As the year closes there are good reasons to be hopeful for 2012. Despite the white knuckle ride in Europe this year when cumbersome politics played a failed game of catch up with markets, the early signs are that some calm is returning. The Euro isn't going down without a fight and may yet end 2012 in better shape. Spanish borrowing costs have sharply fallen. German business confidence is defying the trend by rising and the US economy is adding jobs at a faster pace than most thought. But it's all very fragile and cannot yet be described as a sustainable trend. The last Summit, despite the massive gaps in policy such as ECB intervention and growth stimulus, has unnerved those betting against the Euro as the European banking system is being more robustly back stopped by the ECB, lessening the risk of a Lehmann-style event. It is a far cry from just a few weeks ago.

At home tactics are also becoming clear. Irish support for the new fiscal compact is contingent on restructuring our bank bailout debt. This is not forgiveness but restructuring that would lessen the burden by lengthening the loan repayments and lowering the borrowing costs. Once again we've learned that all the pre-election guff about unilaterally defaulting was the stuff pure fiction.

Which brings us to the paucity of some of the opposition. It's car crash radio and TV listening to the warped economics of the hard left where jobs can be created out of thin air by expropriating the assets of the wealthy and putting the unemployed to work in fixing the water system. Ten billion Euros a year are up for grabs in extra taxes we are solemnly told but a beginners guide to economics will quickly tell you that human beings adjust their behaviour. Income tax receipts are falling precisely because the top rate is already at a tipping point. Raise the rate and destroy the revenues further. The flight of mobile capital out of Ireland would dwarf many times over whatever could be collected in a crass wealth tax but you can’t tell that to those who simply can’t see or won’t see.

Still the ULA persist. Whenever challenged about how they intend funding state paid jobs, the answer always is to expropriate the assets of the rich. When asked how they intend to sustain new industries the answer never is about encouraging prosperity but rather instead about grabbing OPM – Other People’s Money.  Most of us get it –the Irish hard left are pretty harmless but we don’t forget that Trotsky and Lenin understood that the only way their socialist policies could work is by brute force. You can only stop capital flight at the point of a gun and you can only enforce equality of prosperity by cracking down on opposition and suppressing the human instinct to achieve better for oneself and one’s family.

Thankfully our hard left are nothing like the Bolsheviks. The ULA and its leader’s Higgins,  Daly and Boyd Barrett are much more like the People's Front of Judea (PFJ), the anti-Roman splinter group at the heart of Jewish resistance in The Life of Brian. They are against everything and seem to despise how the world works, sharing a particular disdain for the middle classes whom they feel, at best are unenlightened and, at worst, have sold out. They offer nothing other than protest as a workable alternative. The real left opposition will coalesce around Sinn Fein as it develops more informed and mature policies helped in no small way by the absurd theatrics from the nearby Dail benches.

Happy Christmas.

- Eddie Hobbs

By Friday lunchtime it is pretty clear that the imminent danger of a catastrophic Eurozone rupture before Xmas has greatly diminished. In agreeing the outline of a new Treaty in the early hours of Friday morning all seventeen Eurozone members and Euro wannabes have moved quite dramatically, shifting the entire centre of balance in the EU and leaving Britain in a perilous position.

I watched David Cameron’s body language and listened to his rhetoric before the Summit. His lack of experience of big politics shone through as he bristled with youthful vigour, listening only to the voices inside his head and failing to see the beyond. He has made a catastrophic error of judgement and, in my view, handed Ireland a vital new plank in our recovery if we smart enough to grasp it.

By insisting on ring-fencing The City to appease Conservative EU sceptics, Cameron may have greatly damaged Britain’s vital financial services industry, effectively shutting Britain out of the new EU that is emerging. It is an opportunity Ireland cannot afford to waste. We are within the same time zone, a short hop from London, speak the same lingo and have a highly skilled workforce ready to go at the IFSC. Many financial behemoths head quartered their Northern hemisphere and European operations in London, largely because it afforded full access to the single market.

But as Britain, no longer the reluctant European recasts itself as the non-participating European, the message to mobile financial firms couldn’t be any clearer – get yourself over to Dublin and Cork.

The deal itself however will not fix the crisis. Provided it passes Parliaments and the Irish electorate to which we must insist it is put to popular vote, the new sanctions which will be overseen by majority voting, tells markets that, in future, disciplinary measures will be in place. But two other vital planks are missing that guarantee that the crisis will rage into next year.

