Quicker pace is needed on the road to recovery
PONDER the name Adam Posen – the Harvard-educated economist who will join the Bank of England's Monetary Policy Committee in September. His thinking will have a major impact on our lives, and he is warning that the world economy has a good chance of recovering, although it may be its last chance.
Posen, currently deputy director of the Peterson Institute in Washington, headed a stellar cast of economic analysts brought together in Dublin last Thursday for InterTrade Ireland's first annual economic forum.
"Things are not good, but we can take a deep breath and things will be ok," he said. He predicted that the current spate of stimulus packages would see the world economy revive – provided nothing goes seriously wrong.
"God forbid we have another war or natural disaster," Posen warned.
He seemed to hint at higher interest rates to counter the prospect of inflation, but his overall warning was that if the politicians make a series of serious policy mistakes, then their economies will go to the wall. The world will have not the financial resources to reflate and bounce back a second time.
Linda Yeuh, an Oxford economist, spelt out the global situation. Chinese and other Asian savings, she predicted, would eventually flow into western government stocks provided they could be convinced that the west wasn't going to inflate away the debts.
Put simply, Asian economies won't be willing to put their money into dollar, or sterling and euro, investments, if they feel that the value of western economies are going to be allowed to slide down too far.
The full interdependence of the world, where if one big economy hiccups the world can catch the equivalent of swine flu, was hammered home. There was general agreement that the American government's decision to let Lehman Brothers go bust, in the largest bankruptcy in US history last year, may have been the last straw which tipped us all into full scale crisis.
It was disappointing that no unionist politicians or senior advisers were at the forum, because there were obvious lessons for them. The most striking was that the ability of governments to take hard decisions over the next six to 12 months will play a big part in determining who comes out of the recession in best shape.
Mike Smyth, of the University of Ulster, pointed gently at the areas in which the Stormont administration is hiding its head or clinging to outdated policies in changed times. Freezing water rates seemed a good idea in the first flush of government when it appeared that government land could be sold into the booming property market to make up the budgetary shortfall. The same could be said for the decision to freeze regional rates, another crowd pleasing giveaway in our first budget.
Nowadays the cost is both high and unfunded, over 200 million a year for water charges and 55 million a year for regional rates.
All the signs are that a future Tory government will force Stormont to find that money from cuts in spending in other areas. For the next few years appeals to the Treasury are likely to be met by suggestions that we levy our own taxes, as Scotland is planning to do. We will also be offered more flexibility on how to spend our block grant, which currently brings an annual 8billion a year into our economy. "Yes, you may have 12.5 per cent corporation tax", we could be told, but we will have to meet the subsequent revenue shortfall from health, education or roads.
Southern investment and the export of financial sector jobs north, seen as our salvation as recently as a year ago, is not in prospect. Ireland is composed of two separate states, each with its own economy, which often compete. Yet they form a total market of six million people. That creates potential benefits in practical co-operation on areas such as health, education and economic planning. It is essential that they find the most practical and beneficial way to co-exist.
The tough choices which lie ahead must be taken both dispassionately and rapidly. The emphasis must be on what works. In Smyth's phrase, the "variable geometry" of the Good Friday and St Andrew's Agreements, where everyone has a veto and a private interpretation of what was agreed, has made the Executive slow and cumbersome.
Unfortunately slow, cumbersome decision-making is a luxury we can no longer afford. Decisions need to be made quickly, efficiently and correctly or we will miss out on the chance of recovery.
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Tuesday 14 February 2012
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