EUR4.8bn austerity plans, promises to bring the deficit down to 8.7% in 2010, moving on with an already much delayed bond issue that will only buy more time, strikes and industrial unrest – the story of the Greek economy today. Is Greece any further away from the possibility of defaulting than it was a week or so ago – probably not! Concerned though it surely is the EU appears to be playing the parlous economic situation in Greece in a manner that is hardly helpful even if the key to sorting out the immediate problem was most likely always going to be Germany as opposed to the EU as a whole. But to all intents and purposes Germany has effectively said no telling Greece to “sell a few of its islands and maybe sell the Acropolis too”. What is certain now with industrial unrest rife across Greece is that international confidence that Greek Prime Minister George Papandreou can sort this situation out is now minimal at best. And if that is so and neither the EU or ECB is prepared to fly over the hill to the rescue that leaves but one option – the one that I called for right at the very beginning of this traumatic and dangerous situation that, far from being closer to being sorted, is escalating out of control. Call in the IMF.
Even so and even if the austerity plan succeeds in going a fraction of the way to bringing down the budget deficit the Greek government will need to do considerably more than it currently plans. The latest austerity plan is fine as far as it goes but the bottom line is that it represents an answer to about 10% of the overall problem. In any case one swallow hardly makes a summer and with substantial additional debt maturity occurring during the second quarter of this year we can be sure that the parlous state of the Greek economy will dominate the headlines for months let alone all that talk about possible default and yields. Greece is not alone amongst EU nations troubled with a combination of rising budget deficits and large scale debt of course but it is by far the most serious problem on the books of the EU right now. Spain is hanging on by a mere thread and Portugal is frankly little better. And whilst the Italian deficit is considerable below that of Greece, Spain and that of Britain one notes that Italy has substantially higher levels of official borrowings than most – public debt here is standing at around 116% of GDP. At the heart of the Greek financial and economic problem is for the nation to re-learn how to live within its means, how to cut public or raise government income. It begs the question can another EU and Euro member nation – Ireland – that appears to have quickly got to grips with a similar problem provide lessons from which the Greek government can learn.
Having escaped recession from as long ago as 1982 until 2008 but having outperformed many EU member states over the fourteen years between 1994 and 2007 it seems that by the end of 2010 following three years of economic decline Ireland could now be standing at a particularly interesting crossroads. Why? Well on one hand it is right to say that the economy still looks pretty miserable following a near 8% GDP decline last year that had itself followed the 3% decline in 2008. Indeed, although the decline in GDP is targeted to slow markedly in 2010 most still expect the economy to end the year with a further 2.5% drop in GDP. But while one doesn’t need to go that deep into Irish economy too to find bad news such as public finances in seeming disarray as the Government allowed the budget deficit to hot up to no less than 11.7% of GDP last year there is ample reason to believe that the Irish government may have got a lot of things in hand. For a start the Irish government has been extremely quick off the mark in an attempt to turn the weak economic situation around. For a start unlike some other EU governments that may find it easy to target budget deficit reductions without putting significant meat on the bones of how this might be achieved the Irish government has already begun to attack the problem with a combination of severe fiscal tightening, public spending cuts including public sector pay cuts together with cuts in social welfare spending and even a pension levy.
For all the current woes it is probably fair to say that Ireland today remains a quite well off nation and one that has hugely benefited from EU and Euro membership. Ireland is of course a trading nation exposed to significant foreign trade. Thankfully the level of net public sector debt is thankfully low which at least allowed Ireland to face up to its problems without external interference. And as the Irish well know Dublin wasn’t built in a day and neither could a turn round from economic weakness and GDP decline to one of growth. The point is though that process has at least started and the plan that was put forward by the Irish government was it seems not only deemed acceptable and necessary politically it appears to have also been accepted by the electorate. No real strikes, industrial or social problems other than those that one might have expected appear to have emerged as yet. And if that is right it shows that if voters or the population at large is behind the government moving mountains can be possible.
OK, so a year from now I might well need to eat my words and the whole recovery rebuilding process in Ireland might just have fallen on its face. Somehow I think not though even if by then signs of GDP recovery will still likely be slim and the government budget deficit may still not be looking that much better. Hopefully though the underlying problem will by then be beginning to look far less marked and consumer confidence for the outlook should by then have started to improve. House prices should also have bottomed out and mat well be back on the rise assuming a basis that pent up demand still exists in major cities such as Dublin. High levels of housing investment over the past 15 years have of course been a big cause of the current Irish economic problems. Indeed, the high level of housing sector exposure in terms of overall impact on GDP in recent years (this appeared to peak at around 14% in 2005 before falling back to below 4% last year together with the almost corresponding reversal of house prices from a peak 16% inflation seen in early 2006 to interestingly similar 16% deflation seen in prices achieved last year are a big factor in the current woes.
So too is the impact this and other factors has had on the Irish banking system as a whole that led to massive bad debt levels and the subsequent need to bail out several banks
In response to the crisis the Irish government focussed on 5% fiscal tightening last year, a 7.5% pension levy on the public sector, other income based levy’s together with sizable spending cuts across the board including social and welfare costs, public sector pay etc with an aim to reduce the state budget deficit to 3% by 2014. Will it work? Most probably it will – indeed there are ample signs that it already is if manufacturing, production, confidence and spending plus other factors are taken into account. The Dublin government is looking for the economy to actually stabilise this year and whilst that will not mean the problem of banks will go away we believe that if unemployment has now peaked more positive news should occur towards the end of the year.
While Irelands economic problems are still deep and worrying we take the view that by acting with reasonable speed and by attacking the problem with a combination of deep spending cuts and raised taxation the Irish government is to be commended for what it has done. Sure the proof of the pudding is always in the eating and there remains much work to do. The high value of the Euro is also a big problem in terms of competitiveness for Irish based companies although that hasn’t appeared to halt a belief that exports will rise in 2010. Surely the Irish governments actions could somehow be replicated elsewhere – if not in Greece surely in the UK!
