Careful what you wish for in battle over FDI

Part of Ireland’s prosperity rests on its attractiveness as a foreign direct investment hub. Ireland’s big idea since the 1950s has been to get other people’s money here and turn that money into good jobs for Irish people. The two vehicles for the money-getting (at which we are honestly world-class) are the IDA and our multinational-friendly tax and regulation system.

It’s not a hard sell. We save companies a fortune while giving them access to one of the world’s largest markets and giving their executives a nice place to live.

Our competitor countries complain constantly that our success (which implies their failure) is because of our lax attitude to the activities of some of the multinationals located here. While this is changing rapidly, the perception remains, and our colleagues in Europe do seem somewhat bitter about it.

One of Enda Kenny’s first foreign engagements as Taoiseach saw him get stuck into French president Nicolas Sarkozy defending Ireland’s 12.5 per cent corporation tax rate. When they came, the troika wanted the totem of Irish industrial policy taken away. Kenny was having none of it.

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Ireland must focus on mitigating the external risks to our economy

I’m writing this from Groningen, a beautiful city in the Netherlands with one of the world’s oldest universities. Groningen’s buildings still bear the scars of World War II, and it is a place where learning and culture combine easily.

The contrast between what people are saying on the ground in Groningen and what you can read in the international press is, frankly, astounding. For the international press, the Dutch elections are the latest in a line of anti-establishment dominoes started by last June’s Brexit result.

The dominoes next to fall are France and Germany, and then the European Union is toast. The international election coverage hinges on the personality of far-right hair-enthusiast Geert Wilders. It’s easy to see why Wilders is news. He is anti-migrant, anti-Islam and Eurosceptic. He is more Trump than Trump and he sells papers and gets clicks.

Wilders wants to leave the European Union, bar asylum-seekers, cease funding development aid, increase defence spending, ban the Koran and Islamic schools and, of course, decrease income taxes. Stop me if you’ve heard some of this before.

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How Ireland can survive the flight from Britain’s shadow

The Taoiseach needs to give his speech writer a high five, or maybe a fist bump. Because in the last few weeks, we have had two dingers from Enda Kenny.

The first was his Brexit speech, which was understandably overshadowed by the McCabe controversy, but is well worth reading, because Brexit will affect every person on this island, North and South. In that speech, the Taoiseach rightly said: “History has rarely been idle in Ireland.”

In another speech, recognising the distinct ethnic status of the Traveller community, Kenny ended with: “May all the people of our nation live in the shelter and never in the shadow of each other.”

This second phrase, perhaps deliberately, echoes a banquet speech given by President Michael D Higgins on his historic state visit to Britain. There the President said: “Ireland and Britain live in both the shadow and in the shelter of one another, and so it has been since the dawn of history.”

Higgins was himself quoting from an old Irish proverb: “Is ar scáth a chéile a mhaireann na daoine.” This translates roughly as: “It is in each other’s shadow that we flourish.”

Ireland in the shadow and the shelter of Britain. Travellers in the shadow and the shelter of the settled people.

And history never idle. Remarkable parallels.

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Ireland is the Lionel Messi of getting other people’s money. Trump might end that.

The stock market is reaching new highs. People are talking about inflation again. Goldman Sachs has never had it so good. Corporate mergers and takeovers are happening. Everyone is looking to US president Donald Trump and his policies as the engine of world economic growth. Despite the volatility he personally injects, things seem to be going well.

Though you’d never know it listening to Trump, unemployment is at a historic low, as is crime, bankruptcies and debt delinquencies. Four US stock markets, the Nasdaq Composite, the Dow Jones Industrial Average, the S&P 500 and the Russell 2000 of small capitalisation stocks each closed at a record level for four consecutive days last week. Last time that happened was in 1995.

