A Great Future Behind Us

Since the No vote on the Lisbon Treaty I've had that feeling in my stomach that you get when go over a humpback bridge a bit too fast. You know the one where you and the car part company with the road for a moment before coming back down. Except I don't feel we've come back down after Lisbon. If anything, after today's ESRI report, it's beginning to feel like the road's just taken a sharp turn left and we're gliding towards the ditch.

It seems we're now heading for a recession twenty five years after the last one - and it's almost entirely self-inflicted. Indeed the ESRI expects Ireland will be the only EU or OECD country to experience a recession in 2008. Some achievement.

The culprit is a collapse in the housing sector: with the ESRI forecasting a 41.4% decline in the value of housing construction this year. Enough to drag total gross fixed capital formation down by 15.1%: far too much to be offset by modest but positive forecast growth for exports and consumer spending. The speed (if not the scale) of the collapse has caught just about everyone by surprise (including me) - one of those 'several standard deviations outside the range of expected outcomes' that Nassim Taleb describes as Black Swans.

The consequences will be grim: rising unemployment, a return to emigration and a legacy of malinvestment unprecedented in the history of the state that will take the best part of a decade to unwind. Plus the sickening realisation that it didn't have to be this way. And with that realisation will come a search for someone to blame and, if we're lucky, the correct culprits will get the blame. To my mind the culprits are those politicians who introduced and promulgated a set of tax incentives for developers and land owners that gave them a carte blanche to build more houses and apartments than were actually needed. Not so much market-led as donation-led.

Sure the banks loaned the developers the money, but banks make lemmings look like rugged individualists and they were only doing what banks do. That is, following the herd to where they thought the easy money was. The banks took their cue from Government: with the builders making so much tax stimulated money from construction why wouldn't the banks lend to the developers and to the borrowers buying the houses and apartments they were building? And weren't the Government then coining it at the other end with vat and stamp duty paid by the buyers? A win-win-win situation - or so it seemed.

But now we have a lose-lose-lose situation: with Government, the banks and the construction industry hurting. And, as ever, the taxpayer will pick up the tab - just as the taxpayer paid for the boom. A tab that may well include the price of rescuing one or two of the same banks.

How's your stomach?

Save Our Cows

Under the radar of the Lisbon Referendum debate another, potentially more destabilizing debate has begun. It's the one about the Government's plans to meet our Kyoto target obligation by 2012. Or rather, it's about how we simply aren't going to meet the target and what it will mean.

Today's Irish Examiner carries a story not reported in any of the other national papers, namely that the Department of Finance are already saying that the 2012 target for emissions reductions will not be met - and that achieving the 2020 target looks even less likely. Indeed, one unforeseen consequence of a No vote next week may well be to create severe tensions between Fianna Fail and the Green Party: tensions that have been papered over somewhat in order to create a consensus on the Yes side of the referendum.

Minister John Gormley is already making noises about culling the national cow herd as a radical measure to meet our 2012 target. By about 50% according to some calculations. Something tells me this will not be an easy sell to the Irish Farmers' Association and the ICSFA. And it just might persuade some Fianna Fail backbenchers to push for Plan B: a coalition with Labour instead.

Where the Department of Finance might please the Green Party is through the introduction of a Carbon Tax. A recent paper from the ESRI sets out the case for such a tax, including how best to avoid any unforeseen consequences (like culling half the national herd). Though the ESRI doesn't see a carbon tax delivering the 2020 (let alone 2012) targets on its own, they do see one advantage for the Government: they might raise more taxes that way than through income taxes. They even suggest using the revenues from a carbon tax to reduce labour taxes - providing a net stimulus to economic growth. It's a well considered, mostly convincing argument.

There's only one major obstacle in the way of this happening, i.e.: reality. Introducing a tax that will raise energy prices when they are already rising at nearly ten times the rate of inflation would be a 'brave' thing to do politically. And that's the main problem: a carbon tax in Ireland will be an impossible sell for politicians, especially if no one else introduces it.

We could always ask the rest of the EU to join us in introducing a carbon tax: but should the No vote win next week I wouldn't count on a lot of warm feelings from our European peers for any tax ideas we might have. Indeed, they may well have a few ideas of their own about the taxes we pay.

