Ireland is the success story of austerity, the figures prove it. According to the IMF, the domestic economy grew 2.38% over 2010-2012. The bitter medicine is working. Soon we’ll be able to borrow on the markets again.
But even the IMF admits it got it wrong in Greece. Severe austerity there has only deepened recession and dashed any hope of quick recovery. Yet somehow the very same policy seems to have worked in Ireland. Mysterious.
Hold on. Is this not the same Ireland that was recently called a tax haven in the US Congress? A country that – there is no secret to this – encourages transnational corporations to declare their profits here instead of in
other, higher-taxing jurisdictions. How much of our apparent growth, touted by our EU partners as the fruit of prudent austerity, is actually owed to what we might call the Tourism For Your Taxes sector?
Every damn bit of it.
Discounting the money-shuffling activities of transnationals, the domestic economy in Ireland declined by 5.2% between 2010 and 2012 (Source: Dr. Constantin Gurdgiev). The real economy – the one in which people who actually live here have to work and buy things and pay their (much higher) taxes – is one of closing businesses, joblessness, emigration, debt. Austerity as it actually works.
This presents an interesting conundrum for our EU partners. They wish both to use us as proof that austerity works, and to condemn taxation practices that are patently ripping them off, all the while maintaining the cognitive dissonance necessary to avoid acknowledging a causal connection.
Are we not the sharpest-dressed protesters you have ever seen? We’re at the launch of a new commemorative coin – face value, €15 – an event we found more than ironic on the day that the Dáil debates a budget designed to exact from the poor the money promised by the rich to the rich. Unemployment benefit is being cut. Children’s allowance is being cut. Respite support for carers is being cut – this last so obscenely cruel to the vulnerable protectors of the even more vulnerable that I strongly suspect it was put in the budget just to make the other cuts seem politically acceptable.
All of this, basically so that we can make the latest €3.1 billion of payments to the people whose reckless lending destroyed our economy. Yes seriously, we continue to reward the rapacious, wilfully short-sighted, knowingly unsustainable lending that led to 2008. Though we cannot afford it, though we will never be able to pay back the enormous sums our banks went bust owing, we continue to try – by means of attacking the unemployed and impoverished. This is not the function and duty of a state.
Ours was a restrained, even polite protest today. The only real way to tell us from the people who were invited was that we wore less make-up. I’d come directly from an exam in project management. There my wearing a suit had been cause for comment, but I think it gave me a real psychological advantage. No one else did the management exam dressed like the manager.
Whether it was this or the intense preparation I put in, my least-favourite subject turned out be probably my best exam. If it had a fault it was that I spent more time than I really should have on a favourite question. This concerned people issues in “Agile programming”, a modern approach that requires the code-trolls to closely interact with clients. The people issues, they abounded; for the rest of the exam I kept going back to the answer to add new ones I’d thought of. Mixing people with coding skills and interpersonal skills together is not a business methodology, it’s the premise for The IT Crowd.
And that, incidentally, concluded my first semester. What a short strange trip it’s been. That in six months I could end up actually enjoying questions of personnel management theory… It’s some change all right.
But you can’t exactly disagree. In a way, house prices are always stable. A house is always worth… about a house. A person can eat a lot or a little food, own a hundred cars or none, but houses tend to stabilise somewhere around the level of one per every two adults. Because try as you might, you can’t live in much more than one house at a time. Logically then, housing ought to be one of the most stable commodities on the market. It’s actually the rest of the economy that has been vigorously swung around this anchor point. During the housing boom, wages may have gone up on paper, but in house-buying terms they plunged through the floor.
Which gives me an idea… We need a new currency, right? The euro, well, it’s lovely and all. I like the colours, and the handy map on the back. But the thing is, we just can’t really afford it. Using the euro is like having a currency on the gold standard when the world is desperately short of gold. You can’t have a functional economy when the standard unit of exchange is hen’s teeth.
And what do we have plenty of? Why, houses! Too many houses, not enough euro banknotes. Think about it.
Of course you can’t put houses in your wallet or bring them to the shops. There will still have to be tokens. But the base currency unit should be fixed to the value of the standard house – say the sort of small two-bedroom starter home that was produced like popcorn during the boom. Notes should be denominated in fractions of a house. That way, the price of a home can never run away from you. Save up 1,000 of the new thousandth-of-a-house notes, and you can exchange them for one standard house at your nearest branch of NAMA.