The bet is that Trump - a lying, racist, misogynist who has never held a public policy job before - will deliver on his campaign promises to cut taxes for everyone, spend borrowed money on infrastructure, slash regulations across the board and spur economic growth. Despite his own lack of credibility in delivering any of these barely sketched-out policies, market participants are gambling that the smart people behind Trump can craft a policy package to get through the Republican Congress in time for the mid-term elections, which may well see the Congress swing Democratic, and thus block Trump as it blocked former president Barack Obama. So right now, it’s risk-on for equities and, crudely, stock markets go boom. If Trump’s team fulfils his campaign promises, the result will be large windfalls for the corporate sector, and the corporate classes in the US. It is telling that Goldman Sachs has never traded at higher levels, a reflection that the swamp-draining is not going well.

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'Tiny open economies like Ireland are more vulnerable than most to negative technology shocks'

Last week, Hewlett Packard announced it was removing 500 jobs from one of its Irish facilities. The move reminded many of Dell’s decision to move its production facility from Limerick to Poland in 2009, and threw Ireland’s relationship with the many multinationals who use us as an export hub to the European Union into sharp relief.

Multinationals are good for the Irish economy. They bring many benefits, not the least of which are hundreds of thousands of high-value jobs and billions in tax revenue for the state. They promote good management practices and provide at least some knowledge spillovers to domestic firms.

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‘Trump’s not draining the swamp. He’s filling it up, and stoking another banking crisis'

Like many people, I wake up every morning and ask myself: what has Donald Trump done overnight? It’s hard to keep up with everything he’s done.

Everyone is asking: what does Trump mean for me, my family and my business? Should I buy a house if I work for a multinational? Should I travel to the US if I’ve read an anti-Trump tweet? Should I invest if he pulls up tariffs and increases the price my customers will pay for my goods? Should I buy bonds or equities for my retirement? What will the economic consequences of Trump be?

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US economic model not best for Irish workers

Here’s where we are at the end of the first month of 2017. Theresa May is in London, trying to take Britain out of the European Union. Donald Trump is in Washington DC, trying to build walls and erect tariffs. Angela Merkel is in Berlin, veering to the right to stay in power. In France, Marine Le Pen, a hard-right candidate, is likely to clash with two other right-wing candidates to see who can be president of France.

At the annual mutual love-in of Davos, the Chinese premier promised to lead the world in terms of openness. This is code for: lead the world by stepping into the space left behind by a retreating US. Global power is pivoting to Asia. South American economies are sliding into their familiar commodity-based cycles of debt-induced recession, while the Middle East tears itself apart in two wars — the one in Syria, and the one in Yemen. You’re not even safe in the Arctic, because that is melting at an unprecedented rate, paying no heed to what the climate denier in the White House says.

(I am available for children’s parties, by the way.)

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Brexit has thrown up the question that we, as a group of peoples, must answer

Like a train coming toward us through thick fog, the shape of Britain’s exit from the European Union is becoming clearer. The impact is, as yet, uncertain. Whatever happens, the chances are it isn’t going to be good. The worst of all worlds for Ireland is a situation where Britain imposes a hard Brexit.

A hard Brexit means tariffs and levies on the goods and services our businesses sell. The heart of the European Union is its customs union – the definition of a customs union is a common external tariff we have to share as part of the EU.

A hard Brexit means potential quotas on the movement of our workers, and even caps on the movement of our capital. A hard Brexit means throwing our relationship with Northern Ireland into sharp relief.

Where exactly do we draw the line between North and South?

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Ireland’s Brexit blues

Time to adapt or die in the post-Brexit world order

Ireland’s response to Brexit will define our economic landscape for decades to come. Our much-maligned civil servants gave Ireland the best possible start the day after the referendum result, when Taoiseach Enda Kenny, at his most statesmanlike, reassured his people that his government had this under control and had a plan for Brexit.

Kenny even showed us the plan, and it looked like a good plan to me. Our civil servants get a lot of stick. It’s only right we praise them when they do a good job. Again, in fairness to them, Britain had not settled on its mode of exit before last week, but the range of possible negotiating endpoints was becoming obvious some weeks ago.

Despite such a good start, Ireland’s policy makers have yet to articulate their approach to a post-Brexit world beyond grabbing jobs from the City of London.