Britain's Energy Train Wreck

My very first job after graduating was working in a research centre run by Malcolm Wicks, now the UK's minister for energy. He's a good man who now finds himself with one of the most difficult political briefs. I was watching him on BBC2's Newsnight last night defending a recent announcement by Gordon Brown that the UK will be expanding its nuclear industry. As I listened to him he confirmed every concern I have about our energy future in Ireland, not just the UK.

Watching developments in Britain is like watching a train wreck in slow motion - horrible and fascinating at the same time. UK oil production in the North Sea peaked in 1999 and is now down 60% in terms of output. The problem is that everyone knows this but not enough has been done about it in the meantime. Large parts of England experienced a power cut on Tuesday as two power stations (one nuclear, one coal) went off grid at short notice. As one commentator on the Newsnight programme put it: the UK is a severe winter away from massive, regular power cuts as its ageing stock of nuclear and coal fired power stations struggle to keep up with demand.

Unfortunately we are not in the position in Ireland that we can simply observe developments in the UK with friendly concern but without worries about its impact on us. In fact, as the latest ESRI medium term review notes, we will be increasingly dependent on UK electricity through not one but up to three interconnectors that will be built over the next fifteen years or so. Ultimately the ESRI expects we will need to import 1,500 megawatt of electricity from the UK to fill the gap in our own generation capacity. And there's the problem: the UK isn't going to have 1,500 (or 1,000 or 500) mb of surplus capacity to sell us if things keep going the way they're going.

But right now, our energy 'strategy' has essentially outsourced a large part of our future electricity supply to the British. I've no doubt they are decent people who will help us out if they can: but if British households and businesses are left shivering in the dark due to shortfalls in their own capacity then I can't help feeling that we're going to be way down their list of priorities when things get really tight.

Maybe an interconnector with a nice, reliable French nuclear power station mightn't be such a bad idea by way of a fall back plan?

Our Eurovision Future

I had a vision of Ireland's future on Tuesday evening. We last won the Eurovision Song Contest back in 1996 with, as I'm sure you remember, Eimear Quinn singing The Voice. That was twelve years ago. Back then we were the bright new things on the world's stage - too old to be seen as an overnight success, too young to realise it wouldn't last forever.

And it didn't. Now we're practically old money in a European context: GDP per capita in Ireland is more than four times that of Bulgaria. The Eurovision Song Contest belongs to the 'new arrivals' - who anyway tend to vote for one another on a bloc basis. Indeed it seems the former Soviet Union countries tend to vote for one another - but then again, so do the former British Empire countries (i.e.: ourselves and the UK).

This means in effect that Ireland will never win the Eurovision Song Contest again. Though judging by the not-quite-a-national-day-of-mourning that greeted Dustin's demise, I would guess we'll learn to live with that scenario.

But it says something else I think. We're no longer infatuated with Europe, and Europe is no longer infatuated with us. If anything we're in danger of being seen as 'rich and selfish', as I heard a concerned John Fitzgerald from the ESRI put it recently. He's probably right - at least as regards those in Europe who give us a second thought. But most obviously don't: nor we them.

I think we'll vote Yes in the referendum next month: more out of a sense of duty than out of any real passion or ambition. Still, we're a much better country now than we were back in 1996. As Brecht once put it: pity the land that needs heroes. I might add: pity the land that needs success at the Eurovision Song Contest. It is a measure of our success that we need neither heroes nor trophies to feel good about ourselves.

Still, it's a pity Dustin didn't even make it to the final ...

Achilles' Peak

The ESRI's latest Medium Term Review 2008-2015 was greeted with near jubilation today. I'm a big fan of the ESRI; on balance they've called it right more often than they've got it wrong since I started reading their reviews back in the 1980s.

But this time I'm not so sure. I'm no fan of the doom and gloom merchants, especially as regards the near term outlook. The ESRI expect a significant slowdown this year and next (but not a recession) - with recovery going into 2010. It's hard to disagree. It's their medium and longer term outlook that I have problems with. Their benchmark forecast beyond 2010 is base on a number of, frankly, heroic assumptions - Herculean even. The key assumption is a recovery in global economic performance which in turn drives an upturn in Irish exports.

