The lack of understanding of some people regarding the implications of the decision we made to join the euro back in 1999 continues to astound. There was never any real understanding, amongst the political elites at least, about the implications for a very small economy of joining a monetary union. This was subsequently played out to devastating effect as respective governments pursued a fiscal policy that was totally inappropriate for an economy that was enduring a totally inappropriate monetary policy. The result was a total implosion of the economy and we are still struggling to pick up the pieces.

This week we had a couple of MEPs and others expressing disquiet at the changes to the ECB voting structure that will come into force next January when Lithuania becomes the 19th country to join the system. Ireland will lose some of its influence around the ECB table, or so the argument goes. The issue of course is that this was inevitable since the early days of the artificial monetary construct, but of course the bigger question is if Ireland ever had any real influence around the ECB table in the first place.

Under the rotation system, the member countries will be divided into groups according to the size of their economies and their financial systems. The governors of the five largest countries –  Germany, France, Italy, Spain and the Netherlands – will share 4 voting rights between them. the other 14, including Ireland, will share 11 voting rights. The governors of the member central banks will subsequently take turns using the voting rights on a monthly basis.

The objective is to ensure that the decision making process does not become too unwieldy, which does make a lot of sense. All members of the governing Council will attend each meeting and will be able to contribute, but not all will be able to vote every month. The six-member executive Board will have permanent votes.

To suggest that this change to a rotation system is akin to the Irish government ‘sleepwalking’  into the loss of voting rights is total baloney. While the smaller countries will loss disproportionate voting rights, it has always been the case that the larger countries basically dictated policy. It would be extremely naive to believe that the ECB ever set interest rates to suit a tiny country such as Ireland regardless of its cyclical economic situation. Policy has to be set to suit the larger economies. That is the reality of a monetary union and it is up to the smaller countries who may end up with an inappropriate level of interest rates to use the policies that they still have some control over to guide their economies. A number of countries, most notably Ireland, blatantly failed to do that from 1999 onwards. There is an old saying that ‘if one enlists, then one has to march’. There is no point in crying over spilt milk now.

It would be instructive for those who are criticising the imminent move to a rotation system at the ECB to look at what happens in the US with the  Federal Reserve. The Federal reserve system consists of 12 regional Federal Reserve Banks, and a permanent Board of Governors in Washington DC. Within the Federal Reserve the Federal Open Market Committee (FOMC) sets interest rate policy for the 50 states of the US. The FOMC is made of a Board of Governors consisting of seven members, who hold permanent voting rights; the president of the Federal Reserve Bank of New York who has a permanent vote; and 4 rotating regional Fed presidents. the presidents in Chicago and Cleveland vote every second year , and the presidents of the other 9 Feds vote every third year. This system of rotation is deemed flexible enough to deal with the task of setting interest rates for such a large and diversified economic block.

Based on how the US system works, it is hard to see what some of our MEPs are complaining about. Perhaps it is just a case of making some noise to remind the electorate at home that they actually exist.

Within the EMU structure, Ireland is a bit player without any real clout; a fact that should be apparent from our inability to negotiate any sort of deal on our re-capitalised banks. It is only going to get worse. As the euro area continues to expand, further dilution will occur. There’s not a lot we can do about it.




In relative terms, the Government is being inundated with good news on the economic and financial front at the moment. Most economic indicators in recent months have been moving in the right direction, and the news from the two main banks for the first half of the year has been more positive than we have seen for quite some time. Given that we are now well into the second half of the electoral cycle this does represent good news for the parties of government, and provided the recent trends are maintained or built upon over the remaining lifetime of the government, there might just be a relatively positive backdrop as they face into what could be a very politically tricky plebiscite.

What the government does or does not do in the remaining budgets could play a key role in influencing voter choices. Taxpayers have obviously taken a serious battering over the past six years, and the payment of the full-year property tax is hurting badly this year. At the moment we are being treated to a very damaging debate about the likely burden of the water charge next year. The sort of speculation and uncertainty that abounds at the moment in relation to the water charge is very destabilising as it is fostering fear and undermining confidence. There is nothing as dangerous as uncertainty, and the Minister with responsibility needs to create certainty as quickly as possible. At least if people have a clear idea of what the cost is likely to be, then they can plan with some level of certainty.

In terms of additional budgetary changes that might be implemented over the likely remaining two budgets of this government, the pressure is clearly starting to ease. Notwithstanding the fact that we are still borrowing too much as a country and that the level of outstanding debt is dangerously high, the public finances are gradually moving into a better place.

The Exchequer returns earlier this week showed that an Exchequer deficit of €5.18 billion was delivered in the first seven months of the year. This is €25 million higher than the equivalent period last year. However, last year’s figure included the proceeds of the sale of Irish Life and Bank of Ireland Contingent Capital Notes. When these non-recurring revenue items are excluded, the underlying deficit this year is almost €2.3 billion lower than the same period last year. Tax revenues are running €548 million ahead of expectations, and are 6.4 per cent up on last year. The three biggest revenue areas are performing very strongly. Income Tax receipts are 7.6 per cent ahead of last year and €54 million ahead of expectations; Excise Duties are 5.6 per cent ahead of last year and €132 million ahead of target; and VAT receipts are running 7.2 per cent higher than last year and €242 million ahead of target. These items are reflecting the improvement in the labour market and stronger consumer spending, particularly on new cars. It just goes to prove that economic growth is good for the public finances.

