in a boom – you get higher inflation.

    What the Irish government did
    Irish government agencies followed both pro-cycilical prescriptions for high inflation to a tee. I’ve yet to see a single strong argument as to how this is Europes fault from you.

  • Mick Fealty

    Harry,

    I did pick up on it, but was busy looking for something to blog for Brassneck this pm and failed.

    Also found this:

    http://conorfryan.blogspot.com/2009/02/death-of-fianna-fail.html

  • Mick Fealty

    Mack,

    If you ever fancy blogging on the team, drop me a line!

  • Paddy Matthews

    These votes will of course help them south of the Liffey, but may not induce the laid-off workers of Cabra or Tallaght to unite forces in a show of class solidarity with Bacik, Willie Penrose and Alex White, barristers all.

    Whatever about the other two, Penrose is a farm-boy who became an agricultural advisor and then did a night degree in law, AFAIK. It doesn’t seem to do him much harm in rural Westmeath.

  • Comrade Stalin

    Dave,

    I find it very hard to believe that the Irish Central bank would have cut short what everyone believed was an economic boom by raising interest rates. If the Brits didn’t do it, why would the Irish ?

    And what’s the point in having control of monetary policy when the banks are giving people 125% loans ?

  • Dave

    Mack, you don’t have a counter-argument, but you seem to mistake your glossary of terms for one. I suggest you properly acquaint yourself with (a) how the eurosystem functions and the role of the Irish Central Bank in it, and (b) the pivotal role of monetary policy – specifically interest rates – in the economy.

    The Irish Central Bank manages monetary policy on behalf of the ECB and in conjunction with the ESCB. It does not have executive control in formulating that policy nor is it allowed to use its authority in carrying out its remit to counteract the monetary policy of the ECB. That means that if the ECB adopts an expansionist monetary policy, then the Irish Central Bank must not try to restrict the supply of money within the Irish banking system because it is of the opinion that ECB’s monetary policy of increasing the supply of money is not what the Irish economy requires. Therefore, it is utter nonsense to suggest that the Irish Central Bank has alternate means of regulating the supply of money and that it simply doesn’t matter what the policy of the ECB is. It matters.

    It is also utter nonsense for a reason that I have explained to you before but which you still do not grasp: Central Banks are nominally independent of government but still obliged to ensure that their monetary policy follows the fiscal and other policies of the government. That is to ensure that there is no conflict of economic policies between them, e.g. that the contractionary monetary policy is not used by the Central Bank when the government is acting to expand the economy, etc. Because the Irish government has no control whatsoever over its monetary policy, it is obliged to follow the monetary policy of the ECB and to formulate its other economic policies so that they do not conflict with it. That means that the ECB controls the Irish economy, not the Irish government. If the ECB decides that people need to borrow more money and spend it in order to stimulate growth, then that is the policy that will control your economy.

    The Irish Central Bank was well aware that the monetary policy of the ECB would have disastrous consequences for the Irish economy but it was no longer its role to concern itself with formulating an appropriate monetary policy for the Irish economy. It is very easy to calculate what interest rates should have been set at by the Irish Central Bank under the Taylor rule. Davy, a division of Bank of Ireland, did the calculations in 2005 and showed that the ECB was setting interest rates a full 4 percentage points below the needs of the Irish economy. It concluded (correctly) that “There is no doubt that an inappropriate policy rate for Ireland is fuelling the booming residential construction sector.”

    [i]”But losing control over monetary policy to Frankfurt in 1999 has had an impact on the Irish economy. Think of record house building, annual credit growth running at 25%, a near doubling in house prices, and 5.5% average inflation in the service sector. While potentially storing up problems for the future, interest rate sensitive sectors of the economy contributed handsomely to three years of above-trend growth, followed by a strong recovery from a shallow recession. All of which poses the important question: at what level would the key policy rate stand if the Central Bank of Ireland still had control over it?

    Putting all of this together, we reckon that an appropriate policy rate for Ireland is around 6%, fully four percentage points above its actual level.

