Business groups were calling for a vote for “stability” before the general election. The electorate has delivered a result which provides a route to what could be a very stable administration – via a Fine Gael/Fianna Fail coalition – or the possibility of lengthy period of political instability.
A few weeks of political instability as a government is formed, or even a second general election, need not cause a significant hit to business confidence, or to Ireland’s reputation in financial markets – though it could cause people to hold off investment decisions just to see what happens. Like us all, the business and investment world will be wondering where on Earth this is heading, with votes going in every direction.
There isn’t a lot can be said with confidence, but there seem a few few likely consequences, whatever the precise shape of the new administration. I think it is likely that water charges are are on the way out and quite possibly Irish Water, too.
Nobody will take up the European Commission’s call to allow the local property tax rise with house prices. So much for spreading the tax burden away from income.
The more aggressive part of Fine Gael’s plan to abolish the universal social charge is gone too, and the emphasis in the next budget looks likely to be firmly on spending on services. But there is a long way before we get to next October.
There are two broad issues for businesses and investors. The first is whether policy might be changed in an “anti-business” fashion, or in a way which might throw the recovery off course. For now there is no suggestion a new government might try to, say, renegotiate budget goals with Europe, push up taxes aggressively or change course in any dramatic way.
Bond-market wobbles
Some wobbles in the market for Irish bonds cannot be ruled out, but most investors in this market are long- term players. For as long as the economy keeps growing and Ireland is hitting its targets we will still be able to borrow at what is a reasonable rate.
Investors would see a Fine Gael/Fianna Fáil coalition as “market-friendly”, as one analyst put last week. Supported by European Central Bank buying, bond markets are strong and Irish 10-year rates are below 1 per cent.
However, what has happened in Portugal offers a warning: an inconclusive election there and a new left-wing government calling for an end to austerity have sent 10-year bond yields to close to 4 per cent, though they have fallen back to 3 per cent. It shows that confidence in high-debt countries can still be upset quickly enough.
As the political talking continues, the country will continue to operate, with the Government remaining in place and the Civil Service effectively playing a central role.There are some economic differences between the policies of Fine Gael and Fianna Fail – in relation to water charges, for example – and some difference of emphasis on the public finances. But it is nothing that couldn’t be negotiated to create an agreed programme, if the will was there.
Political vacuum
The political calculus shows risks for the two big parties here, and a grand coalition is far from a certainty. Where this could start to take an economic toll is if a political vacuum continues interminably, perhaps reflected in a minority government always on the brink of collapse, or in an inability to make policy decisions.
Belgium is often quoted as an example of a country which operated for a lengthy period without a government – 19 months under a caretaker administration in 2010-2011. But here you could see two problems. One is if any crisis hit. Would you fancy being without a stable government to decide on and outline Ireland’s position if Britain voted to leave the EU in June, for example, or if a slump in growth called for some tricky budget decisions come October?
Taking a more positive viewpoint, some kind of stability is needed if a new government is to tackle the key economic and social issues in areas such as housing and health. Not doing so could threaten growth in the years ahead and would involve social costs. Never mind the “fiscal space” – some kind of “political space” is also needed to tackle these issues.
You could argue that a stable Fine Gael/Fianna Fáil coalition could tackle some of the key problems Ireland faces, underpinned by a majority and a reasonable growth outlook. But in an era of increasingly populist politics – and with an obvious distrust in the political system – reform will not be easy to deliver.
