He's Seen The Future And It Hurts

If you wonder why our EU partners want our taxpayers to pay off the loans of a failed private bank, just look who it owed money to – some of the biggest names in Europe. If we don’t prop them up, how many will have to be bailed out by their governments? (Cut-out-and-keep guide to Anglo bondholders by politico.ie)

Listening to Michael Noonan yesterday worried me for a number of reasons. Firstly, because he’s Minister for Finance. That never strikes me as an ideal arrangement. Worse though, he sounded worried and downcast. This on the day when, at long last, it looks like we’re going to get some deal on the bank debt burden. That’s supposed to be about the best news you could possibly hope for.

If you’re a Noonan, that is. In a world where there is no choice but to force the taxpayer to reward the speculator, the best it seems we can hope for is to get the immediate liability for those bond repayments converted into a long term loan from the European Stability Mechanism (ESM), so taking away the looming danger of default. This will improve our credit rating, meaning we’ll be able to borrow the money to repay the bank debts all by ourselves. Whoopee!

Yeah. No wonder he sounds depressed.

The even less joysome part is that there is clearly going to be no write-down. Arguably in fact, the new mechanism will mean that we’ll be closing off any future possibility of burning the bondholders because now the debt will be to the ESM rather than the reckless lenders themselves. So less of a deal, more a sort of… trap.

And now I’m depressed too.

We Need A Fiscal Compact

One size is not going to fit all

Sure we do. Just not this one.

It is good to have a clear plan for getting out of debt, and it is eminently reasonable to have a budgeting agreement between countries sharing a currency. We should all be playing by the same rules if we’re sharing the risks and benefits.

Just not these rules.

Let’s leave aside the pros and cons of the ESM if we can. Even if we never need it – and I don’t think we will – we should join it anyway; to support other vulnerable Euro members and discourage market speculation against the currency. We shouldn’t be looking at this mechanism as if we’re desperate to join. It’s a mutual benefit scheme that we should contribute to – if we can.

But if the price of joining the ESM is this Fiscal Compact, then the price is too high. And I don’t mean too high for what we get in return. I mean too high as in we can’t afford it, full stop.

Even if the ESM were a free rainbows and ponies club, even if membership entitled us to have cash sprayed over us from a hosepipe, we cannot join if we don’t have the price of admission. And we simply don’t.

We have a vast budgetary shortfall, imposed on us by the appalling financial mismanagement of the last government. Since then however we’ve been top of the class, attacking spending with a chainsaw, losing that deficit as fast as humanly possible. We’re suffering for it. We’ve seen employment, health services, education and welfare devastated. We gave away our pension reserve to save other people’s pension funds. But we have made exemplary progress.

The Fiscal Compact – which we join if this referendum is passed – requires us to redouble that cutting.

Look at the state of our public systems now. Imagine if we made cutbacks at nearly twice the current rate. I mean that, imagine it. What would it be like? What would you do, in a country like that?

Get out, mainly. Anyone who can will. We’re going to haemorrhage young, basically. The rest of us… Well, we’re pretty much buggered. We’re going to see an already shrinking economy fold like a ruptured Zeppelin, as further destruction of the tax base turns a nascent recovery into a plughole pirouette.

We’ll be another Greece.

Deficit spending can often be the wrong thing to do, a too-easy option in difficult times. But sometimes it is exactly the right thing, and it has paid off in the past. The Fiscal Compact however means that we can never do it again. No matter what the people vote for, no matter who is in government, even if we can borrow from other sources. It’s an economic straitjacket, one that no country could put on and still call itself free.

What’s more we have to force ourselves into that straitjacket, in far less time than is reasonable, humane, or indeed possible. If we pass this referendum we will be making a commitment that we simply cannot keep. We will be fined for being broke.

This Fiscal Compact was not designed for Ireland’s circumstances, but to stop major Euro economies like Germany and France from doing again what they did wrong before. It will punish us not for our sins but for theirs, prescribe diarrhoea medicine when we’re constipated, bring a wrecking ball when we need scaffolding.

Reject a treaty that will be our worst mistake since the bank guarantee.

What If We Voted No? Your Questions Answered

Irish Times clock on the new building at Towns...
Sign Of The Times. Geddit? God I’m Stuck For An Illustration Today

Yesterday’s post about Ireland’s alternatives to the ESM elicited such a bunch of interesting questions it would really take all day to answer them properly. So that’s what I’ll do.

