Opposition economics: Part one: The Labour Party

In the first of a two-part series, Owen Bennett evaluates the economic policies of the political parties that are most likely to shape Ireland’s destiny over the coming years.

For years, the Labour Party has been in the shadow of the big two political forces, Fianna Fáil, and Fine Gael. However, the emergence of a strong leader in the form of Eamon Gilmore, aided by popular discontent, has propelled Labour to the forefront of Irish politics. If opinion polls are to be believed, it is almost certain that Labour will form part of the next government; the only outstanding issue, seemingly, is to what extent.

Given the scale of the problems currently faced by Ireland’s embattled banks, Labour’s proposed solution to the banking crisis constitutes a cornerstone of its economic policy. Unsurprisingly, Labour is categorically opposed to the NAMA project. It claims that NAMA places too much risk on the Exchequer and fails to guarantee the resumption of lending to smallto- medium enterprises (SMEs) and households. Moreover, within both Labour and Fine Gael there is said to be unease at the degree of power invested in the Minister for Finance in relation to NAMA’s workings.

In light of the perceived shortcomings of NAMA, Labour has devised an alternative solution to the banking crisis, one which it says minimises risk to the taxpayer and assures access to credit for SMEs. It proposes that AIB and the Bank of Ireland be nationalised temporarily. The weakened loans held by the two banks would be transferred to an asset-recovery trust, which would operate in a similar fashion to NAMA. However, crucially, the asset-recovery trust would only pay the market value for toxic assets, thus eliminating the risk attached to NAMA’s valuation process, which is based on “long-term economic value”.

Temporary nationalisation of elements of the banking sector has been attempted before, with mixed success. Most notably, in the early 1990s the Swedish government implemented a plan similar to that of Labour. It was credited with resolving that country’s banking crisis. Speaking earlier this year, the minister who masterminded the Swedish nationalisation plan, Bo Lundgren, championed temporary nationalisation as the most appropriate solution to the present crisis. Nationalisation would solve the banks’ funding problems all at once, obviating their struggle to raise capital privately.

Although Labour’s temporary nationalisation plan might seem attractive initially, there are a number of worrying consequences intrinsic to nationalisation. The most glaring flaw with Labour’s proposal is the scope for political meddling in the workings of the banks. The party’s most recent manifesto on the banking crisis, “Protecting the Taxpayer”, claims that “the legislation governing nationalisation would specify that the day-to-day running of the banks would not be subject to political control”. Worryingly, the party has yet to indicate how it intends to prevent the sort of political interference feared by many.

Nationalisation of the State’s two largest banks would invariably drive up the risk premium attached to Irish Government bonds. As the Exchequer and the banks would effectively be joined at the hip, only one Irish entity would be borrowing on the international markets; with both banks and the Exchequer relying on international borrowing, borrowing costs would manifestly rise above their already precarious levels.

The Labour Party recently published a document outlining the direction in which it hopes to take the Irish economy over the next 10 years. The party intends to harness a so-called “investment economy” in Ireland, where improved infrastructure and easy access to capital for firms will culminate in sustainable growth, year on year.

In order to realise these ends, a strategic investment bank would be established. This bank would be charged with investing in infrastructure to improve competitiveness, and with providing working capital to SMEs. The notion of state-sponsored bank investment is broadly similar to the former ICC and ACC banks, set up in the early twentieth century to fulfil the same role in the economy.

This is an idea which has also been mooted by Fine Gael to address the market failure apparent in the banking system’s inability to fund enterprise. It is true that the state of infrastructure greatly hinders the Irish economy’s ability to compete internationally. A State investment bank, similar to the bank Labour envisages, might just be the vehicle to drive investment in infrastructure. The EU Stability and Growth Pact hinders the Government’s ability to borrow large sums for capital and for strategic investment; a State investment bank would not be subject to this pact, meaning it could borrow money internationally to finance its loan book.

Nevertheless, there are a number of difficulties that will be encountered should the strategic investment bank be created. A huge capital outlay will obviously be required initially to capitalise the bank, which will necessitate increased borrowing by Government or further depletion of the already shrunken National Pension Reserve Fund. In addition, Labour intends that the bank retain all profits so as to increase its capital base. This could possibly eliminate the bank’s motive for profit, resulting in a web of inefficiency and bureaucracy.

The leftist ideology of the Labour Party shines through in its current economic strategy. A Labour government would vastly increase the State’s influence in the economy. Only time will tell whether these policies will come to extricate Ireland from the worst economic crisis in living memory.