Colm McCarthy on the fiscal adjustment and rebalancing the economy

A report by Colm McCarthy on the challenges facing the Irish economy is available on Scribd.

In the five quarters from 2008 Q1 to 2009 Q2, Ireland’s real GNP, seasonally
adjusted, has fallen by 13.5%. The unemployment rate has risen by eight points,
labour force participation has fallen and emigration has resumed. The economic
decline in Ireland exceeds by a large margin those being experienced by most other
European countries, and constitutes the worst recession in Ireland since the early
years of the Second World War. The policy challenge involves much more than fiscal
consolidation, or recovery from a routine cyclical downturn. In an address to the
recent ESRI/Foundation for Fiscal Studies conference, the Central Bank governor
argued that Irish macro policy needs to focus, not just on the correction of the fiscal
deficit, but on a broader re-balancing of the macro economy, acknowledging the
nature and causes of the economic downturn from which recovery must somehow be
managed (Honohan (2009b)).

Well worth a read – full report.

  • DR

    Thank-you Mack,
    I actually read the entire report! and mite have half understood half of it, but at last I have some idea of the situation down south, my reading is that it is not very pretty but things could be turned round to something sensible within 4 or 5 yrs, if handled right, but I dont hear that coming out of the goverment down there yet which opens up the option things could go really really bad.

  • Mack

    There are some very good ideas in there. Particularly in relation to auctioning access to intangible state assets (mobile phone licenses, radio licenses and the like), reducing costs –

    A successful internal devaluation needs to extend beyond pay reductions, to include
    utility charges, local authority charges and professional fees

    I’d add land costs to that, requiring land reform. Time for the Kenny report after 40 years?

    He also explains some of the problems with some of the capital projects. However, given the potential value to the economy of these projects I would have hoped that some more benefical projects (that won’t contribute to over capacity) be brought forward.

    By the way, I think the government is following this line of action. It remains to be seen if they can match budget cuts – with the required action on cost reductions etc..

  • Mack

    Equalising pensions between public and private sectors (including scrapping the pension levy) is also a good idea and something that would both reduce future liabilities and the discrepency between pay and conditions across the two sectors..

  • How to balance the public/private accounts?

    Start by fining the Irish Times €600,000+ for blowing the whistle on corruption. When you win, you lose.

    Now there is a cross-border issue that should unite all media-types, north and south. So, why no mention that I can see on Slugger?

  • Dave

    The difference between reading an article on the state of the Irish economy from an Irish economist and reading an article on the state of the American economy from an American economist is that the American economist will focus on the crucial role of the Federal Reverse in devising monetary policies and the effect of those policies on the American economy whereas the Irish economist will make absolutely no mention of the crucial role of the ECB in devising monetary policies and the effect of those policies on the Irish economy – unless, of course, it is simply to proclaim that we’d be just like Iceland if we weren’t truly blessed by membership of the Eurozone.

    With the Irish economist, all discussion about monetary and macroeconomic policies is deliberately deleted from the national debate because all possibility of influencing monetary and macroeconomic policies has be deleted from the Irish sate as a democratic option. This provides debased and wholly distorted economic analysis that amounts to nothing more than propaganda while passing itself off as rigorous analysis. It’s scary that this economist is now an influential quangocrat, since that his Alice In Wonderland tripe is not only taken seriously but widely celebrated.

    For example, he makes no mention of the effect that slashing interest rates by 400% in an effort to create a boom might have had on already booming economy but rather he simply blames the government for not acting to stop a boom that they neither had the sovereign power to create, to control, or to stop. It is not that he is simply ignorant that it is illegal under the Maastricht Treaty for the Irish government to offer any advice to the ECB about what monetary policy might be helpful to Ireland or destructive to it, or that it has a legal obligation (in fact, it is a constitutionally-binding obligation as the Maastricht Treaty is part of the Irish constitution) to support the monetary policy irrespective of whether or not it considers it helpful or utterly destructive to the Irish economy. It is not that he is simply ignorant that a government must avoid a situation where its fiscal policy is in conflict with its monetary or macroeconomic policies. It is not that he is simply ignorant the European Commission and not the Irish government determine what the leverage ratio of Irish should be or if they are overleveraged. It is not that he is simply ignorant that the only power that the Irish government had to counteract the disastrous expansionist monetary policies of the ECB was control of the multiple lending ratio or that he is simply ignorant that this devise was useless since any attempt to increase it in order to work against the policies of the ECB would have been circumvented by borrowers securing lending from other financial institutions within the EU who may lend to Irish borrowers on the same terms as Irish financial institutions and who may do so without being subject to the higher multiple lending ratio but rather renaming subject only under EU law to the multiple lending ratio that applies in the state wherein they are based. No, he is ignorant of none of that. He simply has to ignore it like a good europhile puppet of a good europhile government.

  • Ronald Binge

    “In the five quarters from 2008 Q1 to 2009 Q2, Ireland’s real GNP, seasonally
    adjusted, has fallen by 13.5%. The unemployment rate has risen by eight points,
    labour force participation has fallen and emigration has resumed. The economic
    decline in Ireland exceeds by a large margin those being experienced by most other
    European countries, and constitutes the worst recession in Ireland since the early
    years of the Second World War”

    So, a good result for the Insiders like McKenna. People like me either leave or have made the decision to leave, leaving more gooey cake for them. Hope they choke on it.

  • Mack

    I presume you mean McCarthy? Not a good result for anyone, unless you count improved relative standing. But yeah, no doubt he is an insider, and those who have lost there jobs are high and dry right now.

    His report does have some suggestions that will help create jobs. And although he gives a framework for evaluating capital spending – I think he is in favour of net cuts here. A pity – increases in this area would create jobs. I think that’s where the counter pressure should focus..