2010: From "Who's to blame?" to "What's next?"

As 2009 draws to a close, many column inches and front pages are still being devoted to the transgressions of the former chief executives and chairmen of our ailing banks. In the run up to Christmas, the big story was how Charlie McCreevy and other Fianna Fail politicians of varying prominence availed of generous property-related loans with the minimum of fuss and paperwork. The newspaper and broadcast media realise that the dial on the national psyche is still turned to anger and they would be fools if they failed to capitalise on this. But in my opinion they are doing us a slight disservice. While it is completely appropriate to look into the banking, regulatory and governmental failure that has helped to nobble our economy, the media should also be asking one decidedly more important question - "What's next?"

Many commentators have been harping back to 2003 as some kind of economic golden age. This year is correctly cited as the year in which the banks started to increase their loan to deposit ratios and take on more risk in order to maximise profits. In 2003, on average, banks in Ireland had €100 on deposit for every €100 they loaned out. Healthy and responsible. In just a few short years they were lending €160 for every €100 they had on deposit and most of it was going to fund property related activities. Anglo started the game, borrowing heavily on foreign markets in order to pump money into ours. As we now know all too well, the other banks felt they had to keep up, and eventually followed suit, with disastrous repercussions. The Financial Regulator, the Central Bank and indeed the Government did very little to stop these unsustainable credit flows. The Government in particular were delighted to be getting the VAT and stamp duty windfalls from the booming property sector.

So surely to fix our economy, the answer is to go back to what we were doing before all this nonsense started right? After all, our economy was booming ever before this infamous bubble was inflated.

Unfortunately it isn't that easy.

Common wisdom is that economic growth in Ireland up to this point was predominantly driven by our strong exports. And this is true. In 2003 exports were 73% higher than imports, translating to a trade surplus of €35 billion. A fantastic result by anyone's standards. However there are a number of reasons why we can't just turn the clock back to that time again. While exports remain strong, there are many reasons why the international environment is no longer as welcoming to them....

1. Weak sterling/strong euro: Almost 20% of our exports go to our friends in the UK, making them the second biggest recipients of our "stuff". However, recent stimulus efforts by the Bank of England have left the pound a shadow of its former self. They made the choice to devalue their currency in order to make their exports more attractive and their economy more competitive on a global scale. We don't have this choice as we are locked into a monetary union. Our hands are tied. The net result is that we have the overvalued euro, therefore making our exports less attractive to the Brits holding their undervalued sterling.
2. Weaker dollar/strong euro: See above really.
3. World economic downturn in general: Global recession means less spending from consumers and more saving. This means that there is less demand for goods and therefore less trade between nations in general.
4. Less FDI: Most of our foreign direct investment has come from the US. Everyone knows this. Everyone also knows that this has been one of the main drivers of our economic success story pre-2003. Most of our high value exports came from these firms. Your Dells and your Intels. However, even this area is less certain now. Many firms are seeking out lower cost environments. With them go their exports. With them go billions of euro. As the Americans devalue and look to become more competitive, many high-value firms will stay at home instead of looking to set up overseas. And more protectionist policies from the Obama administration may force their hand in that regard.

So, what is the solution then? Where do we go from here? It is clear that there is no real magic bullet. We will likely never see the kind of annual growth rates that we saw in this decade. But there is one area where the surface of our potential has not even been scratched. Let me give you a statistic. The amount of money spent on research and development by Irish firms last year was €400 million. Yes, that's million. The same amount of money roughly that the ill-fated Irish Glass Bottle site changed hands for. That to me, is the most shocking figure I've heard all year. It speaks of a complete lack of any entrepreneurship or innovation in this country. But then again, why should it be surprising? Entrepreneurship is not encouraged in this country. In fact it is frowned upon. Middle class mummies and daddies groom their kids to be doctors, accountants, lawyers, teachers. But never do you hear of a pair of pushy parents pushing their young one into using their initative and their acumen to turn their ideas into cash. And who can blame them? The environment in this country is totally anti-entrepreneur. In the UK, if you go bankrupt, the slate gets wiped clean after a year. Here it takes 8! We're a conservative society, we always have been and it's killing us. In this global recession we need Irish people to stand up, show initiative, use their much vaunted brains, and create wealth. Create jobs. This is not happening.

The reliance on FDI-led export-driven growth is not nearly as poisonous as our reliance on a cheap money driven property bubble. But it is poisonous nonetheless, in its own way. We must now start teaching our kids to take the bull by the horns and make sure that they are not afraid to shoot for the stars and miss. We know we have the brains and the talent in this country. We're renowned for it. Why do you think the Yanks love to employ us? We need to stop making money for them and start making money for ourselves.

(Happy New Year!)