It won’t stop people charging more than the standard house price of course, for bigger residences in better locations. But the existence of a perfectly adequate house at a fixed price – well, a price that money is fixed to – should act as a powerful stabilising influence. You’ll be able to look at a property ad and say “Well it’s a good house. But is it really worth two houses?”
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.
George Soros knows money. A student of the great philosopher Karl Popper, he has become one of the most vocal critics of modern economics and capitalism. But he doesn’t just talk about the failings of the financial markets. He uses his insight to make a quite seriously incredible amount of cash from them. Out of this, he gives billions to worthy causes. A guy with an opinion worth hearing then.
The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. […] It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.
In other words, people lent cheaply to Eurozone banks and governments because they believed that there was zero risk of a Eurozone country being allowed to default. But after Lehman, Merkel – unilaterally – declared that Eurozone countries would have to support their own banks. Markets eventually realised this implied that Eurozone countries might have to default, and so lending costs to them shot up – just when we needed to borrow in order to support our banks! It was a single, immensely short-sighted decision of Merkel’s administration that precipitated our current situation.
And their continuing failure to respond adequately is turning a crisis into a disaster for the EU:
Just as in the 1980’s [Third World debt crisis] all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe.
He does more than just lay blame of course. The power to save the situation, he argues, is also in the hands of the creditor nations. But it won’t be easy:
The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.
We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.
Three months, to get the EU back on the track of being a positive, voluntary association of nations. If we can’t do that, then the choice we’re faced with is basically between effective German control of an impoverished continent, or the sudden and messy disintegration of the Euro. So… We’d better find a solution to this thing. Stat.
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.
One reason a lot of people will vote for the upcoming “austerity amendment” is that they assume it must, when it all comes down to it, be good for us. Sure it’s going to hurt, but in the long run it will help us have a stronger, better economy – right? It’s a natural assumption. And it would be dead wrong. The wholesale destruction of government spending if we succeed in making its insane deficit-slashing timetable – or the fines if we fail – will shrink the economy precipitously. Disastrously.
But why would the EU want to do that to us? It’s puzzling, but it’s not out of any personal animosity. We are but a small cog in this, and we don’t squeak half enough. It’s just that it’s a one-size-fits-no-one set of strictures that would burden even the healthiest European economy.
The Fiscal Compact has two main objectives. The more obvious one is to outlaw the sort of behaviour that got Greece into trouble – essentially, excessive public borrowing and spending. But note that that’s absolutely not what we did. We were good. We paid back debts when we had the money, we ran a surplus. And though our public spending rose, the highest it ever went was still only the Eurozone average. Very arguably we should have been spending well above that, our public services were still grossly underdeveloped even at the height of the boom. Yet this referendum will have the effect of cutting public spending more drastically than ever. And aside from hurting our most vulnerable, that will of course crush the economy even further. As I said a few days ago, it is the cure for the opposite disease to the one we have.
The second and more covert purpose of the compact though is, putting it as crudely as it deserves, to save Angela Merkel’s political future. In order to win her next election – she has about a year and a half left to go – she needs to convince the German people… Not that the Euro is good for them, no. That’s not enough. That the Euro is the Deutsche Mark. A currency run to Germany’s peculiar rules, for Germany’s peculiar circumstances.
Which are peculiarly set against Keynesian economics, the (well-proven) theory that the best thing a government can do in times of economic depression is borrow and spend to promote recovery. This technique lost favour in Germany essentially because it was employed by Hitler. In the Post-War era a new orthodoxy was needed, and they found it in “Ordoliberalism“, a system in which government must play only the most minimal role. It has worked for Germany so far, but Germany has been in almost continuous growth since it started. That might seem a recommendation, but ordoliberalism is a theory for the good times, utterly lost when facing a crisis of these proportions.
It seems likely that only the introduction of the Euro averted the failure of the German system. From being overburdened by the costs of Reunification with the post-Communist East, Germany went rapidly back to being the richest and most productive economy in Europe. Essentially, by selling more goods than ever before to the rest of Eurozone – while simultaneously lending us the money to buy them.
Germany had become Europe’s company store.
It is worth noting that Merkel’s approval rating is at an all-time high back home. She’s getting to project herself as tough by beating us up. So why is Enda Kenny agreeing to this? Is there some secret backroom agreement where he gets to be her bitch now in return for favours down the line? It’s the only way you can make sense of his apparently acting against the country’s interests. But we can’t depend on the existence of covert deal. Even if it exists, it can so easily be repudiated. And in return we are being asked to write vows of poverty into our own Constitution.
If this referendum passes, the best thing you could do would be to get out of the country as soon as you can. And be sure to bring your more vulnerable relatives with you.