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.
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.
We’re hearing a lot about how ‘the markets’ are reacting to changes in the Greek and Italian governments. It would seem the broad assessment is ‘unhelpfully’. Mysterious beasts, these markets. The only clear thing is that they’re damnable tricky to please. Whatever you do, it turns out to be not even close to what they wanted. Basically, the markets are a dreadful girlfriend. I know, in reality they are just bunches of people. But you can never trust people in bunches.
The other day I heard someone say that markets are powerful mechanisms for finding the correct price of things because they depend on the ‘wisdom of crowds‘. This is a real and very interesting phenomenon. If you ask a crowd to estimate something, it often happens that the average of their guesses is more accurate than even the closest individual one. In other words, the crowd as a whole seems to know better than any one of its members. It’s as if all their ignorance, being distributed randomly, cancels itself out – leaving nothing behind but the smart.
Which in fascinating and useful to know. It’s not however how markets work. And particularly not financial markets, where what is being traded isn’t a tangible commodity but – when it comes down to it – promises. People making promises to repay a certain amount of money in the future (or, thanks to some of the more complex financial instruments, the past) in return for money now. People packaging up those promises and re-selling them as promises about promises. People trading on promises yet to be made. All for money – which is of course itself only a promise. It’s not a crowd trying to estimate something objective. It’s a crowd all trying to second-guess each other – a deeply unstable situation. It could turn into a stampede at the first peal of thunder. Yet this is what we’re depending on now, so soon after our experience with the property market. We’re incurable.
Why has the Eurozone gone awry? Why have the economies of Ireland, Greece and – it looks likely – Italy shot off the precipice like runaway trains? Well as in any transport disaster, several things had to go wrong at the same time. Yesterday we looked at Problem one, the credit boom. That was hardly surprising. The next piece of the jigsaw though may be a little more unexpected…
Problem two:The success of the euro. Mad I know, but in many ways the euro crisis was caused by it acting exactly as intended. It immediately improved the economic prospects of the poorer countries of Europe. Well, the poorer ones that were rich enough to join. Currency stability made the ‘peripheral’ economies attractive to money from the richer ‘core’. They became more profitable places to find investment opportunities.
But there were downsides. When a small economy with its own currency enjoys boom times, one immediate consequence is of course inflation. This reduction in the effective purchasing power of the currency generally causes it to drop in value – as if there was a divine law saying the more money you earn, the less it’s worth. But though that’s frustrating, it at least exerts some moderating influence on the economy. It wasn’t long before a strong currency was the very last thing the rapidly-growing peripheral economies of Europe needed. But adjusting it for their sake was out of the question, their interests were secondary at best. The primary goal of the euro, nearly its entire raison d’être indeed, was to be strong. With no possibility of the currency falling it was almost inevitable that these economies would badly overheat.
This was a foreseeable structural problem with the euro. Loosely-attached economies at the fringes were bound to get yanked about violently by the slow but inexorable movements of such a leviathan currency. Yet we still haven’t decided how to deal with it. Had the credit bubble not coincided, we might have had greater time to adjust and put compensating mechanisms in place. But with the bubble and the fluctuation-amplifying mechanism, well, what we got was bursting boilers and third-degree scalding.
And you know what’s the crazy part? With all this turmoil on the bond markets, with all this panic and fear that countries won’t be able to pay their debts, need international aid from the IMF, be forced out of the euro, you might be forgiven for thinking that the euro itself was in trouble. Yet it sails on, imperturbable, as strong as ever. Indeed, many would argue, quite overvalued. Which is really not what you want from the currency that you have enormous debts denominated in.
There is no escaping this: The euro was devised mainly for the benefit of the larger economies, and it is those economies that have benefited most. Yet it is we in the smaller and more vulnerable ones who are being made to suffer for its failings. Here, we’re even expected to return the investments that outside institutions made into our over-inflated property market – the very money that caused it to explode. They want it back.
The enormity of that has still not really sunk in.
Italian stock markets rally on rumours that Berlusconi may step down. That says everything really. Usually the forced resignation of a head of government sends the markets plummeting, as a country switches from general predictability into leaderless chaos. But it seems even leaderless chaos would be more relaxing than Silvio Berlusconi. You can actually calculate the millions he’s costing his country every minute he hangs on.