Fair enough as assumptions go, but I'm just not sure we will see the type or scale of recovery that they anticipate in the global economy. The source of my doubts lies in their analysis of Energy, Environment and Transport in Chapter 5 of the Review. Take their assumptions for the price of oil over the forecast period. The ESRI simply adopt the International Energy Agency's forecasts which amount to a price of $73.9 a barrel in 2012, and $9o.5 in 2020. As of today, WTI oil costs $125.12 a barrel: I think the IEA/ESRI might just be a tad optimistic about the outlook for the oil price.

So where might the price of oil really go over the next few years? Goldman Sachs are forecasting anything up to $200 a barrel in the next 6-24 months, before falling back. CIBC bank are forecasting $225 a barrel in 2012 AND an actual fall in global output as production peaks in 2011. You can see why some of the Review's assumptions start to look Herculean.

In fairness to the ESRI there isn't a lot of benefit in departing from the IEA's oil forecasts since they amount to the scenario the Government is working from. And clearly the ESRI's intent in their Review is to persuade any objectively-minded observer that the Government's current targets for electricity generation (with a ludicrous dependence on wind) AND the Government's targets for CO2 emissions are simply unachievable. Here's what they have to say about the latter:

Even with a carbon tax that starts at €20/tonne of CO2 emissions in 2010 and grows over time, emissions from transport grow by more than 35 per cent between 2005 and 2020. This is notably higher than the 20 per cent decrease for the economy as a whole suggested by the EU climate change and renewable energy package currently being discussed in Brussels.

You don't say! I do like their line in gentle understatement.

The key issue - from the perspective of Ireland's economic prospects - is whether we are near the peak in global oil production (2011-12 according to CIBC) and the consequences this will have for fuel prices (and much, much else besides). Peak Oil is the Achilles' Heel of any medium term economic outlook for Ireland, or anywhere else for that matter.

The question then becomes how will businesses and nations respond to a far higher oil price than that we're already experiencing? Martin Wolf has a handy summary of 'Do Nots' and 'Dos' in today's Financial Times. There's also an excellent paper published by the Vienna Institute for International Economic Studies (WIIW) just out on the subject of Economic and Trade Policy Impacts of Sustained High Oil Prices. The authors note the potential for Europe to respond to higher oil prices by reducing other costs facing energy users (including the non-fuel element of energy prices such as vat and duties). As well as insisting on our trading partners removing subsidies to fuel prices that then drive consumption higher than would otherwise be the case.

Unfortunately there is little we can do in the medium term to avert much of the adverse impact of Peak Oil and higher oil prices. As the ESRI rightly points out in its Review, our transport and accommodation choices are mostly given at this stage because of the long lead time for providing significant alternatives. But we won't be in recession this year or next: so now is the time to be making what adjustments we can (domestically and through lobbying in Brussels) to prepare for even greater challenges over the next ten years.

Nuclear Holidays

Every year hundreds of thousands of Irish people holiday in France, as I am this week. And every year we experience the deep down dread in our Irish eco-souls as we lie awake in our gites wondering if the nuclear power station next door will explode. Actually, I made that last bit up. Let's face it, 99.9% of Irish holiday makers in France don't give a second thought to French nuclear power, blissfully ignorant of the risks they are taking. Myself, I'm here in Antibes, well within the fallout zone from not one but four nuclear power stations at Tricastin in idyllic Provence. Strange how you get used to things ...

Back in Ireland we are embarking on an 'energy first' of our own: ramping up the share of renewable energy (i.e.: wind, for all practical purposes) beyond anything tried anywhere else in the world. As the ESRI noted in a recent paper on the Government's energy and climate policies, the current target requires that wind delivers 20-25% of all our electricity generation by 2020, which is "a large multiple of the level of wind penetration actually achieved in any functioning power system with weak interconnection, and is also a multiple of targets enunciated in other countries."

Moreover, such a level of exposure to an intermittent power source demands a significant backup or baseload power generation resource. Nuclear is ideal for this purpose (regardless of its other limitations), so is gas. So maybe we need to build an interconnector to France before 2020; or outsource our electricity generation requirements to EdF? Of course, if the lights start going out over Ireland on a frosty, winter's day when the wind doesn't blow (as on February 16th this year) then we might all be happy to move to France to cuddle up to a nice nuclear power station ...

