Editor's Comment

No dancing at these crossroads

The economy is at a crossroads." How many times over the past few decades has that pithy phrase been used to describe the state of Ireland Inc?

"Crossroads" has an added resonance in an Irish context. It provided the backdrop to former Taoiseach Eamon DeValera's 1943 speech laying out his vision of comely maidens and a general blueprint for an idyllic agrarian society. That speech formed a key battleground in a culture war raged by modernists against what was seen as the conservative stranglehold of DeValera and the Catholic church.

But there is something about that speech that is often missed. It was one of the last times that a leader of this country set out a vision for the future. The past number of decades have instead been punctuated by the politics of expediency. And it is precisely this culture of short-termism, strokes and plaster-job decisions that has got this country into a mess.

What the economy needs over the coming months is real leadership in a number of key areas, and that includes tackling vested interest groups head on. Colm McCarthy's An Bord Snip Nua report has generated a considerable amount of controversy since it was released. The Cabinet is currently putting the finishing touches to the Nama legislation, which will be published after this issue goes to print and will be passed into law in September.

The implementation of McCarthy's report will have a huge bearing on whether Nama is successful.

If Nama does not recognise the true extent of the losses the banks are carrying on property deals and ends up giving these institutions haircuts on development loans that are nothing more than a fudge, then future generations will pay for this folly. Nama will not succeed in its aim and the banks will flounder.

What is needed is deep surgery. Nama will have to impose haircuts of up to 60% if it is to fully acknowledge the extent of the property crisis. In return, the Government can take much bigger stakes in the banks. If the seriousness of the problem is recognised now and appropriate action is taken, then the banking and property sectors will both get sorted out, albeit following some painful procedures. The Government can eventually unwind its position in the banks, and if all goes to plan, at a price that will be a boon to the national coffers.

If haircuts of 30% or thereabouts are imposed, then that will not be sufficient. The property market will remain in a deep slump for years to come and Nama will become a national debt rather than a debt recovery agency.

But for the Government to take aggressive action with the banks, it needs to sort out its own finances first. That is why the McCarthy Report is so important. Fiscal rectitude is an inevitable consequence of years of profligacy.

The McCarthy Report contains many unpalatable proposals, including cuts to social welfare. When the Siptu president Jack O'Connor said that it was unfair to attack the marginalised in society with any future cuts, he was right. Many of those who have been made unemployed over the past number of months did not create this mess. Unfortunately, this rationale will not get the State's finances back on a sound footing.

Some tough and unpopular decisions need to be taken over the next few months based on McCarthy's recommendations. If that means setting up a confrontation between the Government and the unions, then that cannot be avoided.

If ever there was a time for sectoral interest groups to act responsibly, it is now. There is a lot riding on how the unions conduct themselves in the near-to-medium term. If they take the view that the downturn is the perfect environment to start flexing their muscles in an attempt to increase influence and support, then they could easily derail the economy.

The unions owe a lot to social partnership. The benchmarking agreement delivered benefits to their members that they would not have seen through individual bargaining. What is now all too obvious is that those successive wage increases have undermined the competitiveness of the economy. Unless competitiveness is restored the prospects for the economy are bleak.

Lastly, but not least, the Lisbon Treaty referendum is scheduled for October. The case for ratifying the Treaty was not made with any great conviction when it was voted down in June 2008. True, the Government was put on the back foot by No campaigners. But the confusion about what was actually in the Treaty was a damming indictment of the Government's efforts to explain to the electorate why it is in this country's interests to remain fully paid up members of the EU.

It cannot afford to make the same mistake this time. The consequences are far too high.

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