If he does go though, he will be the third national leader directly forced out by the financial crisis. I don’t think there’s been such a wave of regime change across Western Europe since 1968. How did it come to this – and to ask the question that everyone really wants answered, whose fault is it?
You can’t pinpoint a single cause in these things of course, but surprisingly I think we can narrow it down to just three:
Problem one:The credit boom. We’ve spoken of this before, but its origins can be traced back to the liberalisation of the US banking industry, and the creativity this consequently introduced into a previously staid profession. In particular, the creativity about what the term ‘asset’ means.
It’s always been quite acceptable to loan someone some money and then consider their promise to pay you back as an asset you own – as long as the value you give to that asset realistically reflects the risk of them not paying you back at all. Be unrealistic however, and you’re in trouble. Though many complex and obscure mechanisms were applied to the task, I don’t think it’s grossly oversimplifying to say the basic problem was that overvalued loans were used as collateral to raise more money, which was then turned into more overvalued loans, which were used to raise more money, which was… Et voilà, magic money from nowhere. Inevitably this reached the point where it was mutually profitable for everyone involved to overvalue the loans they were all giving to each other.
This free money fountain naturally encouraged borrowing throughout the US and Europe, and indeed about everywhere with access to currency markets. The first I knew something had gone badly wrong was when I got a letter from my bank telling me I’d been ‘pre-approved’ for a loan I hadn’t asked for. I’m a freelance artist for God’s sake. When banks go round pushing loans on poor people, the Emperor is out waving his dangly bits to a cheering audience.
But it wasn’t just private borrowing that got out of control. Countries too found credit temptingly cheap. What’s more, easy credit helped fuel a consumption boom, which upped tax revenues, which encouraged governments to ease off rates and make more promises. The problem is that largely fictitious revenues can dematerialise overnight. Public borrowings and spending commitments on the other hand are not so easily gotten rid of.
This though merely sets the global scene; in Europe specifically there was further trouble brewing. To follow…
I woke up this morning with just one thought in my head: As James Bond does most of his work outside his home country, he should apply for an International Licence to Kill.
The subconscious mind is weird, yet annoyingly trivial.
Anyway, the G20. Thought this is basically just another of those international showcase conferences where everyone makes the right noises and little of real substance is done, it did act as a deadline for the EU leaders to have their house looking pretty. Like a station mass, if you will. So they – Sarkozy in particular, as host – were not well pleased when Greece crapped on the doorstep. Batting the EU leaders’ kind offer back with a referendum threat has sent the markets into turmoil once more, just when Sarkozy and Merkel wanted to impress the world with their authoritative grip on the situation. It makes them look helpless and incompetent, so naturally they are enraged. It is now all right therefore to talk openly about dumping Greece unceremoniously out of the euro.
Greece will probably not hold the referendum – there is severe doubt that Papandreou could win the parliamentary vote necessary to hold one anyway – but I am making plans in case the opposite manifests, and it returns to its own currency. It’s a nice place to live. It has weather and wine, as well as all the olives and history you can eat. And when its currency is free to float again it will float ever downwards, as their relaxed taxation chases after their optimistic expenditure. So if I move there, but live on what I’m making here, I’m going to be relatively wealthy – increasingly so indeed. I’ll hardly need to work at all.
So that’s my retirement sorted. Unless Ireland leaves the euro too, in which case I’m buggered.
Sixty percent – the haircut that lenders to Greece may have to take if Europe is to avoid bailing their economy out to the tune of half a trillion. Maybe the powers that be – the ‘troika’ of the IMF, the commission, and the ECB – are finally coming to terms with the idea that crushing all life out of a country with punitive austerity makes about as much sense as treating traumatic blood loss with leeches. If the eurozone economies are to be saved then the continent’s major banks are going to have to take some of the pain too.
For Greece only, you understand. The same logic doesn’t apply to us for some reason.
A patient at Our Lady of Lourdes Hospital in Drogheda, Louth, just spent five days on a trolley in the Accident and Emergency department. In better days that would have constituted a horror story in itself, but today it barely raises an eyebrow. Wait till you find out what he had. TB. Tuberculosis. There in public, with a constant flow of sick and injured people around him.
The devastation that TB wrought on this country, that’s still a living memory. It was one of the primary forces that led to the creation of what social health provision we had. Which is now in danger of being sacrificed to expediency – and banks. Banks that lent recklessly into our economy because they were out to make a profit, yet somehow must not be allowed to take a loss.