Last Friday afternoon the Irish Independent published a story about a potential Greek-style EFSF-IMF bailout for Ireland which seems to have been based entirely on the section in the Barclay’s report that first made the suggestion the previous day. As reported in the Irish Times:
“If there are additional financial sector losses or the economy worsens, “The Government may need to seek outside help from either the European Union or International Monetary Fund in such circumstances,” said Barclays. “At this juncture”, given the comfortable near-term liquidity position of the Irish treasury, there isn’t a need to draw on financial assistance, they said.”
The Irish government and the IMF moved speedily to quash the suggestion that any bailout was imminent, as they were critically aware that such a rumour could have even worse effect on a bond yield price that was increasing at a frightening pace throughout the day. Yet, the opinion that it might yet be on the cards remained – even if its imminence was postponed.
After the auction on Tuesday, an article in the Financial Times noted:
Although the auctions saw strong demand with the four-year bond more than five times covered and the eight bond nearly three times covered, analysts warned that the Irish may be “on the slippery slope” towards a Greek-style bail-out.
Padhraic Garvey, global head of rates strategy at ING, said: “Ireland will fight tooth and nail to avoid going to the eurozone bail-out fund, but the cost in terms of yield they are paying is a worry. However, yields will have to rise to around 7 per cent or 8 per cent before it is game over and Dublin will have to follow Greece.”
In the past, of course, the treat of having to rely on money from IMF was used as a stick to beat the Irish electorate into accepting austerity measures, now we find out that those austerity measures themselves are what has caused the increased chance of needing to accept a EFSF-IMF bailout.
Reacting to the financial situation in Ireland yesterday two editorials in British newspapers spelled this out in a way that contradicted Central Bank Governer Patrick Honohan’s view that the only way to stop the increase in the cost of borrowing was to increase public spending cuts.
The Financial Times editorial chided Brian Cowen for the open-ended support of the Irish banking sector and for cutting money out of the economy when the means to pay the constantly increasing level of debt was being undermined by the exacerbated fall in taxes.
“The Irish public has already taken plenty of pain in the form of spending and wage cuts. Before asking for more, Mr Cowen should change a perverse policy that pushes up interest rates and crimps growth. Ireland was not highly indebted before the crisis, with sovereign borrowings of just 25 per cent of GDP. Private sector analysts now fear that gross public debt may reach up to 136 per cent in 2014, once Dublin’s guarantees and estimated losses are added to its sovereign borrowings. Much of this reflects the state’s acceptance of open-ended exposure to private liabilities across the banking sector – a policy that unnerves markets and jacks up sovereign rates.”
As Ireland was the first to implement swinging government spending cuts The Guardian, more concerned perhaps with the expansion of the Con/Lib program to slash and burn the public sector, sees Ireland as lab experiment gone badly wrong:
The most sobering thought for Mr Osborne (if not Mr Cowen) should be that after all the Irish cuts made and announced, and amid double-digit unemployment, the governor of the Central Bank of Ireland, Patrick Honohan, is now arguing that the punishment being meted out by the markets must be met with fresh cuts. Cuts may curb the deficit but they also weaken the economy that must sustain it, and so they can become self-perpetuating.
Of all the dilemmas in macroeconomics, the most important – and least understood – is what a sustained slump in actual output does to productive potential.
The evidence for that has been mounting all week. The Quarterly Household Survey showed the continuing rise of unemployment, the doubling of long-term unemployment, and the increasing in emigration.
And then today, the Q2 GDP data shows that we are indeed experiencing a sustained slump, as Michael Burke points out on Progressive Economy:
“GDP has now contracted in 11 of the last 14 quarters, while GNP has contracted for 9 consecutive quarters, that is, the domestic economy has begun its third straight year of contraction. This compares to an Euro Area average contraction of ‘only’ 4 quarters, which ended a year ago.
The scale of the decline is also well above that in the Euro Area, where the economy contracted by 4.4%. From its peak in 2007, this GDP has contracted by 13.4% in real terms while GNP has fallen by a staggering 17.3%. Worse, in nominal terms GDP has declined by 19.5% and GNP by 24.1%. This measure, GNP at current prices, is decisive with regards to taxation revenues, whose slump is the overwhelming source of the widening public sector deficit. Taxes are paid in cash terms, unreflective of real terms changes in the price level.”
So it is no longer possible for the Irish economy to simply hold its nerve and wait that much vaunted upswing to occur because this news is already making another negative impact on the cost of Irish borrowing, leading it in the direction of the ’7 per cent or 8 per cent mark that would mean game over’.
So, while the potential plays that are available are reducing rapidly, with our ability to borrow for investment being undermined by government policy formulated in the interests of the very rich, it’s time to demand a new strategy, but one that address the structural weakness of the Irish economy and to make up for those shortcomings.
As Michael Taft points out we have to put together several principles around which this alternative strategy should be based. The first, and as Anne Costello for Community Platform argued in ILR last week, is taxation.
Our current tax system does not generate sufficient revenue to fund employment, public services and infrastructure. It is also grossly unfair and reinforces inequality.
There is an alternative. Progressive tax reform will promote economic activity. It will retain consumer demand, protect jobs and protect low and middle income earners.
Michael outlines his suggested five principles as:
- Stop digging. Public spending cuts and taxes on low-average incomes are making things worse
- Reverse the rise of unemployment
- Investment in physical infrastructure, public services, poverty and low incomes, and repairing the defects in our indigenous enterprise base and carbon-heavy economic activity
- Increase taxation, which must impact primarily on high-income groups
- Save, reinvest and remove the deflation from the economy
Arguments against these measures maybe presented by the right in the coming months, but it is more likely that they’ll be ignored in the clamour to reinforce the governments arguments that only more public service cuts and flat taxes which impact low-average incomes more, and bringing those on low incomes into the tax net are needed are need to encourage growth in the future. This imagined growth is expected to come from our “dynamic exports”, almost all of which are based on the output of FDI company’s that pay little tax and provide only marginal employment. As Conor McCabe illustrates lucidly in his forthcoming book:
Since the 1970s the majority of exports emanating from Ireland have been produced by multinationals; in 2008 they accounted for 88 per cent of all merchandise export sales. Yet the amount of people employed by IDA-supported companies in 2008 is only around 7 per cent of total employment. These companies paid €2.8 billion in corporation tax in 2009, and direct expenditure in the Irish economy via payroll costs, Irish materials and services amounted to €19.149 billion. However, total sales amounted to €109.64 billion. Around 80 per cent of the money generated by IDA-supported companies completely by-passes the Irish economy. The profits are repatriated to the country of origin. In 2009 chemical products made up 51 per cent of all merchandise exports from Ireland, the bulk of which were made with imported materials. The chemicals come in via containers, and go out via containers. Irish economic policy has developed exporters, but not exports.
It is time for us to do a Mary Harney and say that this policy is disastrous and will increase the chance of having to accept an EFSF-IMF bailout, after which our chances of reforming the Irish economy and fixing the structural weakness that have been in place for many decades will be remoter than ever and then it may well be game over.
 IDA, Annual Report 2009 (Dublin: IDA Ireland, 2010), p.20.
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