The first is the fire hose – there are no visible plans yet at the ECB is prepared to hose down sharply rising bond yields from the fragile Italian and Spanish economies with enough money creation, to calm markets. Too much confidence has been bled down the drains after past Summits for any type of quick normalisation.

But the ECB, under Mario Draghi may be playing a canny hand just sprinkling enough money on the secondary bond market to keep yields from going critical in order to stiffen Governments spines to force through deeply unpopular austerity, sign off the new treaty and buy time for the European Stability Mechanism to takeover next summer. The ECB has no difficulty in providing almost unlimited liquidity to banks who, on the eve of the Summit have been told to raise another €114bn in capital. That, I guess is hardly enough to bolster Spanish banks rocked by the implosion of a property bubble on a scale to our own. Much more cash will be needed before this is over.

The second missing plank, as I write, is that there is no strategy for growth. Austerity without growth cannot and will not succeed and the newly reconstructed Eurozone will eventually fail if, as I suspect, rich countries will refuse to transfer excesses to poor countries- the ultimate test of solidarity and of the currency union itself. So breathe a sigh of relief but be prepared for another year of drama, setbacks and high stakes poker as this new European baby emerges screaming and kicking from her birth with very big question marks still remaining over whether she will survive to maturity.

Dear Santa,

Here’s my explanation for the gift list I’m sending you this Christmas. Failure to diagnose problems always seems to lead to wrong policy choices by our betters and just makes matters worse. The problem, I think Santa is lack of growth leading to the debt crisis now afflicting Europe and threatening a banking system now at DEFCON 2. DEFCON 1 is nuclear war. That’s why the summit tomorrow has to work but it’s no panacea. I’ve learned Santa that economic growth can’t happen without increased productivity, generating more value per worker. That requires breakthroughs in technology, new mini-industrial revolutions that help workers grab new opportunities to earn more money. Faced with aging and declining populations, the liabilities that are off the national balance sheets in countries from the USA to France and don’t figure in crude Debt / GDP data are simply un-payable - without technology breakthroughs that drive up productivity.

That’s why, for the next decade aging OECD countries will be faced with the massive challenge of trimming back the State because the money won’t be there. The deal on the table tomorrow for automatic sanctions where Eurozone economies break fiscal rules, is only the beginning. Economic growth and parallel stock market recovery in the USA can be tracked directly to artificial money creation. That means there is little fundamental growth in my view. Growth is only happening in countries with young, growing populations that are following the right strategy at the right time, the Newly Industrialised Countries (NICS).

But, Santa arguably Ireland is a NIC! We are one of the few OECD countries that are poised to benefit provided we get it right. We have a young, agile, flexible and educated workforce with a very low population density. We’re also bloody good at what we do when it comes to building networks. Our long term future is very bright but we are in a vice grip, led by another group of politicians that don’t get it. They still talk the language of sixties campus ideology, of “creating jobs”. Course that’s utter tosh.

You create the environment that improves productivity, that generates prosperity and you engineer policies that distribute that prosperity fairly, most especially to the most vulnerable, without destroying the engine room. That is the private sector. The public sector is a cost upon it. The lighter, more efficient and effective you make the public sector, the more prosperity that can be created. In other words, back off and let the private sector do what it is designed to do; create prosperity and, with it, jobs but jobs that pay more not less.

That’s why I wrote this wish list in my letter to you Santa this Christmas;

• Add at least three Cabinet Ministers contracted from the private sector, business leaders with the savvy to transform Irish policy to attract and build new technology hubs especially, in energy, healthcare and new urban city smart technologies
• Replace the tired, visionless and Edwardian senior civil service elite with contracted CEO’s that have track records in transforming complex enterprises.
• Invest immediately in the agency needed to tackle the mass consumer insolvency that is strangling any chance of a domestic economic recovery, returning at least 200,000 fellow citizens as active consumers to us.
• Shrink The Croke Park Agreement to those earning under sixty grand a year and start chopping above because the half a billion pension fund theft in Sept has covered up a vast fall in income taxes and there is no way, no way, that the poor can take another Monday like they’ve just had. Based on 2009 data, there are 76,000 public sector workers earning over €60K of which 35,000 earn over €80k and 17,400 earn over €100k.
• Position Ireland as the bottleneck to any Maastricht Treaty change by insisting on a popular vote to leverage more debt relief.