Ciarán Ferrie of Ireland pointed out:

I found a disturbing little nugget in the fourth paragraph of Paul Gillespie’s opinion piece in the Irish Times on Saturday – In effect, if we vote NO to the treaty, not only will we not be able to draw down funds from the ESM but we will still be obliged to contribute to its initial capital. I think Vincent Browne may have alluded to this double-bind on his show a couple of times but I’m only just realising the implications of it.

I’m assuming that this was agreed before the AG dropped the bombshell of the requirement for a referendum and that the government had assumed they could push the treaty through the Oireachtas unchallenged. Whatever the reasons it puts us in an invidious position with regard to the ESM in the event of a NO vote.

True, but having a chance to claw back what we pay in is hardly a good reason to vote Yes. Really, this is a much better argument for not ratifying the ESM treaty at all.

Which is still an option (even leaving aside the Pringle case, which may yet decide that they can’t ratify it without another referendum), and I think this amendment failing would provide the government with the perfect pretext not to.

They may well do it anyway though – to bolster Ireland’s boy-scout europhile reputation (what good did that do us again?) and to not rock an already waterlogged boat. €1.27 billion over the next three years seems almost like small change compared to our deficit. Though of course that does rather overlook the fact that we’re liable for anything up to €11 billion – in the unlikely event of anyone, you know, actually needing a bailout.

Regular reader Azijn from The Netherlands said:

You mention several times that under the ESM you wouldn’t be able to “invest in growth”. I don’t really understand what you mean by this. What is the precise ESM policy that prevents this? I thought it was mainly a severe constraint on the budget, with very strict rules about the size of deficit spending. (Just like the IMF would).

To deal with this bit first: The EMS – or more correctly the Fiscal Compact we must join to enter it – will compel us to cut government spending at nearly twice the pace we’re already slashing away. Even leaving the immediate human cost aside for a moment, this will have the effect of further shrinking the economy, further reducing the tax take… A vicious cycle looms.

The way to break that cycle would be to borrow and spend as soon as possible to stimulate growth; classical Keynesianism. The IMF – or of course commercial lenders – would have no ideological objection. The Fiscal Compact however requires that, with some leeway for cyclical fluctuation only, governments borrow no more than 0.5% more than income. In other words it bans Keynesianism in perpetuity, for no better reason apparently than German mistrust of it (as I discussed here).

Aside that, you provide a very clear analysis of all the options. It’s sadly clear that all the options, including your preferred one, have major downsides. There’s no silver bullet for the economic problems of Ireland. Or Europe, for that matter.

Especially, because it’s not just conjuncture and aftermath of the mega-losses in the housing and financial markets. A big problem is that while all this is going on, all European countries are concurrently facing the huge (huge!) increases required to simply keep up expenditures in healthcare and retirement funding.

That’s where the biggest pain of ‘austerity’ is felt, but I always find it a tough topic. On the one hand, it’s easy to depict those cutting in the healthcare and retirement budgets as “robbing the sick and elderly”. On the other, it’s a reality that these (often overlapping) groups are experiencing skyrocketing costs.

If any of the “nuclear” options, such as leaving the Euro are chosen, these people will _still_ be among the hardest hit. Also, is it fair to ask younger generations to display solidarity for the elderly, but not ask it all of the elderly?

Well I’m seeing it quite differently. The sick and elderly are my highest priority, and I wouldn’t be suggesting these nuclear options unless I thought they would be better for the vulnerable in society than the merciless constraints of the Fiscal Compact.

Our economy is healthy by the measure that matters most – balance of payments. We ought to be able to raise more money to prevent the sick and elderly getting the brunt of this. To a great extent, it’s Euro membership that is tying our hands. A major factor scaring lenders off now is the possibility that the Euro could collapse, or that we’d crash out of it. If we get that over with, we suddenly become a far more attractive risk. (And of course, our balance of payments gets even better.) It would be hugely disruptive and scary, but very probably preferable to slow economic constriction.

I don’t know what you really mean by solidarity on the part of the elderly though. We’ve already raised the retirement age, I’m not sure what more they can do. Unless you’re subtly suggesting we try legalizing assisted suicide here…

I answered this one yesterday, but I include that here, with a little expansion, for completeness. Hilary Chapman (no known relation) from the UK asks: 

Would it not be best for Ireland to share the currency of Northern Ireland, Scotland, Wales and England, i.e, the pound / punt? Ireland’s economy is so tied up to that of its near neighbours that the euro is an aberration.

