It seems clear that Sinn Fein has briefed the troops to equate Irish unity with German reunification. Since last week’s BBC/RTE poll on the subject, elected representatives and the party faithful have been drawing Teutonic parallels. Special mention to the Radio Ulster caller who claimed German unification had been opposed by “British economists”. Did they threaten 800 years of recession?
Germany is an unwise comparison for republicans to make because it has been unified through an enormous, endless west-to-east subvention, while Irish unity is widely accepted to mean ending the UK’s enormous east-to-west subvention.
Sinn Fein contests the size of this subsidy but virtually nobody else does. It was £9bn at the last official estimate, in 2014, with a well-understood and modest margin of error. Claims that this figure would be halved without our share of UK debt interest, defence, EU membership and so on are sophistry. A united Ireland would have those costs too and our share of them would add up to nearly as much. Even under best-case numbers, losing the subvention would shrink the size of our economy by 25 per cent at a stroke.
However, there is a European comparison that suggests this is perfectly survivable. In 2008 and 2009, Latvia’s economy shrank by 22 per cent, most of it inside a six-month period. The cause was a burst property bubble, forcing the government to cut public spending by 15 per cent of GDP. The country had been living beyond its means on this scale, with budget and current account deficits each around 20 per cent of GDP. In effect, Latvia lost a Northern Ireland-sized subvention and the immediate result was the sharpest, deepest recession suffered by any country in the recent global crisis. Yet within three years it had the fastest growth rate in Europe and by 2013 its economy was larger than it had been the year before the bubble burst.
Latvia and Northern Ireland have some fascinating similarities. Our populations are the same size, as are our economies if measured by purchasing power. Our societies are both defined by an ethnic-national divide, with Russians and others comprising 40 per cent of the Baltic state’s inhabitants.
Latvia’s experience of recession is also strikingly relevant. It made all its budgetary adjustments up front, refused to devalue its currency and had an unusually well-prepared banking system, thanks to a crash in the 1990s. This mirrors any plausible scenario for the creation of a united Ireland inside the Eurozone.
Economists are predictably divided over what Latvia’s recovery means. For the right, it is proof that austerity works. For the left, recovery has been overstated. Record-breaking growth did not last, GDP has still not returned to its 2008 peak and a tenth of the population emigrated. Perhaps the best attempt at an objective study was a 2013 report by the Washington-based Brookings Institute, which found no evidence that austerity had either helped or hindered Latvia’s recovery.
Instead, most experts credit productivity growth with putting the country back on track. Latvians worked harder, or smarter, or both. This is not an entirely rosy picture, as it will have been driven by less productive firms going bust, less productive workers being sacked under Latvia’s very liberal employment laws and everyone else being terrified of losing their jobs. But unemployment has more than halved since its 21 per cent spike and is projected to keep falling, so this most frightening aspect of economic change is almost over.
The Latvian lesson for Irish unity is that a short, sharp shock could be far shorter and less shocking than commonly supposed. The ‘reverse multiplier effect’ of spending cuts, often mentioned by DUP former finance minister Sammy Wilson, is believed from this and other cases to be significantly weaker today than when the economist John Maynard Keynes formulated it in the 1930s. It may also be the case that living within your means is no great dislocation from living beyond your means.
However, the best reason to examine Latvia is to raise the standard of current politics in Northern Ireland. Few people may believe that Irish unity is imminent but the constitutional issue is not going away and failure to address it intelligently poisons everything, for unionists and nationalists alike.
Northern Ireland plays Latvia tomorrow at Windsor Park. Martin McGuinness can now bring himself to wish the home team well. In another few years he may even be able to mention it by name. How much longer before he can say “15 per cent cuts”?
newton@irishnews.com