Sado-Erotonomics

Listening this morning to RTE radio's coverage of the latest ESRI Quarterly Economic Commentary I worried I had accidently tuned into a new S&M channel for the shareholding classes. The nation's broadcaster swapped its traditional hair shirt of eighties socialism for a dominatrix whip: 'unemployment is going to rise' - lash; 'the slowest growth in twenty years' - lash; 'inflation rising' - lash. An ecstasy of misery.

The lead story was the ESRI's forecast that GNP growth in 2008 will be the lowest since 1988. You know what that means of course: tomorrow morning you're going to wake up and it will be the Millennium Year in Dublin; Gay Byrne will be interviewing Roddy Doyle about his new book The Commitments; and someone will have dropped a box of detergent into the Floosie in the Jacuzzi. It will all have been a dream: even more spectacular than when Pamela Ewing woke up to find Bobby in the shower (if you're under 40, don't ask).

So I suggest you ignore RTE's mission to depress the nation, and that you read the ESRI's report for yourself. Yes, the economy will slow this year, BUT IT WILL STILL GROW. Consumer spending is expected to increase by 3.0%, and exports by 5.4%. The numbers in work will not fall, while most of the rise in unemployment will be driven by continuing immigration.

All-in-all a far cry from Barrytown - or from South Fork for that matter.

Marital Affairs

One of the most interesting research studies I was involved in last year was about the first seven years of marriage. The study showed that marriage in Ireland seems to be in robust good shape as an institution - and, more importantly, as a lived experience for the couples involved.

Recent CSO data on the number of marriages and the marriage rate up to Q1 2007 confirms that marriage appears, if anything, to be increasingly popular in Ireland. But what about the future? There's a fascinating debate over at Cato Unbound including an article by Stephanie Coontz on The Future of Marriage. Coontz takes the reader through the history of marriage up to its present day manifestation as a 'partnership of equals' - something it most definitely hasn't been in the past. She is in turn quite optimistic about the future of marriage because of its remarkable capacity to adjust to societal and cultural change, referencing two key lessons from history:

First, marriage is not on the verge of extinction. Most cohabiting couples eventually do get married, either to each other or to someone else. ... The second lesson of history is that the time has passed when we can construct our social policies, work schedules, health insurance systems, sex education programs — or even our moral and ethical beliefs about who owes what to whom — on the assumption that all long-term commitments and care-giving obligations should or can be organized through marriage. Of course we must seek ways to make marriage more possible for couples and to strengthen the marriages they contract.

But what about adjusting to economic change? Tim Harford, the Undercover Economist, has written two excellent articles on behavioural economics and marriage in Slate (part 1 on The Economics of Marriage, and part 2 on Divorce is Good for Women). Like Coontz, he charts a remarkable change in marriage from the perspectives of men and women alike, examining the role of female employment, contraception and education on couples' expectations of marriage.

So marriage is changing in Ireland (as elsewhere), but the one constant is its continuing popularity as a desired state for most young singles. But not everything is changing, as noted in the ESRI report Work Rich, Time Poor? Time Use of Women and Men in Ireland. Irish married men it seems do less than an equal share of the housework, including childcare (but rather more of the paid work).

Though quite why they needed to do a survey to find this out is not explained ...

Carbon Sunk

Sometimes it pays to read the small print. Richard Tol, Ireland's most prodigious economist, writes in the latest issue of the ESRI's Quarterly Economic Commentary about just one of the targets set out in the 86 page Agreement for Government signed by Fiánna Fail, the Greens and PDs in June last year. On page 19 of the Agreement we read that:

... the Government will set a target for this administration of a reduction of 3% per year on average in our greenhouse gas emissions.

As Tol points out, this amounts to a five year goal for the present government of reducing CO2 emissions by up to 25%. Or 'a considerable task' as he wryly puts it.

