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.
Yay.
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.
So lenders are being shorn. The haircut the public are expected to take looks more like this
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.
Ireland’s government is considering making a deeper fiscal adjustment than planned next year in a bid to further distinguish itself from Greece and build on its recent bond market rally. – Reuters
Ah yes. I think they call that “masochism by proxy”. Our government stands ready and willing to show how much we can suffer.
The UK has taken a rather different approach, one not open to us as Euro members. “Quantitative easing” they call it. Sounds like a euphemism for a good solid dump, but it actually disguises something even more unmentionable – what they used to call “printing money”. Of course, they don’t actually print the stuff these days. Who uses cash, darling? Somewhere in some secret turret of the Bank of England, they push a button and simply magic £75 billion into existence.
Doesn’t seem right, does it? If you like, you could think of it as the B of E simply raising its own credit rating and lending itself that £75 billion. But if it’s a loan, who does it have to be paid back to? The future? An alternative universe maybe? I think it’s best to just grit your teeth and accept the reality. Money is fictional. What the B of E has done here is simply made some more up.
Yes, fictional. Money is nothing except what we pretend it is – not even power. Power after all is the ability to make other people do what you want, and money only has that effect if we all play the game, doing what someone else wants in return for mere tokens in the knowledge that other people in their turn will do what we want to get them. If you think about it too much it seems like an utter house of cards. Why do we go along with it – especially we who don’t have so many tokens to begin with?
Well, the only non-fictional way to make people do what they don’t want to do is the threat of direct physical violence. So playing along is preferable to that. Plus it’s hard to see how anyone could be scary enough to organize a whole society through intimidation, certainly not one of any real size.
The other thing that bothers people here is, who owns this £75 billion? Actual wealth like a resource is still there even when it goes unclaimed and unexploited, but money only exists by virtue of someone having it (and someone else wanting it). So when a government just wishes billions into existence, whose exactly are they?
Well the Bank of England gets to spend it, so I guess it’s theirs. What they do though, mostly at least, is immediately use it to buy government bonds. Not from the government, I hasten to add. Modern economics is insane, yes, but it hasn’t quite reached the point where a government invents money to buy the bonds it invented from itself. No, they buy them from people who have invested in them, thereby making those investors’ assets liquid again so that they can spend, spend, spend. Which is good for the economy.
Or so Tories always say when they need to justify the transfer of public funds to private friends.
Will it work? I’m not so sure. When a government makes money up they are unilaterally modifying the rules of the game. Or cheating, as we once called it. This may encourage other people to get creative too. Will markets play fair with the UK government, or will they say that this new stuff just isn’t as good as the old, and they need some more please?
I hate the silly term double-dip recession. It makes it sound like there is some sort of mathematical explanation for this graph, a predictability about it. What we have is false recovery, the kind that only happens because markets work on the assumption that recessions will come to an end out of some sort of natural pattern. Would-be investors wait for the whole boom-bust cycle to start all over again so they can get in at the bottom. The brief spurts of growth we see are like sprinters waiting too long for a race to start. They dash off alone, only slowing to a halt when they realise no one’s joining in.
We are not recovering yet because, simplistically put, we have not yet reached the bottom. More accurately though, we can’t rebuild an economy when there is so much non-existent money in the way.
We need to face up to the fact that the western economy is still stuffed to the ears with bad debt. We are treating bad investments that will never yield a damn thing as real money that somehow must be paid back to the investor – even if the taxpayer has to be made to do it. But it’s not real money. These are failed investments. The money has been lost. It no longer exists.
This blog post is highly speculative, but it argues that the sudden willingness of European banks to take a loss on Greece is because they foresee things getting much worse, soon. One of Italy’s largest banks is stuffed with bad debt, and it seems more than likely that if it goes, the Italian economy will go with it. The Eurozone cannot afford to bail out a country that large.
But this is actually a good thing. We will finally have to stop pretending this can be fixed with bandages, and do the major surgery necessary. It will hurt, but not as much as treating innocent taxpayers like reckless debtors hurts.
Wow. I’m not sure what kind of weekend you had here, but I don’t know when I’ve been hotter. No actually I do. It was at the Hoover Dam. I’ve just been in the warmest place I’ve ever known, with the sole exception of the Nevada-Arizona border. Seriously, I’ve been to colder parts of Africa.
Yet this was Carlingford, County Louth. I can’t quite explain how but I ended up at a festival of Celtic culture there, helping to keep a three-year-old from wandering about. When you consider that we were watching Highland Games, with such events as hammer throwing, caber tossing and hurling weights backwards over your shoulders, you can appreciate how important it is to keep your three-year-olds from wandering about. The sports might be odd but the athletes were spectacular; some of them were so broad they’d be taller lying on their sides. And of course, all in skirts. Yet it was one of the smaller – I believe his name was Ray O’Dwyer from Tipperary – who threw a hammer one hundred feet that day, a new Irish record. Though when I say smaller, you have to remember that’s relative. He would be about four times the size of me.
Huge dudes in frocks
Apart from the Highland Games there was some Scottish dancing and a local pipe band. If it wasn’t for a bit of Breton dance it would’ve been a Gaels-only affair. Alongside all the culture there were – thank God – some of the usual funfair kid-distractors, including a “Safari Train” decorated with some really quite astonishing caricatures.
Fun for all the family, if your family is racist
When it finally cooled we went to PJ’s, a lovely old pub that has survived being extended without completely losing its character, and applied after-sun cream in lavish quantities. Later we went to a concert of Breton music in a converted church, most of which I spent outside attempting to talk the aforementioned small child out of screaming. So if you were passing through Carlingford and happened to see a man holding a struggling, yelling child in a graveyard, there was no need to be worried. He shut up eventually.
Noon the following day I was sitting out drinking beer, not so much burning in the sun now as catching light, when one of those things happened – I met an old friend I’d lost touch with six or seven years before. We went for dinner to celebrate in Magee’s Bistro, which was really good and not expensive. I had the frogs’ legs because I’d never tried them before, and my love of nature compels me to taste it all. Frogs legs, it turns out, have a flavour just like snake.
Oh all right, between very tender chicken and good squid. Nice, but I don’t think I’ll eat them again. There was something too sad about the way they came in little pairs.
My friend's front wall
Turned out my friend owned a cottage not far from the village, so we stayed the night there. What I didn’t realise until the morning is that it was right on the sea. I mean, like other houses are on the street. When I awoke it was high tide – and the sea was up to her front wall.
Her garden shed
Which was low and white, like a wall in Greece. And the sun was like Greece. And the sea. When my other friends – and the small child – arrived the tide was out again, and we walked across Dundalk bay chasing crabs and picking mussels. I’m cooking those mussels for dinner now. Sometimes the world is perfect.
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.
