The EU on Ireland's Lack of Investment and the Improving Irish Labour Market

Paul Sweeney: I continue my examination of the recent EU report on Ireland EU Country Specific Recs. Ireland. It recommends three priorities for EU economic and social policy in 2016: re-launching investment; pursuing structural reforms to modernise Member Statesʼ economies; and what they call “responsible” fiscal policies. It is a staff working paper and while not necessarily reflecting the views of the Commission, it is close, in my view.

In the last blog I agreed strongly with the EU’s recommendations on the need for far greater exchequer investment than is planned if growth and social progress are not to stultify. However, it recommended that the all the proceeds from the bank privatisations be used to pay down the national debt. With i) interest rates being as low as 0.8%; (UK at 1.4, US at 1.8, France at 0.53 and Germany at 0.17%) with ii) our net debt position being much better than the gross; and with iii) a pressing need for investment in public infrastructure and training, that would not be a sensible economic policy (conservative economists love this word “sensible”!). Indeed neither would it be “responsible” fiscal policy in my view.

But that is the stuff of political economy. But if the Irish fiscal hawks suddenly can concede billions on both the USC and Irish Water, maybe they can push the boat out with the Commission on its overly restrictive rules on the utilisation of the bank proceeds and allow it for investment, rather than repaying down the national debt? This makes economic sense, generating an immediate return far in excess of the interest saved, especially at these rates.

On the structural reforms, the Commission usually advocates what it calls “labour and product market reforms.” This is code for reduced protection for all workers, lower pay especially for the low paid, higher pay (less direct taxes) for the high paid, cuts in welfare, outsourcing and privatisation.

As Ronald Janssen, of the OECD advisory body, TUAC, points out here research by IMF staff has found there is no evidence that reforms that deregulate labour markets have any positive impact on increasing the economy’s growth potential. “As labour market deregulation has been a key ingredient in the IMF and troika’s financial bail-out programmes in several European member states, this raises serious questions about the way the IMF itself has managed the financial crisis – particularly in Europe.”

However in this EU staff report on Ireland, it does not do this except in its criticism of the government failure to reform the protected labour market in the Irish legal system. It is critical of the failure in the new laws to tackle the legal cartel and so push down legal costs, a point which objective commentators would not disagree.

On legal reform, it says “Some of the concessions made to the legal professions have significantly reduced the initial ambition of the reform. This will affect the prospects of allowing the entry of innovative players and enhancing competition.”

Indeed it is quite positive about the general labour market, from a conservative perspective. “Significant competitiveness gains have been achieved in recent years, including through increased labour productivity and moderation or falls in private and public sector wages. Competitiveness gains and demand shifts have contributed to external rebalancing and Ireland’s current account position turned into surpluses.”

High economic growth has pushed the unemployment rate below the EU average. “Ireland added more than 135,000 jobs in the three years to the third quarter of 2015 (an increase of almost 7.5 %).” This is a considerable achievement. However it warns that long term unemployment remains high. The proportion of long-term unemployed in total unemployment remains high at 55.6 % in Q3-2015, exceeding the EU average of 48.2 %. Most are in construction and so a major investment programme would have a big impact there.

The report finds that “productivity growth also contributed significantly to the downward adjustment in unit labour costs. Initially, productivity rose as firms were downsizing and shedding labour. More recently, however, productivity has continued to increase while the economy is in full recovery mode and adding jobs. Although nominal wages are starting to increase again, continued productivity growth is expected to hold down unit labour costs in 2015 and 2016.”

The Irish trade unions in their submission to the EU Commision pointed out that “There are serious problems with the quality of some jobs with some employers making increasing use of bogus self- employment” ETUC Submission on Country Specific Recs (p41).

The recovery has improved both the employment and unemployment rates of all skill groups, it points out that a significant share of workers with lower skilled are what it calls “discouraged.” It is also worried about the effectiveness of current activation policies and employment support schemes and upskilling and reskilling opportunities continue to be insufficient. It says that while Ireland has a high rate of third level attainment, there are still problems in access for disadvantaged groups, meaning fees or loans may be needed to also fund the sector.

Finally it says that while some steps have been taken to improve access to childcare, “the limited availability and high cost of childcare remain significant barriers to increased female labour market participation and hinders efforts to reduce child poverty.”

If there is not a serious increase in investment in infrastructure, this will undermine the jobs programme and impact on social cohesion. Investment did not even feature in any serious way in any party manifesto. It is a very serious economic issue. Especially compared to the current dialogue on the priorities for the next government.

In the final blog I will examine what the report says about equality, fiscal policies, property tax, Irish Water, water charges and healthcare.