That would be a hugely retrograde step. The old Irish pound was pegged to the UK pound from independence until the mid-70s – not exactly an era of sparkling economic performance. A currency union tended to steer business towards or through the UK, only exacerbating the geographic disadvantage of having a larger country effectively sitting between us and the wider world.

So the general thrust of policy for decades has been to untie the economy from our nearest neighbours! Mainly, by finding new trading partners. (And whatever about its downsides, the Euro has definitely been a help in this.) Decades of separate development have made the UK’s importance for trade much smaller than you may think.

You will see shops in Ireland full of UK brands (and indeed, high streets full of UK chains); we certainly do still import a huge amount of retail goods from there. But that may give a misleading impression. From getting virtually 100% of our imports from the UK at independence, we now source less than a third there. In exports we send more goods to the Eurozone, and the US has long overtaken the UK as our single biggest customer.

We may have troubles right now, in other words, but there’s really no going back.

*      *      *

If we do leave the Euro we would first of all devalue significantly of course – but then I think we’d start shadowing it again, with a view to eventually rejoining. I would certainly prefer though if we could rejoin – or stay in – a much modified Euro. One better geared for the benefit of the EU as a whole, less engineered for Germany’s particular insecurities.

I do sincerely sympathise with German concerns however. Inflation, in post-crash circumstances not so different from those now, is seen as a major contributing factor to the collapse of democracy in the 1930s. But preventing the currency inflating doesn’t make the causes of that economic dysfunction vanish. In inter-war Germany, these were largely the heavy burden of debt and restrictions on self-determination imposed on the country by its neighbours, whereas now…

Hmm.

So Where Do We Get The Money?

Cover of "Irish Gold (Nuala Anne McGrail ...They tell us we have to vote Yes to access ESM (European Stability Mechanism) funding, in case we ever find ourselves unable to meet current expenditure. But will it really be our only option? It had better not be – the ESM may never come into being after all. Would it be the best? Only in the sense that it might be cheapest. As I argued yesterday, in every other way it is probably the worst option conceivable, less a loan mechanism than a sort of national receivership. I do not believe we can meet its terms.

So what are the other, officially-denied options? You could categorise them in different ways, but I basically see five. I put them here in not my preferred order, but in what I think is roughly the order of likelihood that they’ll be resorted to (though likeliest of all I think is two or more in combination):

1) The EFSF (European Financial Stability Facility). This is the fund we’re currently availing of for the EU/IMF bailout, and though the ESM with its stricter and (it is hoped) more sustainable rules is meant to replace it, the EFSF will continue to exist for more than another year. Hopefully in that time it will become clear whether we need to borrow more.

2) The IMF (International Monetary Fund). The IMF may have a reputation for setting tough conditions on loans, but unlike the ESM it has no entrenched ideological opposition to countries investing in growth. Some argue that they would refuse to loan to countries that the EU had refused, but the organisation itself has not pronounced either way. And as a partner in our current bailout, the IMF has invested in us already. It is not known for letting its investments go bankrupt.

3) Leaving the Euro. Get out in some semi-ordered way, before we’re forced out precipitously like Greece could be any day now. Devaluing our currency rapidly would solve a lot of our problems, but it would not be painless; imports would leap up in price, effectively making us all poorer immediately. But it would be a huge boost for industry and jobs, sparking immediate actual growth. Indeed, much as I am in favour of the single currency in (broad) principle, it is virtually undeniable that we’d be better off now if we’d never joined. Its inertia has only served to exacerbate both boom and bust.

4) Debt Repudiation/Restructuring. The nuclear option to some, the obvious first step to others. In part this is because we have two main sources of debt, so morally different that they need to be taken separately:

(a) Bailout Debt. However pressured we may have been when we agreed to this, there is a strong moral imperative to, you know, do what we said we’d do. But that is not the highest of all values. Debt repayment does not trump such imperatives as, say, not letting people starve. You can always repay a debt later, but people die for good. No one claims it wouldn’t be a drastic step. It is bound to have negative consequences on other countries, and after we did it we’d be pretty much on our own. But remember the adage – if you owe the bank a million, they have a problem. We shouldn’t be afraid to contemplate default if it can win us better terms.

