Greece and Ireland, the Price of Stabilizing the Euro
Even before EU Finance ministers were due to meet today to discuss whether Greece needs to do more to reduce its deficit this year from 12.7 to 8.7 percent GDP, Jean-Claude Trichet was on TV demanding that Greece needs to take “extra measures” to ensure the credibility of their “turnaround plan”. These extra measures, a 1 - 2% increase in VAT and a public sector pay cut, are being resisted by Athens, who say that the current plan should kept in place until mid-March, when ‘officials from the European Union, ECB and International Monetary Fund are due to carry out a forensic inspection of Greece’s deficit-cutting plans’ say the Financial Times.
If there is a review planned in the near future, why is the ECB in such a rush to implement these extra measures? The reason is not to put the Greek economy on a more sustainable path, but to protect the Euro. It’s also clear that the ECB does not care about the political ramifications that stablising the Euro means, or about examining alternative ways of protecting the Greece economy.
On the front page of the Sunday Business Post yesterday we were told about a report due to be published by the CESifo group, an ‘influential German research group”, on the 23rd of February, which names Ireland - along with Greece - “as a country where international money markets see a significant risk of a sovereign default or an exit from the eurozone”. The report suggests that a ‘‘wave of bailouts” of weaker member states must be avoided to maintain the euro as a stable currency. The group publishes the IFO Business Confidence Index which will single out Ireland as one of just two eurozone members for which eurozone membership is ‘‘not optimal”. While the two Brians are receiving praise here and in Brussels that they are imposing an austerity budget that is to the ECB’s liking it seems they are not out of the woods yet. The ECB is also taking its time to get back to government about the legality of NAMA - the potential level of debt from the Irish banking crisis which may yet be revealed might put Ireland in a similar situation to Greece in the months ahead.
But as we can see from the reaction of Greek workers to the austerity budget announced last week the crisis is not only economic but also deeply political. Writing in a much earlier but still very interesting CESifo group paper, on economic and monetary union published in 2006, Paul De Grauwe describes the inherent institutional weakness of the present Eurozone governance, and argues that the economic instruments employed by the ECB through the Stability and Growth Pact, or the remit provided by the Maastricht Treaty, force national governments to bear the political responsibility of the bank’s decisions.
“When the Commission starts an excessive deficit procedure which aims at forcing national governments to cut spending and/or increase taxes, it bears no political responsibility for these decisions. In fact, the national governments do. When these follow up on the Commission’s procedure and cut spending and raise taxes they are the ones who will be judged by their national electorates, and who face the threat of being punished by the voters at home. In contrast, the European Commission at no time faces the prospect of being voted away. Thus from a political point of view, the European Commission, which initiates the control and sanctioning procedure of the SGP, lacks democratic legitimacy, because there is no mechanism to make the Commission accountable before an electorate for its actions.
This lack of accountability of the Commission makes the SGP unsustainable. Each time a conflict arises between the Commission and the national governments, the former is bound to loose. (See CESifo Workshop on EURO-AREA ENLARGEMENT pages 21-23)”
He then refers to the 2003 confrontation with France and Germany. Well, national governments were able to win then but what France and Germany were able to do then does not translate into what Ireland and Greece can do now.
Perhaps the one economic factor that puts the greatest political pressure is high unemployment. As De Grauwe goes on to say, it is this factor which the ECB consistently chooses to ignore but which national governments can’t:
“Without asking permission, the ECB has absolved itself from any responsibility about unemployment. It has relegated this responsibility to the national governments. It has done this using the wisdom of an academic theory, the empirical evidence for which is still being debated. As a result the rest of society is not convinced and will not easily accept the attempt of the ECB to extricate itself from any responsibility about unemployment.
In addition, by relegating the responsibility of unemployment to the national governments it creates a political problem that is similar to the problem identified with the SGP. If national politicians have to bear the sole responsibility for unemployment, it is only natural that they will want to use all available instruments to fight unemployment. The claim that all they have to do is to introduce “structural reforms” (whatever that means) will not solve the problem because there is more to unemployment than the structural component. The lack of instruments, both monetary and budgetary, to fight the cyclical component of unemployment will lead national politicians to the temptation to use these instruments because these politicians will be made accountable before national electorates when they fail to lower unemployment.”
Of course, the one instrument that is available to national governments is taxation. And it is telling that the Irish government has consistently avoided moving away from our low tax regime. Michael Burke in an excellent post on Progressive Economy (which is worth reading in full) shows how low taxation has consistently been the problem in Greece:
“The terms of the bailout and its extent are unclear. But what is clear is that Greek workers will not be enjoying a bailout of any kind. Along with the lowest paid and those dependent on public services, Greek workers will bear the brunt of the ‘adjustment process’, through wage and welfare cuts, pension reductions, an increased retirement age and other austerity measures. It is noteworthy who will not be targeted. Greece has one of the lowest tax takes in the Euro Area. In the 15 years to 2006, Greek total general government revenues as a percentage of GDP were 37.9% compared to an average rate across the Euro Area of 45.3% (and 36.3% for Ireland)*. This low level of taxation was, in the Greek case, the source of long-standing deficits which were hidden from a gullible EU (or Eurostat) inspectorate over a number of years. Greece taxation is also a long-standing burden borne by the poor. The FT reports that, according to tax returns, there are only literally a handful of Greek citizens who earn more than €1mn per annum, and that the Greek shipping magnates and others are registered as ‘non-domiciles’ in Britain, and consequently pay tax nowhere.”
One suspects then that the motivation behind the Irish Government’s strategy was to not only anticipate the austerity budget that the ECB would demand, but to go one better, to ensure that they never get a chance to provide one. Because if they did they might be in a position to make certain structural demands - ie changing our favourable tax rates.
In a very telling quote, Pat Leahy, also in yesterday’s Sunday Business Post refers a Department of Finance official who is all too aware that Ireland is viewed as a low tax economy. Speculating about the ‘price that would be extracted by Germany for any bailout of this country’ he says:
‘‘The first thing they [the Germans] would do is say, ‘Um, those tax rates look a bit low, they’ll have to go up’,” said one official. And there would be little that an Irish government could do but accept it.”
So our government, with its limited range of options and avoiding at all costs a potential EU bailout has made a choice, it’s better to endure widespread unemployment than change the tax rates.
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