So what would it take for the Government to deliver on this one goal? Given that we're more or less stuck with the energy infrastructure, housing and transport systems that will predominate even by 2012 (as these things take decades to change), then more radical measures are required. Here are some of Tol's calculations of what it would (hypothetically) require for the Government to succeed:

• Reduce the number of cattle in Ireland by 50% between now and 2012, or


• Reduce the number of people in Ireland by 50%, or


• Reduce energy usage per resident by 50% or


• Move two fifths of industrial and service production off-shore

Tol therefore proposes that the Government actually abandons its target. I'm inclined to agree with him on this one. Remarkably, Tol's analysis has gone completely unchallenged by the Government, suggesting perhaps that they've realised the error of their ways and have indeed decided to quietly abandon this particular target. I hope so.

The wider context for the issues Tol addresses is one of political wishful thinking, economic ignorance and doomsday weather forecasts. Most people (including me) reckon that there are signs of significant climate change and that human activity has played a part in these changes. But beyond that there is a wide divergence of opinion about how fast, how far and how bad these changes will be. You only have to read the International Panel for Climate Change Working Group 1 Report "The Physical Science Basis" to appreciate that there is significant uncertainty about the future nature and impact of climate change in the short, medium and long term (though consensus that there will be some change and impact).

This is not to council doing nothing. Rather, as a number of critics of both the IPCC and the Stern Review (including Tol here) have argued in some fairly robust discussions in the Journal of World Economics and elsewhere, the balance of probabilities leads to a policy of introducing and gradually increasing measures such as carbon taxes. But the same probabilities in relation to climate change do not justify the kind of Khmer Rouge Year Zero extremism implied by targets such as the Government's above.

Climate skepticism does not necessarily mean 'climate change doubting': read the considered scepticism of the folk at Climate Resistance. But it does mean standing up to nonsense, even if it's nonsense with the imprimatur of binding orthodox consensus stamped on it. And anyway, we could always do what David Keith proposes, and inject a cloud of ash into the air above the poles, bringing the melting of the ice caps to a halt within days.

Mind you, I don't expect any consensus on that one any time soon ...

Half Glass Forecasts

Samuel Britton, an economic journalist I have long admired, observes in a recent FT article that:

Friedrich Hayek once said that he knew few people who had made money from acting on economic forecasts, but a good many who had made it from selling them.

The latest Quarterly Economic Commentary from the ESRI is certainly one of the more difficult ones to act on, if you feel so inclined. It looks like the economic glass in 2008 will be 'half full' or 'half empty' - depending on your point of view.

The publication this week of the latest Eurobarometer survey shows the Irish to be relatively optimistic about 2008. Only 7% expect 'your life in general' to be worse over the next 12 months, while 36% expect life to be better. However, 34% expect the 'economic situation in Ireland' to be worse next year, and only 18% expect it to be better. It is the usual story of 'private comfort and public concern' that I've written about before in relation to consumer confidence. That said, even though the top two concerns for European citizens are unemployment and inflation respectively, for Irish citizens their top two concerns at present are crime (at 57% of all adults) and healthcare (45%) - among the highest ratings of all EU27 countries.

It might be more accurate therefore to say that Irish consumers are 'less optimistic' about the outlook for the economy rather than unduly pessimistic. So I am inclined for once to take the 'half full' view of prospects for next year, especially in relation to consumer spending. The ESRI forecasts a 3.8% growth rate for real consumer spending - about half this year's rate, but still respectable in an EU context. Add to that consumer price inflation of 2.5% and you get a total consumer spend of €97.1 billion, or €5.8 billion more than this year.

That's a lot of extra consumer spending whichever way you look at it.

Ethnic Marketing: tá siad ag teacht

The ESRI have once again done marketers a service (unintentionally) by publishing a study on the income status of immigrants to Ireland. Though most of what the ESRI focuses on relates to issues of income inequality and relative poverty (their regular beat), the findings have relevance to Irish marketers looking to reach the rapidly expanding foreign national market.

Table 3 in the study reveals something very interesting: it turns out that fewer than 1 in 5 or 18.4% of native Irish members of the labour force have a third level degree or above, but this rises to over 2 in 5 or 43.5% of immigrant members of the labour force. The level of educational attainment among immigrants is actually more than twice the average for Irish nationals.

Worth thinking about: maybe all those efforts to diligently translate advertising copy into Polish, Chinese, Lithuanian etc are in vain. With that level of educational attainment it wouldn't be surprising if our foreign national workers eventually become more conversant as gaeilge than the host population before too long ...