On the expenditure front, the Government is also maintaining tight control. Net voted expenditure is €172 million lower than last year and is €73 million lower than targeted. The current expenditure component is just €24 million higher than expected, while the capital expenditure component is running €97 million lower than expected.

This all suggests that the government remains well on track to improving upon the Exchequer borrowing target of €9.6 billion for the full year, and a General Government Deficit equivalent to 4.8 per cent of GDP. Granted, there is still five months left in the year with the biggest revenue collection month included, but based on current trends it is certainly possible that the deficit could come in up to a billion euro lower than expected and the deficit could hit 4.3 per cent of GDP.

Should it so desire, this would give the government scope to deliver a total budget adjustment of less than € 1 billion euro in October, which would necessitate marginal changes once the water charge receipts are taken into account. I believe it would be pre-mature for government to contemplate a tax cutting budget. That should be left for Budget 2016, which will likely be the final one before the general election. Assuming the government survives its full term, a relatively generous budget in October 2015 would be likely to give maximum political advantage to the parties of government.


This Article appeared in the Irish Examiner August 1st 2014

The key to Ireland’s future is to build a sustainable diversified economic model, and not end up putting most of our eggs in one basket, as we did in the not too distant past. Sectors such as agri-food, tourism, fisheries, indigenous medical devises and IT companies, and the arts can all play a significant role in Ireland’s future if properly managed. The sector I have ignored thus far is the foreign owned sector. It currently plays a key role in the economy and hopefully will continue to do so.

The facts about foreign direct investment in Ireland are very impressive. At the end of 2013, the IDA had over 1,100 client companies in Ireland, directly employing 161,112 people. The IDA has also taken responsibility for 55 companies in the Shannon region, bringing total direct employment up to 166,184. This is equivalent to more than 8.7 per cent of total employment in the economy. Of course those companies buy goods and services in the local economy and so are directly responsible for many more indirect jobs. The IDA estimates that for every 1 job in a multi-national company, another 0.7 of a job is supported elsewhere in the local economy. This phenomenon was highlighted in very stark fashion in Limerick a few years back when Dell re-structured its operations, with very negative consequences for haulage companies and the like who were heavily dependent on the company for its business. Of course retail and hospitality businesses are also heavily dependent on a large employer in an area. Based on the IDA’s employment multiplier, another 116,000 jobs are supported by IDA client companies, bringing total direct and indirect employment up to over 282,000 jobs, or almost 15 per cent of total employment in the economy. This is very significant and needs to be protected and nurtured to the greatest extent possible.

In the first six months of this year, over 100 investments were secured by the IDA. This represents an increase of over 40 per cent on the first half of last year. Over 40 per cent of the investments secured are from companies investing here for the first time, with the remainder coming from existing companies. It is estimated that those investments will lead to more than 8,000 extra direct jobs in the economy.

Some observers have a tendency to denigrate the role of multi-nationals in the economy, based on the amount of profits they repatriate back to the home country. They do repatriate profits, but an assessment of what they contribute in terms of direct and employment; payroll taxes; corporation taxes; non-wage expenditure in the local economy; and work practices is very worthwhile. Multi-nationals represent a very significant and valuable part of Ireland’s economy, and if for some reason, the positive investment trends of recent years were to be reversed, Ireland would be in a very dark place.

For multi-national investment in Ireland, the biggest threat is posed by the issue of corporation tax. The OECD is currently undertaking a Base Erosion and Profit Shifting (BEPS) exercise to see exactly how companies pay and avoid tax. Amongst others, Ireland is a key focus of attention, given the whole debate about effective tax rates and various taxation practices that are very difficult to understand. The OECD’s task is not an easy one, but at the end of the whole process it is likely that there will be a much greater focus on ensuring that tax is paid in the jurisdiction where the economic activity occurs. That is only fair, but it will not work to Ireland’s advantage. How much damage might be done to Ireland is anybody’s guess at this juncture because the issues involved are very difficult to comprehend, not least by the OECD. Apparently the Revenue Commission and Department of Finance are inputting strongly to the whole exercise.

The message for Ireland seems clear to me – it would not be sensible to build our FDI model on a continuation of the current taxation system. It will be eroded to some extent and one way or the other, Ireland’s situation will be less advantageous than it is at the moment. It is really just a question of degree. Consequently, we must ensure that other key attributes for attracting investment are nurtured. These attributes include the quality of the education system and the labour force it produces; physical and IT infrastructure; suitable high-quality commercial accommodation; the quality of public services such as health and education; and the personal tax burden. At a general level we need to be as open and pro-business as possible, and easy legitimate access to those in power should be preserved.

Ireland is still punching way above its weight in terms of attracting FDI, but inevitably we will have to run faster to stand still in the future.