Thanks Santa

- Eddie Hobbs

Yesterday in putting the savage cuts in context I wrote that raising tax on work is just about the dumbest thing to do when in a recession. But that’s largely what we’ve been doing so far. We burst the country trying it for 12 years until 1987 and we were on track to do it again as tax receipts crashed. Minister Noonan, in his first budget grasps the nettle finally. No more income tax increases. Come January end your net payslip will be unaltered. By doing so he’s telling anyone who is squirreling cash, loud and clear, that it’s ok to come out spending again, even if VAT is going to 23% on non-essentials. If you save, DIRT is now 30% and 33% for Exit Tax on unit funds. Motor tax is going up, so too fags and booze though not from excise duty. Capital taxes rise to 30% and thresholds for inheritances from parents to kids collapses to €250k. This Minister is getting his €1billion from taxing our consumption. He has also increased the exemption from USC on those earning four grand to ten grand, about time.

For understanding the psychology of consumer economics in a depression, you have to give Minister Noonan credit but I’m not sure about his attempt to stimulate the deflated property market. It’s clear that NAMA and its €75 billion in our assets is being protected from the failure to deal with upward only rent reviews. Hiding behind property rights and the constitution doesn’t wash. In an emergency we can change anything including the constitution, just ask the next Judge you see about his “unconstitutional” pay cut. Minister Noonan proposes a review of hard cases, retailers ready to go burst, but any agency that is prepared to rewrite NAMA rent contracts must not be part of NAMA.

But there’s nothing here that will stimulate growth, just indirect supports for the domestic economy. He is working on hope, hope that someone else, FDI or savvy domestic entrepreneurs will appear like fairy godmothers and sprinkle some magic growth on the Irish economy. Noonan has a good grasp as a bean counter but he displays no grasp of how to encourage prosperity and generate jobs from it. No flair.  Like Wilkins Micawber in David Copperfield, Mick Noonan’s growth plan is that something will turn up. This passive strategy is tied up with a successful outcome at Friday’s summit otherwise we’ll be back to square one and the Dept of Finance’s estimate of GDP growth of 1.3% will have as much validity as its  gross miscalculation of GDP growth before the burst.

But the glaring chasm in both Minister Howlin’s and Noonan’s plan is that neither of them have provisions to deal with the cancer eating at the marrow of the economy – massive consumer insolvency. There are at least 200,000 Irish people stuck in the blight of distressed mortgages and other debts and their arrears keep growing. The economy cannot recover without a plan to implement a comprehensive and modern debt resolution process. That, according to one report, means at least 100 full time insolvency experts designing, customising and negotiating workouts for those who will otherwise remain in a standby economy, a ghetto, non-participants in any recovery. Although Minister Noonan made passing reference to Government concerns, we are four years into the mortgage and debt arrears crisis and not a single cent has been allocated to any new agency to tackle it. Until rhetoric is matched with clear cut action and backed by sufficient firepower to deal with the vast scale of the crisis, it’s impossible to read this as a budget for recovery.

- Eddie Hobbs

The game, until Budget 2012 was to dream that there was a safer place, a better refuge from austerity. It’s now clear there is not. Vested interest groups shouted ideology across the divide at each other, in many cases devoid of any logic or an understanding that money is not an agricultural by-product of planting trees . Still we tried taxing the bejasus out of the economy but just look now at the result - collapsing tax receipts.

Nobody wants to hear this today when it’s popular to rage about cuts, but it’s the truth. The longer you try to raise taxes instead of cutting, the worse the economy becomes. Still the political instinct for self preservation never fails to try the economically impossible. In 1975 Ireland hit a deficit of -7.6% and spent the next 12 years getting it hopelessly wrong. Taxes as a percentage of GDP rose from 38% to 44% but spending was maintained, barely moving from 49% of GDP in 1975 to 48% in 1987. The politicians played politics while the economy died, growing at a paltry 1% pa. Ireland got increasingly poorer, our young left in droves. We weren’t the only country then led by chuckleheads. Austria spent 14 years getting back into balance and Spain 15 years by taxing instead of cutting.

By 1987 with debt to GDP at 123% Irish politicians simply had to cut, cut and cut. We couldn’t borrow another cent. Three years later after truly savage cuts, except on education, Irish GDP was roaring at 5%pa and the Celtic Tiger had started. We know how it ended. Public spending, much of it pay and pensions, gorged itself on once off property tax revenues. The power of public sector unions meant that yesterday’s cuts could not come from the inflated pay and numbers that characterised the tiger period. It is easy math. Social protection accounts for 38%, pay and pensions another 36%. Immunise one and you savage the other but predicting this inevitable juncture at the outset of the crisis was as about as popular as Jesuit support for Gallileo in Rome four hundred years ago.