Those jobs don’t seem to be coming our way, though. That may be no bad thing.

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Why can't we fix healthcare?

There are no beds. The sick and the dying are left outside while stressed-out healthcare professionals work round the clock to help them. Elective procedures are cancelled, previously closed beds are reopened. It is a surprise. The ensuing media storm assures us the situation is unacceptable. The doctors’ representative, the nurses’ representative, the union representative, the patients’ representative, the minister and the technocrats who run the system are all over the airwaves, because the situation is unacceptable. The solution is more money. Much more money. Money and time. Because change will take place, but only over a number of years. And change must happen. Because this is unacceptable

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Economic Outlook 2017: The start of a new age of anxiety

On the advent of ‘Global Trumpism’, Stephen Kinsella, Ireland’s economic commentator of the year, reflects on its potential to destabilise the Irish economy.

In 1948, the poet WH Auden wrote The Age of Anxiety. Auden was talking about a world after the second world war in which the old certainties he was raised with had been blown away. By 1948, Britain had ceased to be a world power, the US was ascendant, and much of Europe was still in ashes. Auden was also talking about himself. Then aged 37, he was worried his best years were behind him, and did not look forward to old age.

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Strange days indeed

We’re living through very strange times. Times when it’s a good thing that only 46 per cent of the Austrian electorate voted for a neo-Nazi to become their president. Thankfully he lost, but only marginally.

Times when fairly sensible constitutional reforms to improve the stability of Italy’s governance system get rejected and immediately throw the Italian banking system, with its €360 billion-worth of non-performing loans, into crisis.

Times when the European Central Bank (ECB) boss Mario Draghi’s decision to only buy the pittance of €60 billion of bonds per month instead of €80 billion in a ‘trimming’ exercise causes the markets to have a conniption.

Times when the 2017 French presidential election will be framed as a contest between Marine Le Pen of the Front Nationale, a hard-right ultra nationalist candidate, and François Fillon, a hard-right neoconservative candidate. Whoever the Socialists choose will be decimated, thanks to François Hollande’s tenure in the Elysée Palace.

Times when Angela Merkel, who allowed more than one million refugees into Germany in under two years to save their lives, needs to kowtow to interests in her own party to stay in power, and starts ranting about appropriate burka policies in supposedly liberal Germany.

Times when a racist, misogynist, lying, nativist demagogue like US president-elect Donald Trump can appoint climate change deniers to the US Environmental Protection Agency and union-busting burger magnates to the Department of Labor, even as the unemployment rate in the US falls to its lowest level since 2006.

Trump will preside over the first US economy since World War II where the average person born in the 1980s has less than a 50 per cent chance of earning the same or more as their parents. Think about that and apply it to your own situation.

Do you expect to earn more than your parents? For most people in Ireland, I think the answer would still be yes. What would it mean for your life, and your expectations for your children, if you didn’t expect to earn more than your parents did?

The ECB last week forecast global economic activity to continue to strengthen, although remaining below its pre-crisis pace. It’s important to stress just how sluggish the international economy is. A recent study on global growth by the ECB found the growth of imports since 2012 has been half of what it was between 1980 and 2008.

We are living through the longest period of below-trend growth in almost half a century, for both advanced and developing economies. One reason for this below-trend growth is the sputtering Chinese economy, which since the 1990s was hoovering up imports of every commodity and service imaginable as it grew.

There’s a problem: prices in China have fallen every year since 2012. No boom here. As China switches slowly from investment-led growth to consumption-led growth, because it has a middle class now, commodity exporters outside China have seen demand for their stuff hit the floor.

Mario Draghi, president of the European Central Bank, addresses the media in Frankfurt last week Picture: Getty

This collapse in demand has geopolitical implications. Countries like Venezuela and Nigeria are deeply dependent on just a few commodities to export. Without buoyant demand for oil, gas, copper and coal, they get mired in recessions and depressions. These recessions have real human consequences, as we in Ireland know.

