Trump card could see off Ireland’s run of good luck
Fortune helped the Irish economy in recent years but there are signs this happy spell may end soon, warns
TRUMP’S victory is the second political surprise of 2016 with negative consequences for Ireland, following the UK’s Brexit decision at the end of June. There could be further negative surprises from European electorates in 2017.
Unfortunately the response from the Irish Government has been a further postponement of budget balance in the measures announced on October 11, followed by an apparent willingness to borrow more to meet public service pay demands. If the economy slows down, the public finances could worsen again very quickly.
The recovery in the Irish economy over the past few years is due in large degree to a run of pure good luck. There have been three favourable influences, all the result of external developments rather than the fruits of domestic policy. The three are:
(i) lower energy costs — Ireland is a big importer of energy, so when oil and other energy prices fall, Ireland benefits a lot;
(ii) a lower value for the euro, until recently, against both sterling and the dollar. Ireland has substantial trade outside the Eurozone, so a weaker euro helps;
(iii) lower costs for governments as they re-borrow debt coming up for repayment — Ireland has heavy debt, so low interest rates flatter the budget numbers.
The pace of economic recovery in Ireland since the dark days of 2011 and 2012 has exceeded expectations. A recovery was always likely at some stage, but it has been faster than in most other developed countries. The lucky run could be coming to an end. Oil and other energy costs seem to have found a bottom. The euro has jumped since June against sterling. Interest rates on government borrowing have already risen a little and could head further north in 2017.
A risk-averse government, conscious of the over-borrowed state of the public finances, would have responded with a series of cautious budgets. Instead the minority administration has signalled its willingness to contemplate extra borrowing to finance budget give-aways and public service pay increases.
If oil prices stay low, the euro is weak and the Government can re-borrow at low cost, then growth could continue and everything might work out fine. But there are no guarantees and all three indicators could head in the wrong direction together.
Trump’s election makes things worse. One scenario is that a Trump administration will opt for budget and monetary policies which will weaken the dollar, either accidentally or on purpose. A weak dollar will erode further the competitiveness of Irish firms, already hit hard by the decline in sterling. Trump has campaigned on a protectionist platform and will hardly worry too much about dollar weakness, since it complements nicely a more aggressive trade policy.
The likelihood of a big cut in corporate taxes in the USA, perhaps to 15pc, has increased and it could happen soon. That would leave Ireland’s key industrial strategy weapon, the 12.5pc tax rate, under siege from both east and west. Britain’s new chancellor Philip Hammond has been hinting at a further cut in its 20pc rate, so Ireland’s relative attractions can hardly survive, even without further action from the EU where the departing British have been defenders of member state independence in tax policy.
The official mantra that ‘the multinationals are not here solely for the tax breaks’ is about to be tested and may be found wanting. Many US firms feel they must have operations somewhere in Europe and choose Ireland because it has the best tax deal, but Ireland, it is regularly asserted, also has plentiful availability of skilled labour, low non-wage costs and a pro-business political climate.
But international comparisons of educational attainment from the OECD tell a different story. Irish schools may not be all they are cracked up to be. Energy costs are high by European standards and look way out of line relative to the USA. Particularly in Dublin accommodation is expensive and is beginning to fuel pay demands. The tax take on middle and higher incomes is more onerous than in the UK and several other European countries.
Without corporation tax advantages, how many incoming US multinationals will choose Ireland? How many will seek European locations at all if the full array of Trump’s policy proposals gets to be implemented?
Trump’s election victory could have political consequences in Europe just as significant as the corporate tax changes and the shift to protectionism. The credibility of right-populist parties has been enhanced and the first test will be in France next April and May. The National Front’s Marine Le Pen is now priced shorter (7/4 against) than Donald Trump was last Monday.
This is important for one simple reason. Marine Le Pen is committed to France’s withdrawal from the euro, on one occasion promising to quit the common currency on her first day in office. It would be rather more complicated than that, but a Le Pen victory could trigger a re-run of the ‘will the euro survive’ speculation that so destabilised European sovereign bond markets in 2010 and again in 2012. An actual French departure would spell the end of the common currency project.
For good measure there are elections in Germany and the Netherlands next year and the Italian government could fall if it loses a referendum due three weeks from today. The calm of the past few years in Eurozone financial markets should fool nobody — the fundamental strains are still there, including over-borrowed governments, fragile banks and weak economies. The soothing balm of the ECB’s easy money medicine cannot be applied indefinitely.
The objection to a new public service pay round is not that the Government is unable, currently at any rate, to borrow the extra money. It is that now is not a smart time to be letting the budget deficit, which should already have been eliminated, start to run back up again.
The recovery is proceeding, although there are some early signs of a weakening in major headings of tax revenue. It could come to an early halt for reasons beyond the Government’s control, and at a time when the sovereign debt market could have turned against heavily indebted borrowers. This adverse scenario might never happen but every month that passes seems to shorten the odds.
There is no reason why public-service trade unions should not aspire to improvements in pay and conditions in the years ahead and the ambition is a natural consequence of the pay cuts imposed in response to the 2008 financial crash. Those cuts were applied in a manner which created grievances that were bound to resurface.
The trouble is the timing, which the unions are seeking to accelerate with Friday’s deadline-setting intervention from SIPTU.
A public service pay commission has been established tasked with a comprehensive fact-finding review. There is something a little suspect about the unseemly haste on the trade union side: it looks like a rush to agree an acrossthe-board pay round before this commission has reported.
The minority Government has every incentive to talk tough and capitulate. Better to threaten a general election unless the public-service unions agree to await the findings of the pay commission.
‘A Le Pen victory in France could trigger a re-run of speculation over the Euro’