This is a slightly updated version of an article I wrote for the latest edition of the Scottish independent Marxist journal Frontline.
Ireland is now the centre of a European economic crisis, as the events of the last few weeks have made startlingly clear. The continuing rise in the cost of borrowing on the bond markets has led to an investor strike, as no one in the bond market believes that Ireland will be in a position to pay back its increasing levels of debt.
The arrival of the IMF and ECB ‘squads’, the ranks of which are filled with financial and banking experts, was precipitated by the realization that the Irish Banks were becoming increasingly unstable. An €85 billion bailout for Ireland has been offered to support the banks should their debt levels increase, as is expected through increasing mortgage defaults, and to assure fleeing depositors. It’s also there to bolster government spending in the face of further depleting tax revenues. Ultimately, however, the tapping of the €750 bn fund set up in the wake of the €110 bailout of Greece in May of this year is being put in place to protect the Euro.
While the factors that brought on this current crisis and the arrival of the IMF are tied up with the structure of the eurozone itself and the power of international banking within that, it’s clear that Ireland has brought on a certain amount of it through the twin evils of the Irish 2008 blanket bank guarantee, which protected not only those bondholders who had already invested in the 6 Irish banks, but future ones too, and early onset austerity.
The bailout itself has been put in place to steady the market and to free Ireland of the need of immediate short term borrowing from the international markets. However, as Paul Krugman has pointed out, like the banks, the problem is not liquidity but solvency, and until a debt restructuring program is put in place the problems will remain. As is most likely the case Ireland’s real level of debt is still not known.
There has been much palaver about the loss of Ireland’s economic sovereignty with the arrival of the IMF, most incredibly from the dusty portal of the Irish Times, which, as Gene Kerrigan succinctly put it, came not from sentimental nationalism or by the discovery of some new found love of genuine democracy, but from the shock of the so called “real establishment” finding themselves suddenly outside of the sphere of influence.
Arguably sovereignty was already lost long before this (leaving aside the passing of some sovereignty as the EU become more integrated or the issue of US troops passing through Shannon). Prior to the bailout the ECB was effectively funding Irish banks as no one else was willing to lend to them despite the guarantee. Moreover, in the more recent auctions Irish debt was bought through intermediary banks to counteract the tendency among the hedge funds and banks to use their bailout money from the EU to bet on whether Ireland would default on its bonds.
So, how did all this come to pass?
Slump in Investment
The problems facing the Irish economy are the result of a €19bn slump in investment between 2007 and 2009 leading to a total decline in GDP of €20.3bn. Private consumption also fell by €8.1bn in that period. The over reliance on tax receipts from the buying and selling of property evaporated with the collapse of a huge speculative property bubble, and recessionary effect of a drop of domestic demand that comes with increasing unemployment, lower wages and emigration hit the other plank of the Irish tax base, indirect taxation on consumption. To put this in the context of the growing deficit €15bn of the €18bn deficit last year was due to the fall in tax receipts from €48 to €33 billion from December 2007 to December 2009.
In the meantime Ireland’s almost unbelievably productive and FDI-led export (CSO refer to it as “modern”) sector, in particular chemical/pharmaceutical companies run by MNCs like Pfizer, continued to grow. This is a highly capital intensive, but low tax and low employment sector. While these companies can avail of Ireland’s 12.5% ultra low corporation tax, they often use what is known by tax advisors as the “Double Irish“, which combined with the “Dutch Sandwich” can reduce their Irish tax obligation to 2%.
They only create employment for 7% of the workforce in Ireland and rely on 80% of imports for production. Apart from legal and financial services they also provide only marginal “link backs” (using indigenous companies), to the real Irish economy. Because external demand for these products wasn’t affected by the Irish recession and our entry to the Euro, which prevented Ireland from devaluing its currency to deal with the shock of a collapsed property bubble, meant that output in these sectors continued to perform very well. However, because of the reasons outlined this continued growth has no effect on Ireland’s domestic economy.
Ireland: The First with Austerity
The government’s reaction to the decline in the non-export based economy was to immediately impose austerity. Whereas every other major European country provided a stimulus Ireland initiated a round of budget cuts and temporary tax levies on waged labour which in three budgets took €14bn out of the economy.