Venezuela, for example, is currently going through a crisis which makes Ireland’s troika bailout look like a chat over coffee slices in the Shelbourne Hotel. People are unable to find work, food, or shelter, the government is in crisis, and inflation is out of control. Consumer prices in the country have increased 180 per cent year-on-year, and piracy has returned as a real problem.

Another reason for the collapse of global trade is the European Union. Since 2008, austerity and poor crisis management meant that demand for goods and services has been much lower than it should have been. If demand is low, then employment will be low. As we know, long spells of unemployment cause social, economic, and political problems.

Domestic demand in the eurozone was around 1 per cent lower in the second quarter of 2016 than it had been in the first quarter of 2008. The US economy from 2008 to 2016 managed to increase demand by about 23 per cent – which explains why president-elect Donald Trump inherits an economy with low unemployment.

In the eurozone from 2008 to 2016 we managed to increase demand by just 7 per cent. We should have been able to do better. But we didn’t, and the result is mass unemployment and mass youth unemployment in Greece (50 per cent), Spain (48 per cent), and Italy (40 per cent).

Which brings me back to Italy, and its shuddering banking system. Banks are basically balance sheet management systems. We should remember that for a bank, its assets, the things it owns, are its loans and the bonds and cash it holds. The bank’s liabilities, the things it owes, are its deposits and the bonds it has issued to balance the books. A very large bank’s balance sheet is highly sensitive to the economy it operates in.

Say the bank has one mortgage and one deposit. If the price of the house linked to the mortgage falls, the value of the bank’s balance sheet goes down. Even worse, if the person paying the mortgage loses their job and has to default, then the bank has to eat into its equity — the difference between its assets and its liabilities — to cover the losses. If it can’t do that, the bank will need a bailout from the taxpayer or to be wound up.

The Italian banks are stuffed full of non-performing loans. Estimates range from €300 billion to €400 billion.

The era of globalisation we have enjoyed since the 1970s may well be ending

The largest immediate problem is the third-largest bank, Monte dei Paschi di Siena (MDS). It requires €5 billion in recapitalisation funds from the private sector and probably some funds from the European Stability Mechanism, sooner rather than later.

Whatever problems MDS has internally, it shares the same underlying macroeconomic problem with all of Italy’s banks. Without sustained economic growth, loans will continue to either default or scrape by. You can’t heal the balance sheets of a banking system unless the economy is getting stronger. Which it won’t do without significant reforms. The best chance for those reforms went out the window along with Matteo Renzi’s political career.

Italy’s banks are too big to fail, for a few reasons. Size-wise, the banks are about one fifth of Italy’s GDP. They are highly connected, so letting one get into trouble damages other, potentially healthy banks. The ‘bondholders’ of the banks aren’t the typical large international institutional investor. They are ordinary Italian citizens who now own something like €200 billion-worth of bank bonds. Defaulting on them would be like the Irish government defaulting on Prize Bonds.

The likelihood is that European cash will be found to help the injured banks limp along, but this just delays the inevitable. Meanwhile, other tensions increase.

It is fascinating to note that Renzi is the 41st prime minister of Italy since 1946, and the fifth since 2008.

Italy is the only eurozone country whose GDP has not recovered after the crisis. Youth unemployment and Europe’s migration crisis have hit it hard. Yet the amount of net public investment in its crumbling infrastructure has been either zero or slightly negative for decades.

It is not surprising, then, that the world values survey finds the share of the population who “believe it is a good thing to have a strong leader without elections or parliament” is rising.

Faced with either institutional paralysis and democratically elected politicians simply ‘ruling a void’, to use the political scientist Peter Mair’s notable phrase, the average person says no thanks.

Either people disengage politically, or when asked, people use their vote to bring in a strongman character who makes unobtainable populist promises to take power, which, results in corrupting the system further. The model here is not Donald Trump but Silvio Berlusconi, the architect of many of Italy’s current woes.

