Every Little Helps
Two weeks ago Ireland’s National Treasury Management Agency (NTMA) announced the rarest kind of accounting mistake. As a consequence of some double counting of liabilities within the Housing Finance Agency the Irish government established that it was 3.6bn Euros better off than it previously believed that it was. Following the discovery of the error, Ireland’s gross outstanding debt for 2010 was revised to €144.4 billion (92.6% of GDP) rather than the published €148 billion (94.9% of GDP). A nice windfall, certainly, but not a panacea for the years of government and private sector excess – but as the large supermarket chain would say: “Every little helps.”
Little by little, Ireland is edging in the right direction. Accounting windfalls aside, as a recent Goldman Sachs piece pointed out, Ireland’s main risks are now external, not domestic. Four key positive developments have contributed to this improvement. First, Ireland’s economic data have been better than expected – real GDP is running at 7% annualised – driven by strong export growth. Second the new-ish Fine Gael/ Labour government, elected in February, is pushing through the previous government’s austerity plans (yet maintaining popularity, perhaps more remarkably). Third, the attitude of the European authorities towards Ireland has changed since the European crisis intensified in July: Ireland is now presented as a beacon of successful austerity. Fourth, and perhaps related, Ireland has received a significant reduction in the interest rate it is paying on bailout funds, reducing the interest bill on government debt by 0.7% of GDP from next year.
As an Irishman living in London, I have good reason to be interested in the economic path of both Ireland and the UK. While Ireland as a small open country on the geographical edge of Europe has chosen to tie its economic future to the European mast, the UK has played a cautious wait and see policy, choosing to stay out of the Euro and to retain control over its monetary policy. As Greece teeters on the brink of collapse and speculation about the too-big-to-fail futures of Italy and Spain mounts, policy-makers in the UK are becoming prouder of their Euro-scepticism by the day.
In the short run, this rhetoric is understandable. Control over the levers of monetary policy has allowed the UK to maintain record low interest rates, to pursue quantitative easing and yet represent a relative (all things are relative) safe haven in global bond markets, keeping the UK’s borrowing costs to a minimum. The UK is currently able to borrow for 10 years at an average interest rate that is little more than 2%, while Italy has breached the critical 7% level in recent days.
Perhaps, however, in the long-run such levers create a false sense of security. While there is much talk of austerity and “biting” cuts, the reality is that between 2000-2010 had government annual expenditure stayed pace with inflation the budget would have risen from £343bn to around £450bn. That sober paced development might have seemed reasonable, yet Alistair Darling spent £669bn in 2009-10 and George Osborne will have spent £692bn in 2010-11. The notion of cuts is, in reality, closer to scratches than genuine flesh wounds. The bond markets appreciate the sense of austerity, but it is more conceptual than real.
Instead of being forced to truly address the key aspects of an inflated public sector, a decreasing level of international competitiveness, and an over-reliance on financial services, the government has been able to hide behind tools like low interest rates, quantitative easing and inflation which hurts savers but reduces the real value of the government debt. While news of economic hardship has been standard issue for the 24/7 media, the vast majority of people are not feeling much worse off than they did before the financial crisis started. Anyone with a floating rate mortgage certainly isn’t, with monthly payments at all time lows.
Jin Liqun, the head of China’s $400bn sovereign wealth fund recently accused Europe of “indolence” and “sloth”. Specifically he said: “If you look at the troubles which happened in European countries, this is purely because of accumulated troubles of the worn out welfare society.” That is a very generic analysis of Europe as a whole, and clearly each country is different. What is clear, however, is that as the massive populations of India and China develop, and their middle-classes grow, so too will their quest for knowledge and their skills base. If the world economy remains as globalized as it is currently, workers in high-cost, high-margin countries like Ireland or the UK will be under increasing pressure to prove their worth.
Failure to compete in this skills race will lead to further outsourcing, either to human capital elsewhere in the world or to investment in I.T. which doesn’t have a pension plan or healthcare costs associated with it. Recently the CIO of US asset manager Blackrock, Rick Rieder, said that he had calculated the number of productive hours that have been saved by software implementation nationwide over the past decade. It added up to the equivalent of 44 million jobs. “We have 148 million jobs in the country. Take 44 million jobs away from 148 million jobs and you can’t fix that. I think it’s a really big deal.”
Perhaps we will see a new period of Luddism in places like the US or UK, as would-be workers start smashing the production lines of Apple Computer. More likely is that labour is either going to have to become more flexible (accepting less or moving), or more skilled. Clearly something has to give.
Ireland, while not perfect by any means, has historically had a highly flexible workforce. It also now has developed a strong skills base, which goes some way to allowing it to compete on a global scale in specific industries. Almost 1,000 companies – including the likes of Google, eBay, Intel and Facebook have chosen Ireland as the hub of their European networks. Eight of the top ten global medical technology companies have a manufacturing base in Ireland. Companies investing in Ireland for the first time rose by 20% in 2010 and included the likes of Telefonica, Warner Chilcott, and LinkedIn.
Significant competiveness improvements are underpinning Ireland’s return to export-led growth – consumer prices have fallen, while competitor countries like the UK have remained on an upward path. Wages and other costs have adjusted to the change in labour market conditions, with public sector wages having been reduced by an average of nearly 15%.
Cuts in Ireland truly are biting; and will continue to bite, but the difference there is that there exists a growing sense that there is a route out of the mess. This route will be a “real” route, based around becoming more competitive in the skills race and not an “artificial” route, which sustains the self-indulgent status quo.