In the weeks prior to the 2011 budget on December 7th the Irish government announced a four year budgetary adjustment of €15bn, €6bn of which will be “front-loaded” this year. This front-loading plus the previous €14bn mean that since the end of 2008 €20bn has been taken out of the economy, the equivalent to 13.1% of GDP. This compares to the 9.2% reduction of the UK’s GDP as a result of the draconian £9bn in cuts in the UK budget this year and the £41bn next year.
We can consider how the government thought when faced with a €20.3bn decline of GDP through a slump in investment that taking a further €20.3bn out of the economy would do the trick to fix it. Surely something very odd is going on.
What is even odder is that the Irish government’s strategy to place the burden resulting from the collapse in investment on workers and the poor while at the same time protecting the investment of the British, French, German banks who hold bonds in Irish financial institutions, is supported by three of the main political parties in the Dail: Fine Gael, Labour and the Fianna Fail government’s coalition partner, the Green Party. While the Labour party claim that the government’s proposed fiscal adjustment is too high, (they argue for a €4.5bn adjustment this year) they also believe that it is possible to reduce the deficit by cutting spending during a recession and when fiscal tightening is taking place in other economies.
However, the evidence that this is not possible is overwhelming.
The Effect of Fiscal Tightening
A recent IMF report, “Will It Hurt? The Macroeconomic Effects of Fiscal Consolidation” showed that cuts imposed on an economy that is unable to reduce interest rates (in Ireland they are actually increasing as banks pass the cost of a deteriorating capital base through falling asset values on to their customers) and where budget cuts are occurring simultaneously elsewhere have far greater negative effects on growth.
In such a situation, explained the economist Michael Burke in the Progressive Economy blog, which is the same as the one Ireland finds itself,
“…the response to a fiscal tightening equivalent to 1% of GDP lowers GDP by 2% in the first year alone. Cumulatively, the IMF research shows that over 5 years the lost output is approximately 6% of GDP. Any shock which lowers output by 6% will of course negatively impact government finances, by far greater than the initial 1% ‘saving’. This is precisely what has happened- spending cuts have led to a wider deficit.”
A report from CEPR, The IMF and Economic Recovery published in October 2010 indicates that the IMF’s own growth projections in those countries that they have been called in to assist since the crisis began in 2008 have proved to be over-optimistic. This is attributable to the deflationary effects of austerity. While the recommendations of the IMF are only beginning to impact the economies such as Latvia and Greece now the effect of such a policy can be seen in the one country that they advised closely but to whom they did not provide direct assistance until last week: Ireland.
The CEPR report notes that the IMF has had to revise our projected growth figures.
“Although Ireland had positive growth for the first half of 2010, the IMF projects negative 0.3 percent growth for the year. For 2011, the IMF projects growth of 2.3 percent, but this is difficult to believe given the massive fiscal consolidation taking place. It is worth noting that when Ireland began its budget cuts at the end of 2008, the IMF projected 1 percent growth for 2009; the actual result was negative 10 percent.”
As the report authors, Mark Weisbrot and Juan Montecino state, in each case the growth projections provided by the IMF fail to take any of its deflationary effects into account. They argue ultimately for an ECB funded stimulus for the periphery economies funded through the buying of bonds from the country that needs them, “creating reserves in the process and agreeing to refund the interest payments on this debt to the [sponsered country's] treasury”.
By way of example, they show such a system used to help Spain, would lower the Spanish net debt burden to just 60.5 percent of GDP in 2020 (see Figure 10: page 11). This compares to net debt stabilizing at 64.3 percent of GDP in 2020 if the current austerity measures remains in place. But this is only, they add, if the country does “not lapse into prolonged recession or stagnation, and/or face large increases in its borrowing costs”. This is far from guaranteed.
Without a Stimulus What Will Happen?
If the Government persists with its present strategy, says the conservative Economic Social Research Institute in a recent projection our debt as a percentage of GDP will be 106.9 percent by 2020 and rising. With regards to GNP, it will be 134.1 percent and rising.
The reason why it is important to show figures for both GDP and GNP is that the GDP includes in it the profits from Multinational Corporations operating in Ireland, the vast majority of which are repatriated to their country of origin and are not reflected in final tax revenue. While all other developed economies use GDP to measure economic performance, a better picture is formed in the Irish case if GNP is used, as it doesn’t include MNC output.
The ERSI has also just reduced its projections for 2011, which the government has claimed will see a reduction of the deficit from its current 13.2% (its 32 % if we include the cost of recapitalization this year) to 10%. This seems increasingly fanciful as the Institute has revised their projections for GDP down, from 2.7 to 2.2 percent and GNP from 2.2 to 2.0 percent.
