Lightening the load of austerity

Ongoing austerity measures will only inevitably lead to even more of a downturn because raising taxes and capping government spending at a time of deep recession is never a good idea. What Ireland and Europe needs right now is more growth and less austerity. That was the forthright view of Dr Nouriel Roubini, the noted American economist, at Davos last week when commenting on the outlook for this country. Roubini has already called for Ireland's bank debt to be cut and has warned of the long-term social consequences for the country if it is forced to undergo a prolonged period of austerity. An ardent critic of the current austerity programme, he added that Ireland should not be used as a testing ground for the economic theories of others. Having been hit by the perfect storm of the banking collapse and bursting of the property bubble and then slammed by the eurozone crisis, an austerity programme was inevitable in an effort to try and stabilise the economy. While the Troika has expressed its satisfaction with the measures imposed after Ireland's massive bailout, on the ground, for the average Irish person, any gain is difficult to see. Unemployment is at its highest since the 1980s, public services have been slashed, house prices have fallen by over 50 per cent, families are being strangled by mortgage and other debt, up to 1,000 young Irish people are emigrating every week and there's widespread cynicism over whether or not the extremely unpalatable economic medicine being taken will actually get us out of this mess. And now the EU's Fiscal Compact Treaty will further cement economic austerity across the continent. Virtually everyone is agreed that jobs will only come if we can get growth, but if we keep deflating the economy, it is difficult to see where growth can come from. Until we can generate economic activity, unemployment will not come down. From the perspective of business, any recovery is being depressed because consumers are in no position to buy goods and services. An austerity programme piled on top of a recession equals a downward spiral. The type of programme the government needs to engage in is one that supports consumer confidence by getting people to spend money in the domestic economy. But it has limited options in this regard as it has assumed responsibility for the massive debts of the banks and has no money to play with. Back in early 2011, austerity did appear to be working because the economy was actually growing at that time. However, the international picture has now changed as a result of the eurozone crisis, in particular, and austerity alone is now not working. In this context, it was particularly sickening to see the government last week pay out €1.25 billion to senior, unsecured bondholders in the former Anglo Irish Bank (now the Irish Bank Resolution Corporation - IBRC). The repayment of the large bond for a failed bank which played a central part in the self-inflicted disaster which befell the banking sector in this country has caused deep anger among ordinary citizens. It was also a galling decision for the government, which has said failure to repay the bond would have damaged current attempts to save a larger sum in negotiations with the European Central Bank (ECB) and EU partners over promissory notes. Ireland is now looking at how it can reduce the size of the current bill payable because of promissory notes at the IBRC and Irish Nationwide Building Society. A plan is to be published shortly which will provide details of how to find a "less expensive solution" to the current payment scheme. Securing an agreement to restructure or refinance the promissory notes would reduce the country's exchequer borrowing requirement by over €3 billion every year for the next decade. Such an amount won't wipe out the country's massive public debt but it would have a positive impact on the country's balance sheet and possibly improve market sentiment towards Ireland further. The current promissory note arrangement is an expensive arrangement for the Irish taxpayer, and any re-engineering of the system to find a less expensive solution would certainly be welcome. The State's desire to defer €31 billion of IBRC debt for up to 10 years has not been been shot down in Brussels, and this must give some hope that a new arrangement, whereby Ireland would pay back the money over a longer period of time, could lighten the debt burden even further. Some may see it as simply kicking the can further down the road, but any measures that can be taken to cut the costs of the bank bailout for the present should be grabbed with both hands.