Most likely of course 3 and 4 would need to be done together, as debts denominated in Euros would be so much more painful if we’re paying in Irish Fairy Gold or whatever. (If we’re getting a new currency we may as well have some fun with it). And by the same token, if we aren’t repaying our debts I think the Eurozone would prefer if we got the hell out.

(b) Bank Bondholder Debt. This though we should have repudiated long ago. The taxpayer has no conceivable moral duty to repay this private debt. And if the European banking industry will collapse if they don’t, then quite frankly the European banking industry deserves to collapse. Let’s call their bluff on this one.

5) Taxing the rich. This is last on a list in order of likelihood because of course the rich have considerable influence over these decisions, though in a sensible democracy it would be first. It has been pointed out that with only a moderate tax on capital and/or a new upper tax bracket we could pay off our debts without making cuts at all. That may be unrealistic, but could very significant new revenue be raised without causing capital flight or discouraging investment? I think it could. There is money to be made here, all we’d be doing is raising the price of making it. I think the market can bear that.

And let’s not forget that the richest have been consistently increasing their share of the wealth, while simultaneously reducing their tax contribution, since the 1980s. If they don’t start paying their share again now when will they start?

~    &    ~

Well OK, the obvious next question is if all these alternatives exist, why does the government prefer the one that will wreak such havoc?

The answer has to be that they don’t really believe what they are asking us to sign. The draconian terms of the agreement are there to convince the money markets that they won’t profit by breaking up the Euro. In the real world exceptions will be made, just as they were made for Germany when they were in trouble. Right? Perhaps we can fudge what is and isn’t structural deficit; no one seems to know quite what that means so it’s a useful bit of ambiguity. Surely, when it comes down to it, we cannot be held to borrowing limits and repayment rates that would wreck our economy?

Perhaps they sincerely believe that, perhaps it’s even true. But to sign your name to a contract on the basis that you hope it will never be enforced is, to put it mildly, unwise.

Rabbit Of Government Versus Truck Of Euro

So having looked at the reasons to reject the Fiscal Compact, let’s examine the government’s pro-treaty arguments.

 

Fiscal Compact in Ireland - YES Campaign [MEP] Olle Schmidt support
But fear not, here’s the opposi… oh

Well that didn’t take long. Really there is no positive argument beyond the stability of the Euro. As good a thing as that might be, it seems a trifling technicality when compared with the very real and immediate suffering the treaty would impose. So it is perhaps not surprising that the government has focused instead on reasons not to vote no. Effectively they’re reduced to the null argument: Well what would you do? If we need more money, how would you raise it?

By asking this they hope to split opposition. Different opponents of the treaty have different ways they’d prefer to raise income, and if they can move the debate on to that then people may forget it’s not the urgent question. It’s like someone driving straight at an oncoming truck and saying “Well which way would you swerve?” The government’s case rests almost solely on the argument that we may require aid from the European Stability Mechanism (ESM), and that this would be preferable to other loan options. But that’s actually composed of two questionable assumptions:

Firstly, we are obviously going to avoid another “bailout” if we at all can. The necessity will depend very much on global markets, how fast we can regrow our economy and so on. The really mad thing here is that if we sign up for the Fiscal Compact, the restrictions it will place on our opportunities for growth make it so much more likely that we will need a further emergency loan.

If we do, will the new ESM be the best lender? Well it will almost certainly offer the lowest interest rates going – for sure lower than any we’ll be able to get on the open market for a long time. The problem is the  conditions. Obviously the ESM won’t lend us money to invest in growth, because that’s what the whole Fiscal Compact is ideologically opposed to. We can borrow to pay for emergency things, like public wage bills or – irony warning – loan repayments we can’t meet, but not to invest.

And the mad part of this is that if we do sign the treaty, we are committing ourselves to these conditions even if we borrow from somewhere else. Even if we raise funds on the open market, even if we go to the IMF, even if the European Social Fund never comes into existence – which is a very real possibility – we still have a commitment not to borrow to invest, on pain of having our budgets dictated to us. Joining the Fiscal Compact is agreeing to abide by the conditions of a loan we may never get. Who does that?

Quite opposed to there being no other option for funding except the ESM, there is almost an embarrassment of of them. None of them is a picnic of course, but I would argue that any one of them is preferable to the Fiscal Compact. This post is already too long, but tomorrow let’s play the government’s game and see what other options we have apart from destroying our own economy just to be obliging.