Employment and Emigration
In its pre-budget statement the government also gave a reasonably optimist projection for employment. In their recently published Economic and Budgetary Outlook, the Government now projects that employment will fall by 5,000, and will only grow by approximately 75,000 by 2014. However, they claim that the Live Register will only rise by 0.25 percent. How can such a large fall in employment led to such a small increase in unemployment? The reason is emigration. The government projects, in fact relies upon, net emigration to account for little change in the live register. The Irish economist Tom O’Connor has calculated that the recent fall in the live register was entirely due to emigration. In its new Economic and Budgetary Outlook the government states:
“Net outward migration will restrain the pace of growth in labour supply, which combined with the increase in net employment will reduce unemployment to under 10% by the end of the forecast horizon.”
In 1992 Lars Mjoset, a Professor of Sociology at the University of Oslo wrote a report The Irish Economy in a Comparitive Institutional Perspective for the National Economic and Social Council in which he characterized the cyclical nature of the problems with the Irish economy to the setting up of a vicious cycle. The cycle consisted of a weak national system of innovation, a conservative social structure, the threat of marginalization and immigration and population decline. In the report he noted that none of the political parties during the periods of mass emigration which occurred since the formation of the Irish state chose to identify themselves or support those who were forced to leave the country for economic reasons, and that this in turn fostered a broadly conservative polity.
He was in Dublin again on Saturday, 16th October 2010 to give a lecture on the subject of ‘Ireland in crisis: radical alternatives‘ and observed that Ireland is the only country in the EU that doesn’t have emigrant voting rights.
So it is little wonder that the bond markets won’t lend to us. Indeed, there is a precise correspondence between the increasing cost of Irish borrowing which has only increased rapidly of late and the imposing of austerity. For most of 2008 the spread on Irish bonds was the same as Belgium give or take a couple of bps. Yet the economic policies of the two countries diverged at that point as Belgium, like a lot of other European countries attempted to re-inflate the economy through government spending and temporary tax cuts. Ireland at the same time began its first round of austerity. As the measures in each country took hold the forecasts for Belgium’s deficit reduced, while those for the Irish deficit increased, and the cost of borrowing went with it.
However, as the rapid increase in the bond yield was explained away in Ireland as being the result of everything but the poor prospects for growth as a result of cuts in government spending further undermining domestic demand. The excuses for the recent spike varied from the collapse of Portugal’s budget discussions and Greece’s tax revenue shortfalls to the most recent, that Angela Merkel’s comment that a mechanism would be put in place by 2013 to reduce the cost of borrowing by making bondholders pay through partial write downs spooked the markets.
Using a Stimulus to Close the Deficit
All of this is entirely unnecessary, as all a lender to the Irish economy wants is to be paid back. What could provide a definite return is a stimulatory investment of 3bn euro in infrastructure, health and education, as proposed by the progressive think-tank TASC. Using IMF estimates mentioned earlier such an investment would have a €6bn positive impact in the following year and provide a cumulative boost of approximately €18bn. Sinn Féin, in its recent pre-Budget submission There is a Better Way has suggested a 7.5bn government investment. The calculation of the positive multiplier effects show an increase on that investment if put in place now of €16.1 billion by 2014.
And yet the benefits of a stimulus without cutting government spending and privatizing state assets at the same time have been studiously ignored by the main political parties. Instead talks between the government and the main opposition parties to cement cross-party consensus on what needed to be done were only possible once those entering the talks accepted that the target of a reduction of the deficit to 3% by 2015. The only political party in the Dail to demur from this impossible to reach target were Sinn Féin.
Why No Stimulus in Ireland?
The decision of Fianna Fail to impose austerity immediately considering the sudden contraction in the economy appears at first glance to be rather odd, as I have said. In the other major economies around the world the rush to stimulate the economy when recession hit was done to protect indigenous industry. This is because, as Nicky Dempsey has pointed out Ireland lacks “any significant capitalists that compete in world markets, there was no purpose to such a policy and the first resort was to attack wages and social welfare spending”.
Arguing that Ireland still retains the distorted social structure of the recent colony, Demsey continues:
“Most especially, outside of the dominant layers in banking and property speculation, the bulk of the Irish bourgeois class is comprised of globally insignificant capitals, with owners of fast food outlets, bookmakers and publicans to the fore in IBEC, the main employers’ federation. There are literally only a handful of Irish-owned companies that compete in global markets.”