The era of globalisation we have enjoyed since the 1970s may well be coming to an end. As we’ve talked about in this column many times, economic policy failure always ends up becoming a political problem in the end. So the failure to cope adequately with the global financial crisis of 2008 created many of the problems we have today. Ireland is not insulated from, or immune to, these problems, and a return to re-nationalisation driven by these large forces would hurt us all the more.

Strange times indeed.

Evincing the emotion of housing

Home ownership is the most emotive policy issue in the state. Not water charges, not public sector pay, not Travellers’ rights, not reproductive rights, not even the status of Ireland’s so-called military neutrality. Nothing evinces emotion like housing.

The tip of the spear is, of course, homelessness. We are one of the richest countries on planet Earth, and we have thousands of families living in hotel rooms, hostels and on the streets while vulture funds buy properties and jack up rents only to pay no tax on their gains.

We have a generation of young people for whom owning a house is not a dream but a fantasy. We have a banking system still stuffed with non-performing loans nearly nine years after those loans stopped performing.

We have a minority government incapable of action, hamstrung by domestic politics and fiscal and monetary rules.

None of what I’ve written above is wrong. It’s just not very helpful. The words you’ve just read is not analysis so much as emotive language, aimed at identifying a problem and sympathising with sufferers of that problem without trying to fix it. It’s virtue-signalling, which is just whinging, basically, and it’s what much of the commentariat has been doing since the Central Bank introduced its rules on loan to income and loan to value for homeowners in February 2015.

Blamed for doing nothing before the crisis, the Central Bank was blamed for doing something to avoid the next one. Regulators shouldn’t be popular. That’s why they aren’t elected, they are independent, and they get paid lots of money.

I was a fan of the prudential rules when they were introduced because I listened to the entire banking inquiry online. As each banker came in to be roasted (consequence-free, of course), it was clear they hadn’t a clue of the damage they were doing while they handed out the loans to grateful (and greedy) homeowners.

Unfettered access to credit via a loan to value ratio that was much, much too high was the true cause of the housing bubble from 2002 to 2007. It is the Central Bank’s job to safeguard the stability of the entire financial system. It didn’t do that before 2007. We know this because there was a peak-to-trough fall of over 50 per cent in residential property between 2007 and 2012.

A build-up of credit on the household sector’s balance sheet made this sector much less resilient to the 2007 downturn.

Flawless logic of the rules

The logic of the rules on households and banks to restrict the supply of credit is flawless. Requiring those borrowing a mortgage to put up a minimum percentage as a deposit and then capping the amount they can borrow at 3.5 times their own incomes means the borrower is much more resilient to any change in the value of their house.

This is exactly what the rules are there to do, and new research by John Joyce and Fergal McCann shows that newer mortgages given out since 2009 are much more resilient. The probability of these homes defaulting is much, much less than the homes borrowed for in 2005 and 2006 with 100 per cent (and more) mortgages, but this is probably because banks had reverted to their historical role of gatekeepers of credit rather than being dispensing machines for it, a role they had assumed from 2002 to 2007.

Good economics tells us why. The economist Hyman Minsky described a financial cycle where banks, stung badly in a previous crisis, are extremely reticent to lend. Only the best projects get funded. So for example only two senior civil servants married for 20 years with no other debts get a mortgage. These people are safe as houses (pun intended). Then as the economy recovers, more and more loans repay, and so banks make credit more freely available. The process moves from careful extension of credit to euphoria and collapse with remarkable regularity.

It is clear we are at the start of yet another cycle of credit extension, over extension, and property mania. The end is a collapse. The Central Bank is doing its job in guarding against the Minsky cycle, but has bowed to pressure to change its rules.

Rental sector is the problem

The problem is the damaged and poorly regulated rental sector, which is unable to accommodate all these people, stuffed full of accidental landlords who need rents to go up to heal their own damaged balance sheets. Fergal McCann’s research on Irish rents shows that they increase where the population is higher, unemployment rates lower, house prices higher, and rental supply lower. Dublin, in other words. The locus of the problem is the supply of available rental accommodation in Dublin.