This article appeared in the Sunday Business Post August 3rd 2014

In recent days somebody whose views I deeply respect suggested to me that official data releases and general popular discourse are not fully capturing and reflecting the magnitude of the real upturn in the fortunes of the economy. This view resonates with my sense of what is going on around the country. Whatever about official economic data releases which I believe, have been very positive in recent months, many businesses I deal with and speak to have been suggesting to me in recent times that there is a very noticeable improvement in conditions. Granted, this view tends to be more prevalent in the greater Dublin area than elsewhere, and is very relative, given the low base from which many businesses are now operating.  Be that as it may, there is an inevitability about recovery starting in the capital city and its environs, and  it is very reassuring that the precipitous decline in economy activity from 2008 onwards has stabilised over the past couple of years and there is now a very real recovery starting to build. The perennial pessimists and sceptics, and those who advised us to follow the Argentinian route may find this difficult to stomach, but the recent evidence is pretty compelling.

Despite the collapse in our banking system and its’ still pretty dysfunctional characteristics, the results from our two biggest banks over the past week have been relatively positive.

In the first half of this year AIB returned to profit for the first time in six years. It delivered a pre-tax profit of €437 million, which was well ahead of any analyst forecasts that I am aware of. The bad debt provisioning has been reduced considerably; operating expenses continue to fall; and total income rose by 36 per cent. Furthermore, its Chief Executive David Duffy has reassured the taxpayers of   Ireland that his bank will return all bailout funding of €20.8 billion received from the state since 2009. For a bank that is 99.8 per cent owned by the state, this is good news. Meanwhile over at Bank of Ireland, a first-half pre-tax profit of €399 million was announced.

This week’s news from the banks is unambiguously positive. Whatever we may think about banks and bankers, it is an irrefutable fact that for an economy to function properly, its banking system must be functioning properly. The role of a bank is primarily to act as a trustworthy intermediary to attract deposits and channel credit into the real economy. Since 2008, the Irish banks have not been meeting these criteria, but with a return to profitability, this looks set to change over the next couple of years. A functioning banking system will help accelerate the return to a properly functioning economy.

On the real economic data front, the news is also generally positive.

Earlier in July, national accounts data for the first quarter showed that GDP expanded by 2.7 per cent during the quarter, and was 4.1 per cent higher than the same quarter in 2013. Real GNP increased by 0.5 per cent during the quarter and was 3.1 per cent higher than the first quarter of 2013. This represented a very positive start to the year, and the good news is that the recovery has subsequently gathered pace.

Consumer confidence is at more than seven-year highs, but consumer spending is also gradually gaining traction. In the first six months of the year the value of retail sales was 4.4 per cent higher than the same period in 2013, and the volume of sales increased by 6.5 per cent.  However, when the motor trade is excluded, the retail sales performance was less strong, although more vibrant than in previous months. Excluding cars the value of retail sales increased by 1.5 per cent and the volume of sales increased by 3.4 per cent. We know that the number of new cars registered was 23.4 per cent higher than the first half of 2013. Indeed after 9 days of July, car sales for the year to date surpassed total sales for 2013.

On the export front, the news is also positive. In the first 5 months the value of merchandise exports was 0.3 per cent higher than last year.  Exports of Chemicals & Related Products declined by just 1 per cent (the patent issue), but exports of Food & Live Animals increased by 10.7 per cent. The volume of manufacturing output is 21.8 per cent higher than last year. Irish industry is clearly moving again.


The labour market also continues to improve. In July, the number of people signing on the live register was 37,461 lower than a year earlier and has fallen by 55,800 over the past two years. Most recruitment consultants will tell you that there is a marked pick-up in demand for labour. The IDA also continues to deliver.  In the first six months of this year, over 100 investments were secured, which represents an increase of over 40 per cent on the first half of last year. Over 40 per cent of the investments secured are from companies investing here for the first time, with the remainder coming from existing companies. It is estimated that those investments will lead to more than 8,000 extra direct jobs in the economy.

The final piece of the jigsaw is in the housing market. According to the CSO, national average property prices have increased by 12.5 per cent in the year to June and are now 13.9 per cent off the low point seen in March 2013; Dublin prices have increased by 23.9 per cent over the past year and are now 30.2 per cent off the low point in August 2012; and Outside of Dublin, property prices have increased by 3.4 and are now 5.6 per cent off the low point in March 2013. While this strong pick up in house prices will not please all, it does help remove thousands from a negative equity situation and does indicate a greater level of confidence out there.


All in all, I find the evidence of economic recovery very compelling, and hopefully it should continue to build from here. This is not to suggest that it will be plain sailing. It most definitely will not. There are still many obstacles to overcome, including the continued pressure on discretionary incomes; public and private debt; credit availability; housing market issues; and the fragile nature of the banking system. However, economic growth will make all of these problems more manageable, and it is very clear that this is starting to happen.  Hopefully, Michael Noonan will deliver a modest budget correction in October, and this should reinforce the more positive vibes in the economy and in business.