Therefore there was no indigenous capital of any major significance to protect with a stimulus. However, what did need protection were not only Irish banks, but those who had invested in Irish banks, namely British French and German financial institutions and pension funds. As James Meek points out in the LRB Blog, British banks hold something like £130 billion worth of other Irish debt (link is to a BIS report showing the full exposure of European banks to Irish, Greek, Spanish and Portuguese debt).
One of the so called success stories of the Irish Celtic Tiger was the high profits earned by international financial institutions after the establishing of the Irish Financial Services Centre (IFSC) in 1987 under the ‘initiative’ of Charlie J. Haughey. The decision to extend corporation tax levels to cover financial ‘exports’ as well as ultimately devaluing the Irish punt in 1992 to stay inside the ERM, laid the basis of a huge influx of foreign capital into Ireland. The opening up of the common market in the EU, which was finally formalized under Maastrict also created the ground for the using of Ireland as an effective tax haven for foreign capital.
Of course, the decision by Charlie Haughey to set up to set up the IFSC, and make the traditionally barely regulated Irish state a haven for foreign capital was not the brain child of the North Dublin politician and tax evader. Rather it was due to pressure from foreign capital itself, mainly from US banks who wanted to avail of the further opening of the European market.
The Era of Cheap Credit
The establishing of the Euro in 2000 had the consequence too of reducing the bond yields between the German bund and those former high yield countries on the periphery of Europe, which basically meant that the cost of buying debt from banks in these countries got close to zero. This in turn led to a huge increase in the amount of cheap credit available to these countries which in turn put pressure on the domestic banks to lend money. The result, in Ireland as elsewhere, was a property boom. All of this was paid for by British, French and German banks. In Ireland the situation was made worse, by a system of tax breaks and unregulated land pricing system that encouraged speculation and which had been highlighted for reform since the early 70s (and ignored by successive governments made up of all of the main parties in the Dail).
The Bank Guarantee
So we can see while it was felt there was no need to protect the Irish economy through stimulus there was the need to protect banking capital through an unprecedented blanket bank guarantee, a decision that the influential Financial Times columnist Wolfgang Münchau considered to be “one of the most catastrophic political decision taken in post-war Europe.”
Many people are still wondering why the Irish government, meeting on Sept 29th 2008 chose to it. Nicky Dempsey once again offers an explanation:
“The effect of the guarantee is to provide an enormous transfer of taxpayer funds to bail out primarily German, British and French banks, the main holders of debt in Irish banks. While the EU and ECB have insisted on this when burdening Greek workers and the poor with increased debts, the Dublin government initiated this policy itself. The only conceivable explanation is that by bailing out the bondholders, the latter will not foreclose on the banks and their property speculator customers.”
The Irish people are being told almost constantly that the Irish economy, and by that they mean Irish workers who are taxed on their earnings, can cope with this burden, that, in the words of the Governor of the Irish Central Bank, Patrick Honohan that it is “manageable”.
Contrary to such class propaganda, however, we can see that the bailout of a zombie bank like Anglo Irish Bank, with its deep connections to the ruling Fianna Fail party is having a devastating effect on the real economy.
Tom O’Connor again
“The government paid €7 billion to the Anglo Irish Bank and the National Pension Reserve Fund last year, bringing the deficit to 25 billion. Netting out this 7 billion to compare last year’s deficit with this year where this 7 billion spending won’t occur, shows that the deficit will widen considerably at the end of this year.
The deficit net of Anglo/NPRF at the end of 2010 was €18 billion last year and it will be €22 billion at the end of this year. Consequently, the government will have saved 4.3 billion mostly by cutting services to those such as old people, children with special needs, community groups, home helps and social welfare recipients and it will have increased the deficit by 4 billion!“
A Genuine Alternative Solution is Needed
A first step in resolving this crisis is an election which will inevitably result in the kicking out Fianna Fail from government – in a recent poll the party was down to 18% from 41.6 in 2007. However, the most likely alternative government is a coalition between Fine Gael and Labour, as discussed above, their understanding of the crisis is fundamentally the same as Fianna Fail’s, so the policy choices would continue.
In addition, the visit from Olli Rehn to Dublin recently to cement consensus with those parties who agreed to the 3% deficit by 2014 suggests that pressure from the EU to provide a four year fiscal tightening budget will be imposed on Irish workers even if they are in government after a general election.