Still despite the rhetoric, this Government’s first budget went after the lowest hanging fruit. Cutting capitation fees to schools is a community tax, meaning more cake sales, more mercy payments. Money to pay the heating is cut before pay. Reducing jobseekers benefit but not capping Bertie, Brian and Mary’s pension is cruelty. But it can’t last. The new coalition have simply bought twelve months at most. There is no way The Croke Park farce can stand against the cuts of Christmas future;  €1.7bn 2013, €1.9bn 2014 and €1.5bn 2015. Yesterday is the smallest of the four at €1.45bn. 

The announcement to move to multi-annual spending programmes and away from an annual budget circus that only encourages media leaks, backbencher histrionics, back room dealing and power plays by vested interests, is most welcome. But by next Monday it should be clear that all Minister Howlin is doing is fitting into the new model being prepared as part of the price of continuing Eurozone membership, a precursor to Treaty change. 

You can forget all the guff about being back in markets and restoring economic sovereignty as Taoiseach Enda Kenny would have us believe is an achievable goal. Minister Howlin’s new template is being readied for the new Ministry for Finance in Brussels. The Dail and its annual budget will become to Brussels what Louth County Council is to us; of interest only to locals, an exercise in the illusion of self governance, ruthlessly controlled from the centre of power.

- Eddie Hobbs

The following is an email I received from Brian Malloy a director of HC financial advisors, a large independent financial firm west of the Shannon! What struck me about Brian’s thinking is that he is taking a cynical optimist view, that large countries will, cynically act to preserve themselves. Anyway I so enjoyed receiving something well thought out and argued from another advisor I asked Brian’s permission to publish it on my own website;

1) The Euro is not breaking up - realistically it was never breaking up !! The costs in financial and political terms were always such that it was never going to be allowed to happen.

2) Muddling through (the policy todate) was actually the right policy - given the diverse structures within the EU and the Eurozone. Without it there would have been no means of forcing "regime change" in the most exposed countries (Greece, Ireland, Spain, Portugal, Italy). Muddling through without a single massive solution meant that the market (and the threat of bankruptcy) was used to bring these countries to the current position - new govt. full acceptance of the need to get their fiscal house in order. IF the ECB had jumped in during 2010 how likely would massive austerity measures have been in places like Italy? Spain? Would Greece have continued to play fast with the truth?

3) Merkel (and Trichet) was 100% right - the ECB should NOT simply print money.

4) The time is right now for a big solution - but it needs to have market controls. The market is a cruel master and that is what is needed to keep countries in line (for everyone's long term good). The idea that the market drives countries out to the arms of the IMF (using ECB funding) is actually quite a good one. It takes the normal politics off the table and uses the strength of the IMF to force countries to sort them selves out (fiscally) whilst at the same time using the ECB to fund this (without it becoming an easy source of unlimited funds.

5) In that context the EU17 can announce that they will (over time) implement a model of centralised debt management (eurobonds could be a part of this or cross guaranteed debt etc). There will be rules attaching which will include areas such as 3 and 5 year budgets being submitted and reviewed. It may require treaty change but actually a "cleverer" idea would be to keep it out of the overall EU treaty and limit it to an MoU between the 17 countries - this could be ratified by Governments outwith a full treaty referendum. There would be acceptance that this would take time and that in the interim countries would need to move to a position of fiscal balance etc (stability and growth pact for slow learners !!). Some countries will struggle to achieve market support during this period and an immediate solution will be available to these in conjunction with (and under the auspices of) the IMF.

6) This solution is attractive because it ticks the boxes for the big guys - the big guys get the Euro stabilised (they need that at least as much if not more than anyone else) without the ECB becoming a printing press for the profligate countries. The Germans don't mind the carrots of printing money or centralising debt issuance PROVIDED that there is a big stick to enforce austerity and keep the countries fiscal position in balance. They know that having the EU police that is pointless (thats what got us here) but the IMF is a different matter. The smaller guys get euro stability and access to funds. The politicians get cover for implementing austerity - "do it or the IMF will come in" or (as we have here) "we have no choice - the IMF said we have to".

Anyway - just my thoughts on it Eddie

Here is the link to HC if you’d like to contact Brian Molloy and for the record I have no financial or personal links to him or his firm; http://www.hcgroup.ie/index.htm.