Time to fight monopolies properly and stop public sector bringing up the Reer

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By Cormac Lucey

According to Eurostat, Ireland is now the second most expensive country in Europe for consumer goods and services. Across a broad cross-section of products, prices here are 125% of the EU average, with only Denmark more expensive. When it comes to alcohol and tobacco products, we are way out in front, with prices 175% of the EU average.

Deutsche Bank conducts an annual survey of global prices for a variety of goods and services. The most recent one covered 47 cities, and Ireland’s rankings make interesting reading. In terms of income levels, we are firmly in the middle of the developed world, but our costs rival those of the planet’s richest countries. We ranked 19th (-5) for disposable incomes, but were 13th (+6) in the list of highest rents and 12th (+5) most expensive for a “cheap” night out consisting of taxi rides, McDonald’s burgers, soft drinks, two movie tickets, and a couple of beers.

Why is everything in Ireland so costly compared with other countries?

I believe there are several factors. Take the price of alcohol. The government has intervened heavily to raise its retail price, most budgets increase alcohol taxes, and there has been a strong campaign to introduce minimum pricing.

The World Health Organisation estimates the average Irish person aged over 15 drank the equivalent of 10.9 litres of pure alcohol in 2016. That’s a drop of almost a quarter compared with the 14.4 litres we got through in 2005. Our consumption levels now lag far behind Britain, France and Germany. High taxes appear to be reducing alcohol consumption, but perhaps consumption would have fallen anyway as the population has grown older.

The fall in consumption has not stopped the anti-alcohol zealots campaigning for higher taxes and minimum prices; instead, alcohol taxes have become a totemic symbol for people to show how much they care about the problem of alcohol abuse, rather than a logically used public policy lever.

Another factor behind high alcohol prices is the strong market positions of Diageo/Guinness and Heineken/Murphy’s. According to Euromonitor International, Diageo enjoys a market share of 42%, and its combined share with Heineken must approach 70%. What is the position of the Competition and Consumer Protection Commission on this dominance?

The banking sector is similarly dominated by Bank of Ireland and AIB Bank, with Ulster Bank and Permanent TSB Group limping behind. European Central Bank surveys of eurozone loan rates regularly show that lending rates for loans to Irish SMEs and mortgage borrowers are among the highest in the single currency area. How has the state reacted? It established the Strategic Banking Corporation of Ireland (SBCI) as an offshoot of the National Treasury Management Agency.

Two aspects of the SBCI’s establishment are noteworthy. First, it addresses the funding needs of SMEs — it does nothing to address the relatively high interest rates faced by Irish mortgage borrowers. Second, credit is provided through “on-lending institutions who, in turn, will lend directly to SMEs”, according to its website. So, rather than challenge Ireland’s cosy banking cartel, the SBCI works with it.

Reflect on these facts when the Taoiseach Leo Varadkar and his finance minister proclaim their concern for the needs of ordinary people. I don’t dispute their concern, but I dispute whether they have thought through how to confront market dominance properly.

It is hard to avoid the conclusion that the state’s commitment to combating monopolies and oligopolies is little more than rhetorical. In this we are copying an international fashion that has allowed the development of dominant market positions by Microsoft (with its Office suite of applications), Google (internet search), Facebook (social media) and Amazon (retail), unhindered by considerations of anti-monopoly law.

Another under appreciated aspect of Ireland’s cost problem is the influence of eurozone interest rates. Prior to 2008, eurozone interest rates were too low for Irish economic conditions. That spurred additional activity, boosting costs here compared with our international competitors. The ebb and flow of the ECB’s influence on our prices can be seen in Ireland’s real effective exchange rate (Reer) over the period.

The Reer doesn’t just measure movements in an economy’s exchange rate. It also captures changes in its cost base. This means that, while Ireland and Germany may share the same currency, we still have different Reers.

The think tank Bruegel maintains a database of Reer data. Ireland’s Reer rose by more than 35% between 2000 and 2008, as stimulative eurozone monetary policy aggravated inflationary pressures. But about three-quarters of that relative cost inflation has been reversed since 2008, when ECB monetary policy was too tight for our needs. Comparing Ireland’s Reer with Germany’s shows the same pattern of inflationary pressures prior to 2008 and subsequent deflationary pressures. With eurozone monetary policy now somewhat too loose for Ireland’s needs, a resumption of inflationary pressures may be expected.

After 2008, and until recently, eurozone monetary policy was too tight for Irish conditions. That depressed economic activity here and exerted downward pressure on Irish prices. Deflationary pressure in the labour market was largely borne by reductions in the numbers employed as getting wages to adjust downwards proved extremely difficult. Economists Kevin O’Rourke and Alan Taylor observed the same pattern in Greece, Portugal and Spain in their article Cross of Euros.

Intense competition in traded goods that can easily be bought abroad prevents the price of manufactured goods in Ireland getting too far out of line with those of our neighbours. The cost of electronic goods here matches the EU average. Yet domestically traded services face considerably less price competition from abroad. Our restaurants and hotels are the fourth most expensive in the EU.

The domestic service that faces the least external competition here is the public service. Its key wage costs remain very high and unaffected by clear evidence of inadequate service delivery.

The quest of reducing Irish prices to levels closer to the EU average requires significantly greater levels of vigilance in the areas of enforcing competition law and withstanding acts of economic self-harm from the public service.

Published in The Sunday Times (Ireland edition)

November 5th 2017