The only parliamentary party suggesting that a state led financial stimulus should be provided to put growth back in to the economy is Sinn Fein and recent polls suggest that they are only popular with 9% of the electorate.
The Irish Council of Trade Unions (ICTU) has also suggested a stimulus. Unfortunately they envisage this being financed at least in part by the private sector.
The job for the left however, is to continue to make the argument that cuts in government spending, protection of the bank bondholders, the continuing recapitalization of the banking sector are killing the economy. Austerity has failed absolutely.
Instead they have to continue to put the evidence forward that there is a better more equitable way to save the economy. And there is more than enough evidence.
For example, one argument against a stimulus is that we can’t borrow any more money. Borrowing more increases our level of indebtedness, pushing up the cost of borrowing which increases the deficit resulting in no one lending to us! That someone would make such an argument in the current circumstances, when we did the opposite and ended up as debt burden pariahs indicates the deep stupidity of the economic debate in Ireland.
However, putting that to side for the moment it also ignores the multiplier effect of a stimulus that would be precisely directed at the domestic economy (a stimulus for the export market for example which is dominated by MNCs would be absurd. As discussed any stimulus money would go on imports, which constitutes the major of their inputs).
“[In Ireland] an additional 1,800 people entered the High Net Worth Individual category (in the Merrill Lynch and Capgemini 14th World Wealth Report ) bringing the total up to 18,100 individuals, an increase of 11% on 2008.
In addition 18 people found their way into the Ultra-HNWI category, bringing the total number of individuals in the state with a net worth of over $30 million to 181.”
The decision not to reform Irish low tax regime and to make the majority of budgetary adjustment in spending cuts rather than raising taxes indicates the damaging class bias at the heart of Ireland current recover strategy. If it could be given a governmental operational name it would be “Operation Wealth Protection”.
Aside from increasing tax on wealth, which is well known to have a less deflationary effect than cuts in the income of low and middle income earners there is also reserves of money that could be used for investment without the need to borrow.
As Michael Taft argues, we have the cash on hand.
“For the Eurozone countries which we have data for (I have excluded Finland as it is an outlier – with cash/assets worth 88 percent of GDP, mostly in social security funds), Ireland is the league leader, well above all other countries. What are these cash and assets? Primarily two:
- NTMA cash balances: this is the ‘cash-on-hand’ accumulated through pre-borrowing – borrowing over and above what is needed by the state for current funding purposes. This is kept as a buffer in the eventuality that there are temporary problems in accessing the international market. It can be referred to as ‘rainy-day account’. At the end of June 2010 cash balances made up €20 billion.
- National Pension Reserve Fund: this is the value of assets (equities, securities, cash, etc.) contained in the fund. A significant portion of this fund – approximately €7 billion – is tied up in bank shares. At the end of June 2010 the discretionary fund (that is, excluding bank capitalisation) stood at €17 billion
These are considerable resources.”*
Michael indicates where this money can be spent*. As I have argued earlier, such investment spending would return multiples of this value. However, make this argument now, in the media, amongst those indoctrinated by the message that we have no hope but an IMF bailout leading to the inevitable devastation of the remnants of our social security system and you will get shouted at. The teeth of your interlocutor will grit, veins will be drawn to the surface of the neck, and hatred will pierce the eye. What you will get is pure class aggression.
There is only one solution in such circumstance for the working class of Ireland. Revolt!
Image copyright – Steve Bell in The Guardian 23rd of November 2010.
* Since writing this, of course, we should also be able to tap some of the billions in the 85 bn fund to tap. Why should all of it be for the banks.
 See Conor McCabe’s post on Dublin Opinion, Ireland Trades in it’s Property Bubble for an Export Bubble to see some of the staggering numbers around Ireland’s export market (http://bit.ly/9iXfFW)
 For more on the continuities between Ireland’s colonial economy and that of the free state, including the class dynamic underpinning Irish capitalism see Conor McCabe, The Lights of The City on Irish Left Review (http://bit.ly/8bbpif ) and Donagh Brennan The Irish Left Needs a Reality Check (http://bit.ly/bkE9GF )
Also, Denis O’Hearn, The Atlantic Economy, The US, Britain and Ireland, as well as Peadar Kirby: The Celtic Tiger in Distress for a background on Irish clientism, and relationship of the Irish elite to the economic power of Britain, the US and Europe.
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