The residential property price index for Dublin was almost 9 per cent above the rest of the country in September 2016. Since mid-2013, all residential property prices have been rising, but Dublin has done all the running. Many people think that apartment prices are rising faster than house prices, but this isn’t the case. The recovery in Dublin house prices is the real story since 2013.

The loan to income rule is there to stop banks over-extending themselves across the household sector. It is a crude measure which penalises people who have costs other than buying the house: for example, those who have to commute long distances to and from work. Banks can only lend 3.5 times the value of the house, capping the exposure they previously had to households with relatively low incomes who, once made unemployed, were unable to service any portion of the pre-crisis debts they were allowed to run up.

The loan to income rule isn’t changing. If any rule was to change, this one would make the most sense in my view. It is in the loan to value area that everything went really wrong before 2007. Research by Gerard Kennedy, Eoin O’Brien and Maria Woods showed using the ratio of prices-to-income and the ratio of prices-to-rent that house prices fell below their long-run values during the crisis - meaning they were undervalued - and today they are slightly above these long-run averages, meaning they are slightly overvalued.

The loan to value rule is there to make sure households have an equity buffer. Today, if you are a first-time buyer, you can only borrow 90 per cent of the value of the property up to €220,000 and 8o per cent for the remaining balance. In 2017, you’ll be able to borrow 90 per cent of the entire value. Combined with the mortgage relief and tax credits introduced in Budget 2017, and the fact that banks can make ‘proportionate allowances’, the effective deposit will be reduced from slightly under 20 per cent to 5 per cent.

A concrete example: first-time buyers purchasing a property worth €400,000 need €58,000 today. By January 2017, the same buyer will need a deposit of €40,000, and they can avail of tax rebates of €20,000. The effective deposit has gone from €58,000 to €20,000.

It is very difficult to see how this will not result in price increases, especially where the supply, reasonably, of housing is fixed.

With credit now more easily available, with a much smaller equity buffer, households will also be that bit less resilient to downturns.

It is very interesting to see where the unpopularity of the rules came from. Of course, the populists hated them. Of course, the tabloids hated them. Stories of young families struggling to raise a large deposit while paying rising rents shot through the media. Most interestingly, the strongest critics were the mandarins of the Department of Finance, which lobbied intensively behind the scenes to get the loan to value and loan to income rules relaxed. In its August 16 submission to the Central Bank, the department argued for exactly the changes the Central Bank has brought forward.

Anyone who bought in 2016 might feel like a sucker today, but they shouldn’t. They are much more resilient to any downturn. They owe less, and the Central Bank’s changes mean they can expect to see rises in the price of their property, especially if they are in Dublin. The rental market may see an easing of price increases as first time buyers who now need a far smaller deposit can exit the rent market in favour of ‘getting on the ladder’. Those who are looking today are in a better position, but their expectations have been changed, and they don’t know what risks exactly the Central Bank thinks might be worth changing the rules again.

Say we see a huge spike in house price increases in Dublin as first-time buyers run out in January and bid up the price of every three-bed semi inside the M50. Will the Central Bank act? How and when, and in what measure? People don’t know. The Central Bank is stuffed with smart people whose job it is to keep tabs on price movements, but how it communicates its future policy moves matters a lot when people are considering what will likely be the largest purchase of their lives.

The role of the Central Bank is to dispassionately and independently analyse and regulate an important and highly emotive asset class. It has tweaked the rules once. The question is now: when will the rules change again? Will Minsky be proven right, once again?

Will robots eat your job? @ryanavent's snapshot of a global economy in flux

Review of 'The Wealth of Humans', By Ryan Avent, Penguin, €19

Will robots eat your job? Will your kids have higher standards of living than you, in an age where there are too many workers and too much savings, when technological change makes the jobs many people do obsolete? When their citizens see their jobs disappearing due to international competition or technological change, how will politicians react? Will we see an increase in globalisation or a series of Brexits to re-nationalise the global economy?

Ryan Avent’s new book The Wealth of Humans takes us through the arguments around the digital revolution, the development of the world economy and the very notion of work and wealth in a new post-scarcity age.

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