Stephen King in Irish Examiner gets it spot on.

FF dissidents should realise there is no future in economic decadence

By Stephen King

Wednesday, July 07, 2010

AS Charlie Haughey might have put it, I think there is some dissatisfaction with the (FF) leadership at the moment. Forty years ago, in the wake of the Arms Trial, the issue was policy; today, the grumblers claim their differences with the Taoiseach are presentational.

The suspicion must be that is just a code. Soldiers of Destiny are permitted presentational differences but, as the dwindling size of the parliamentary party demonstrates, policy differences are another matter.

Haughey overestimated the degree of unhappiness in 1970 and Lynch served as a very successful leader for another nine years. By the time you read this, following last night’s parliamentary party meeting, we will be better able to gauge Brian Cowen’s shelf life.

As it happens, between Cowen and Brian Lenihan, I have no strong view. But there is a wider and more important issue than personality. Essentially, the hard core dissidents have been spooked by the opinion polls. In a sense, who could blame them? FF has never been so consistently low. But why opinion polls are treated like holy writ in Ireland is beyond me. If there were going to be a general election tomorrow, I could understand.

When polling day does come, any number of issues and variables will be at play, as always. And, as always, too many of them will be essentially localist in nature.

But Ireland, like the rest of Europe, does have one big choice. It was once depicted unhelpfully as Boston or Berlin. Considering the choice facing Ireland currently, though, perhaps the choice between Athens, Georgia, and Athens, Greece, would be a better idiom.

Only one good thing came out of Athens, Georgia – the band REM. In every other way, it is an unremarkable sort of an American place, a bit dull perhaps.

Athens, Greece, on the other hand was the site of one of the world’s great civilisations. But today it rests on its laurels. And, boy, do they know how to rest.

John Maynard Keynes used to worry about resting: not that people were doing too much of it, but how they would fill all that time when they were not working. The Greeks – and the Italians and the Spanish and the Portuguese – don’t have a problem in this regard. They live the good life. Like in the rest of Europe, the struggle for subsistence seems a distant memory. Free trade has made all of us in the developed world richer than ever, many times more so than our grandparents.

What some European countries haven’t quite worked out, though, is how to pay for all this leisure. In other words, what happens when the economic problem – providing enough food and shelter – has been solved? Well, we become decadent, it seems. Prosperity generates sloth. This isn’t a problem in the medium-term. Governments can mask it – but not forever. The buck does eventually stop: you can’t live well as a nation if you don’t work.

The Greeks are at one end of the scale, of course, but Europeans generally are far less productive than their American counterparts. It’s not that we are inefficient – which was the case a generation ago. Rather, we simply don’t work long hours or for many years and we take too many holidays.
That’s essentially why European prosperity lags behind that of the US.

Partly, it’s a taxation issue. Taxation rates on the next euro of income have became so high in parts of Europe that people are discouraged from working – especially when early retirement has been made so enticing.

That is the legitimate social choice many nations in Europe have made: to pour money into a welfare state that provides lavish support to the elderly (and not so elderly), perennial students and, let’s be honest, the workshy.
In other words, a growing, sleeping army of non-workers have voted to make the more industrious support them in their leisure activities.

But Ireland is not wealthy enough to retire; Greece certainly isn’t.

It’s no one’s fault. Nations, like people, started to believe they were richer than they really were. Europe supported its welfare state with borrowed money. There’s no problem with that – so long as national debts are modest and loans can be serviced by diligent workers.

But Greece was a middle-income country behaving as if it were a rich one.
The secret was borrowed money. At the end of 2009, the country had a public debt equivalent to 114% of its GDP. Yet the Greeks lived the high life with an official retirement age of just 58.

On the brink of not being able to pay its debts earlier this year, as we all know, it had to be bailed out.

The bailout encouraged a false sense of security, patching things back together on the same unsound basis that existed before the financial panic hit. If properly understood, the disruptions in Greece and the eurozone should have served as a wake-up call, reminding us that the global economy is far from healthy or stable.

But the stabilisation package did nothing of the sort, especially with bond traders threatening to target other heavily indebted countries such as Spain and Portugal.

And so in May, European leaders tried again. This time they were more ambitious, coming up with a €750bn bailout plan. In addition, the European Central Bank announced it would buy government bonds. The rescue plan was a big step, an attempt to shock and awe the markets and get ahead of the crisis for once.

The aim was to save banks holding southern European gilts and stop the Greek crisis from spreading further. It had an immediate calming effect on markets.

But analysts soon realised that this did not solve the underlying problem of high, unsustainable government debt. The long-run problem of high wages and generous retirement and medical benefits that can no longer be afforded was exposed pitilessly by the recession.

THE problems of industry then expressed themselves as problems of finance.
Many might think that state fiscal problems revealed in Greece and elsewhere are simply due to over-borrowing or excessive spending. But underneath fiscal issues is, again, the issue of economic growth.

It is now obvious that annual growth of 1% – typical in much of Europe – just won’t do, especially in a period of austerity.

What is needed is a growth agenda. Lower marginal income tax rates, fewer regulatory hurdles for entrepreneurs and an end to the protection of over-manned ‘national champions’.

Britain has now finally declared that the financial emperor has no clothes.
It refuses to keep up the pretence that all problems can be solved by fresh stimulus packages, each entailing additional government debt. The new British government has opted instead for structural adjustment. This austerity will cost jobs and income, but will eventually reduce government debt and increase domestic savings.

And that’s the fundamental choice facing Ireland: populism and cushioning against the harsh economic realities which will eventually lead to a Greek situation or a strategy to cut spending, reduce debt and, eventually, cut taxes. Charlie Haughey’s 1987 government did the latter and helped lay the foundations for economic growth throughout the 1990s.

History can repeat itself. The leadership of FF, therefore, is a sideshow.
The dissenters should stay the policy course.

This story appeared in the printed version of the Irish Examiner Wednesday, July 07, 2010