Economics always eventually trumps politics, as the Republic of Ireland's experience shows.
There has been huge attention in Ireland about how long the present Prime Minister, Brian Cowen, can survive and indeed about the balance of power following the forthcoming General Election. But if you strip out the politics and the personalities, the story has not changed. It is of a long march back towards solvency after a monumental binge.
There is really only one question: to what extent will Ireland pay its debts? It is a question that will be answered one way or the other in the next three or four years and I don't think at this stage we can know the answer. What we do know, however, it that there is already an extraordinary contrast between the successful export sector and the dismal property sector. Sadly, debts of the property sector are dragging down the entire economy.
As it happens I was in Dublin over the weekend and caught a glimpse of the contrast. If you go out to the new developments on the ring road you see the disaster. What from a distance looks like a finished office block is not finished at all. You get close up and you see that there are just light panels fitted onto the steel and concrete skeleton to make it look as though it is a building when it is really just a shell. And work, of course, has stopped. I saw the same phenomenon 12 years ago in Thailand, when the Asian property bubble burst, except then they were called X-ray buildings because you could see right through the frames – they had not bothered to try and clad them.
Now that was on the posh south side of Dublin. Eventually, the blocks will be completed and tenanted. Given the great location and the underlying strength of the Irish economy, yes, they will be fine. Go to the country and there is another story, for there are ghost housing estates that are too far from other centres of population – too far from jobs – that will never be completed. It is not just that these houses have no value; they may have negative value because of the cost of pulling them down. That debt overhangs Irish banking.
But Ireland, despite what you read, is not entirely a negative story. I have just been looking at some figures for food and drink exports. They were up 11 per cent last year and producers were generally optimistic about 2011 – as you might imagine given what is happening to food prices worldwide. Ireland's high-tech exporting story has been widely reported; its more traditional export industries less so. What is really interesting is that this export boom is not the result of devaluation, for Ireland of course has remained in the eurozone.
You get a similar feeling of uplift actually in the city centre. True, there are voids: empty shops and offices. But the shops in Grafton Street seem full enough, restaurants are busy, traffic is almost as bad as it was during the boom years, flights at the airport are full – and I did spot one Bentley. As someone who knew the city in the old days, the present mood does not feel too bad at all.
It is not for outsiders to comment on Irish politics, except perhaps to observe that a government that has presided over an economic catastrophe will always find it hard to choreograph the journey back to health. Nor is it helpful for outsiders to urge this or that policy on the Irish government. What can be said, though, is that turning points do not come suddenly and cleanly and that the early stages of a recovery are always uneven.
Ireland matters a lot for the UK, not only because our banks, Royal Bank of Scotland and HBOS in particular, lent a lot of money to the country – stupidly as it turned out. Ireland is also as big an export market for the UK as China, India, Russia and Brazil put together. The debt issue is huge and not yet fully resolved. There is no easy way of fixing that. But it would be a relief if I am right and the economic turning point has indeed been reached. Once growth is secure then you have time to set about sorting out the finances.
Let rates stay as they are for now
One problem Ireland does not have is inflation, for prices were up just 0.6 per cent on the year. The UK, by contrast, has the most serious inflation of any large developed country. Say that again – the most serious inflation of any large developed country. It will get worse as the tax increases, including of course the 20 per cent VAT, feed through.
But even those of us who feel the Bank of England has been too complacent on inflation would find it hard to buy the "soaring interest rate on the way" headline. A rise in inflation was not just the logical outcome of the Bank's policy of quantitative easing; it was the intended outcome of that policy, as the Bank made clear in its briefings on the subject.
It was the final bit of the jigsaw, following increases in asset prices and real demand. I suspect we have gotten rather more of this inflation than the Bank boffins had in mind and that was because the timing has been unfortunate. The effects of QE have come through at the same time as external price pressures from commodity prices and the oil price. But there is, as yet, no need to tighten monetary policy right away, for two reasons.
First, we really do not know what the effects will be of fiscal tightening. My own guess is this will be less damaging to demand than the economic models suggest, but that is only a guess. Second, tightening has to be gradual. We have to have higher interest rates and it would be wise to expect these by the summer. But we have also to maintain a flow of funds into investment. There is not much point in having notionally low loan rates when you can't get a loan. Much better to have slightly higher rates and better availability, which is what we will eventually get.