Itís time for our leaders to make history

Thursday, 3 November 2016  |  Admin

A guest post by author, John Looby, first published in the Sunday Business Post on 16 October 2016:

After the Brexit and Apple shocks, a step-change in the right direction is there for the taking

Historic opportunity is unsurprisingly rare. For most policymakers most of the time, the mundane management of the humdrum is their likely lot. The opportunity to make a historic step-change in the direction of their country is confined to the fortunate few.

For Ireland, notwithstanding the necessarily humdrum measures announced last week, the unexpected confluence of recent events is now presenting such an opportunity. It needs to be grasped.

The Brexit vote was a shock and is a challenge. However, the opportunity it presents to Ireland is potentially historic. By any measure, London ranks beside New York as the most significant financial centre in the world, and its role is likely to be threatened and ultimately diminished by the Brexit vote.

Dublin, and by extension Ireland, should be the main beneficiary. Since the British vote, our deficient housing and transport infrastructure have been cited resignedly as the major barrier to realising this opportunity. While there is no denying the deficiency, there is no reason why it can’t be tackled successfully.

In a country as sparsely populated as Ireland, this is fundamentally a transport challenge. With the proper high-speed links to Dublin, quality and affordable housing becomes a new and attractive option throughout the country. To achieve this, the tired but apt phrase that ‘we don’t need to reinvent the wheel’ springs readily to mind. Bullet trains with speeds of up to 320 kilometres per hour are a common feature of life in countries such as France, Germany and Japan. There is no technological barrier to reaching Dublin in an hour from practically anywhere on the island.

The extraordinary Apple judgment has generated an array of claim and counterclaim. The appeal process is likely to be lengthy, unpredictable and hard-fought. Whatever the ultimate outcome, it’s clear that the days of depending on an exceptionally attractive tax offering to attract and maintain foreign investment are drawing to a close. As a direct consequence of that investment, Ireland has enjoyed a standard of living since the late 1950s which is markedly and undeniably higher than would otherwise have been possible. With the passing of that era, we need a new approach.

For almost a decade now, the response of the major central banks to the global financial crisis has been clear and decisive. Interest rates have been cut to practically zero, and wave after wave of asset buying has succeeded in the goal of propelling asset prices skyward.

Monetary policy remains extraordinarily accommodative. According to a recent report from Merrill Lynch, there have been 667 interest rate cuts by global central banks since Lehman collapsed in September 2008. G7 central banks own $25 trillion of financial assets (a sum larger than the GDP of the US and Japan). There is currently $12.3 trillion of negative yielding global bonds (28 per cent of total). There is currently $8 trillion of negative yielding sovereign debt (54 per cent of total).

Monetary policy normality remains elusive. Consequently, the funding cost of policy action has never been as low. For Ireland, with a nominal ten-year bond yield of just 0.5 per cent – and a 30-year yield of just 1.35 per cent – the real cost of long-term funding is currently less than zero.

To take full advantage of this extraordinary opportunity within the confines of EU rules, we need to successfully argue the case for splitting the capital budget from the current budget. Simply put, we are a young state with a deficient infrastructure facing new and potentially devastating challenges.

We need to win the argument that, to take full advantage of the post-Brexit world, and to compete effectively in the post-Apple one, a new budgetary framework is needed. We must be free to exploit this extraordinary era of ultra-cheap, long-term funding.

We need a separate multi-year capital programme under a new minister for capital investment – separate and distinct from the rightfully constrained day-to-day current budget. The capital programme should be designed with the overarching goal of making a step-change in our development. There has never been a better or arguably more necessary time to pursue such a programme. Indeed, the greater risk to our future may well be a failure of vision or courage to grasp this reality.

To succeed, there may be a case for partially renewing our relationship with the much derided troika. In this wholly new context, and for this wholly new purpose, we may benefit from its imprimatur and oversight of this specific programme. In particular, it may add crucial weight to the case that we make to our EU colleagues. Now confidently on the front foot, some of the stock of credibility from our successful management of the difficult 2010 to 2013 period could now be deployed wisely.

The coming to power of Sean Lemass in 1959 marked the last step-change in the direction of Ireland. Inspired by the ideas of TK Whitaker, a new political and economic policy actively sought engagement with the outside world.

Trade barriers were gradually dismantled, foreign direct investment encouraged and we began the steady march towards sharing a market, a currency and a political framework with our European neighbours.

The contrast with what went before could hardly have been more complete. The ultimate transition from being a basic producer of bulk agricultural product, dependent on the often volatile British market, to being a broad-based service economy exporting across the globe has been a spectacularly positive one.

A comparable step-change is needed now.

Following the trauma of the financial crisis and its aftermath, the shocks of Brexit and Apple have come thick and fast in recent months. Such challenges can paralyse or inspire.

At the risk of misplaced melodrama, I think the oft-quoted words of US president Franklin Delano Roosevelt from his first inauguration speech in 1932 seem particularly relevant to our choice in responding to our challenges today: “Let me assert my firm belief that the only thing we have to fear is . . . fear itself – nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance.”

Historic opportunity now beckons for our policymakers. For all our sakes, let us hope they can overcome any fear to grasp it.

John Looby is a senior portfolio manager at KBI Global Investors, a global investment manager based in Dublin. The views expressed are his own. John's writings have been published in three collections: 

Investing through Troubled Times: Reflections from the Front Line

Troubled Times: Investing through the Troika Years

Sixty Shades of Sunday: Investment Thoughts