    There is no doubt that an inappropriate policy rate for Ireland is fuelling the booming residential construction sector. One way to think about it is to imagine the mayhem that would ensue were interest rates to rise to 6%. Our worry is that an elongated boom could lead to a more severe correction in the housing market when rates finally begin their ascent (to 3% rather than 6%) or when sentiment changes. A return to higher inflation rates may also occur. Private sector credit is growing at 26% year on year while services and construction wage inflation is back up to 7%. We may well have to rely on another tool beyond our control to keep inflation in check—further appreciation of the currency.”[/i]

    http://www.davy.ie/content/pubarticles/wmccr20050124.pdf

  • Dave

    [b]Continued[/b]

    If those interest rates were set at the appropriate rate of 6% by Irish Central Bank instead of the widely inappropriate rate of 2% by the European Central Bank, then it is undoubtedly true that Irish consumers would not have borrowed so much money and that Irish banks would not be exposed to massive write-down’s in the value of their assets. For example, 340,000 houses in Ireland are vacant.

    There was only one way to stop the overheating and that was to increase interest rates. If Ireland still had sovereignty, then it would have been in a position to stop the rampant borrowing. That is what happens when you delegate monetary policy to foreign agencies in order to promote a political agenda of Euro-federalism, and not an economic agenda.

  • Dave

    Stalin, the Irish Central Bank had control in 1998. GDP growth was 8.7% and inflation was 2.2% with interest rates set by the Irish Central Bank at a sensible level of 6.2% that was in full accordance with the needs of the Irish economy. They have always been sensible in setting an appropriate rate. It was idiotic to delegate that control to an agency that would not and could not set a rate that was in accordance with the needs of the Irish economy, and that would always be set in accordance with the needs of the German economy (which bankrolls the EU).

  • Dave

    By the way, Mack, perhaps you’d like to do the math on how much of Ireland’s 1.67 trillion external debt was borrowed under that you believe were deficient loan-to-value ratios and how much you think, therefore, that external debt would have been reduced by if tighter controls applied? It is a core part of your contention, so shouldn’t you at least try to support it with the relevant figures when you proffer it?

    If your claim that the Irish monetary crisis is the fault of those who regulate the monetary system rather than the fault of those who formulate the monetary policy and that it could have been prevented by tweaking such things, then why don’t you support it? Because it’s just hollow rhetoric you picked up from Europhiles to divert the blame from where it property lies?

    The ECB determines the macroeconomic policy of the Irish government entirely as it alone sees fit, leaving the Irish government with nothing but microeconomic tactics to control the supply of money and the demand for it – such as the pissing on a forest fire methods that you suggest. Did you know that the Treaty provisions that formed the ECB make it illegal for the Irish government, the Irish Central Bank, or anyone else to even offer advice to the ECB about what Irish monetary policy should be? Even the Irish government’s fiscal policy is subject to the rules and procedures in the SGP. That is how little control Ireland now has over its own economy.

    I think you’ll find that attempting to frustrate the supply of money domestically would not have reduced the demand for it (nor, indeed, would it have reduced the supply of it since it can be borrowed elsewhere in the Eurozone under less stringent criteria), and that demand could only have been reduced by increasing the cost of borrowing it.

  • Mack

    Mick

    I’ll drop you an email if I can find something interesting to write about!

    Dave

    The time to debate Euro membership was any point prior to it’s launch – our debts are in Euro now and we’d be better placed learning how to work within the system rather than fight against it.

    This (below) is an interesting thread. I agree with a good portion of what the Eurosceptic Economist Geckko says in it..

    http://www.thepropertypin.com/viewtopic.php?f=19&t=17738

    To quote –

    I am not saying this is the only cause, or that Ireland could not have found other (very second best) policies to compensate and mitigate. But it was a biggie – the single biggest policy blunder, among a few other big ones.

    Having joined the Euro, our government and it’s agencies needed to implement those ‘second best’ policies to mitigate the effects of the ECB’s policy. Look at their record, far from complaining (as French politicians have when the ECB rate was too high for France), they cheer led the boom (“the boom is getting boomer”).

    The other important point to consider, is that other countries outside the Euro also had property and credit bubbles. The property delusion was already rampant in the south when I moved down here – prior to the Euro’s launch.

    Incidentally according to David McWilliams, Irish banks have an average loan-to-deposit ratio of 150-160% (and over 250% at PTSB!). A naive interpretation would be to say at least 30% of Irish loans are due to wholesale borrowings. It’s naive, because while true, the actual figure will be much, much higher due to fractional reserve banking – money that’s borrowed externally, then gets spent within Ireland, winds up on deposit and lent out again.

    http://www.davidmcwilliams.ie/2008/11/16/banks-cant-hide-from-this-crisis