February 19th Morning: The Recession Diaries

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Can you feel it?  Brian has dinner with Sean and Co.  Was one of the Anglo-Irish 10 there breaking bread with the Taoiseach-elect?  And Senator Dan Boyle signals a wobble on the part of the junior coalition partner.  Low-paid civil servants are demonstrating; as are the Guards; Dublin Bus is facing into an all-out strike.  The National Demonstration is gearing up for Saturday.  More and more are speculating not on if, but when.  I know that WBS over at Cedar Lounge Revolution is sceptical about an early election, and I would tend to agree.  But sometimes a Government falls, not because of a bang, but out of exhaustion, from being pummeled too much, losing too much authority.  You can’t graph it.  You just feel it.

The Government took another hit yesterday.  The EU Commission announced that it was launching an ‘excessive deficit procedure’ against a number of countries, including Ireland.  Given other events, this might seem down the agenda.  But the repercussions for this, or any new, Government are potentially profound.  If not handled properly, we could be mired in recession for an extended period.

It’s no surprise the EU Commission took action against the state.  After all, the Government’s annual deficit has literally trashed the Maastricht Guidelines – guidelines that former Commission President Romano Prodi once called ‘stupid’.  This action, in the first instance, doesn’t mean that the EU Commission are coming in to run the country, nor are they going to hand down edicts.  The first step is to ‘invite’.

‘In view of the Commission assessment, Ireland is invited to (i) limit the widening of the deficit in 2009 and specify and rigorously implement a substantial broad-based fiscal consolidation program for 2010 and beyond; (ii)  . . .  strengthen the binding nature of the medium-term budgetary framework; (iii)  . . . improve the long-term sustainability of public finances by .. . ‘

This invite is akin to an invite from the two repo-men, Knuckles and Bruiser, when they ‘invite’ you to let them take back that furniture suite that you can no longer pay for.  It’s tough to turn it down.

That Ireland has company may be of cold comfort.  The fiscal naughty club includes Greece, Spain, France, Latvia and Malta.  How likely is it that these countries will face the ultimate sanction: penalties and fines?  Not likely.  It has not happened yet, even through most EU-15 countries have breached one of the two guideline reference points at one time or another.  And the idea that the EU Commission would take action against France is remote in the extreme.  This is, after all, a country that has no problem with telling other countries to lump it.  Their latest escapade – a bail-out of their car industry – has New Member States in an uproar because that bail-out comes with strings attached; namely, keeping French jobs in France and even taking them back from Eastern Europe.

The problem is that Ireland may be in a league of itself – super naughty.  The average annual deficit of the other countries named by the EU Commission is -4.8 percent.  The Commission estimates Ireland’s deficit to be -11 percent this year and -13 percent next.  The other countries are Bart Simpson.  We’re Eric Cartman- on a bad day.

And the Commission just doesn’t believe this Government – and this is a big part of the problem.  It throws cold water on the recent budget revisions – stating that the €16.5 billion adjustment the Government envisages in order to return the deficit to ‘normal’ is

‘ . . .neither allocated to the revenue or expenditure side (let alone to subcomponents) nor supported by measures.’

It suggests the Government’s growth scenarios (Fianna Fail thinks we’ll be back in the black by 2011 and that economic growth will be 3 percent plus by 2012) are ‘somewhat optimistic’.  Ya’ think?  And more unnervingly, the Commission refers to even more destabilisation:

‘Further risks stem from the measures in place to support the financial sector, in particular bank guarantees and, concerning the debt ratio, the possibility of further capital injections or nationalisations of banks.’

Professor Morgan ‘Apocalypse Now’ Kelly paints a bleak picture of a radiated economy, poisoning society for years to come: public sector wages and social welfare cut by a third, draconian tax increases, a run on the banks; in a word, meltdown.  Is this scenario likely?  No (fingers crossed).  Is it possible?  Yes, at least in parts.

The extent to which it could become a full-blown reality is if we follow the prescriptions of fiscal reactionaries.  Slashing public expenditure, cutting wages (private and public), imposing tax rises on low to average incomes – all have the capacity to drive down economic activity even further, resulting in more job losses, driving up public spending and reducing tax revenue: in other words, widening the deficit.  The Right claim they can solve the fiscal crisis.  Their policies would only worsen it.

No doubt, for those fiscal reactionaries, the Commission’s report is like manna.  It purportedly confirms their economic platform.  But does it?  No.  And this is where the Left has to take the battle deep into the heart of the conservative consensus, mobilising whole armies and not just snipe from the perimeters.  This attack must comprise a political and economic element:

  • First, the Commission wants to see results and is not dictating the means.  A progressive government, implementing an economic stimulus package within a new paradigm of extending and deepening public intervention into the market economy, can ‘limit the widening of the deficit’ and ‘improve the long-term sustainability of public finances’.  In fact, it is the only way.  This is the economic element.
  • Second, we need that progressive government now.  It’s not just the Commission who doesn’t have confidence in this Government; it’s just about every sentient being in this country.  A new Government will be given the benefit of the doubt – to construct a programme to achieve what everyone wants – a slowing and eventual reversal of economic decline, job creation and retention, and the restoration of public finances so that, in a virtuous circle, we can invest more, borrow more, spend more – to bring our economy into the 21st century.

In this respect, the Commission is as much interested in ‘process’ as it is formalistic guidelines.  And half the process battle is that people have confidence in those organising and directing that process.

But if that new government (and there will be one eventually) is not imbued with an expansionist character, if that new government merely replaces a corrupt and incompetent conservatism, with a fresh and clean conservatism – no matter how tempered by a progressive presence – we won’t be a whole lot better off.  Same dynamic, different faces; process and confidence squandered.

We will, then, be leaving ourselves open to even more ‘invitations’ from the EU Commission – invitations that we won’t be able to refuse.

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