Monday, 7 February 2011

Ireland and Greece – A tale of the good twin and the bad twin and their common fate

Terry McDonough and CJ Polychroniou: The Celtic Tiger was one of the most famous economic success stories of recent times. Ireland was the poster boy of the globalised, low tax, business friendly economy. Foreign direct investment poured in at least in the early years. Recorded exports rose to close to 100 percent of GDP. The economy achieved full employment while at the same time profit shares rose. The government deficit was paid down. Ministers and economic pundits travelled the world dispensing advice on how others could emulate ‘the Irish Model.” On the opposite pole, Greece had one of the worst economic reputations in the EU. The public sector, while not especially large by European standards, was notoriously corrupt and fragmented, catering to the needs and demands of an industrial and financial elite and their political collaborators.

At the same time, a swiss cheese of loopholes and tax evasion meant that tax revenues had no hope of catching up with expenditures. The deficit grew to unsustainable levels. Greek exports could not expand fast enough to cover the rising demand for imports. Employment was stagnant and a proper welfare state was never really achieved despite the deficits.

Now the good boy and bad boy of Europe sit side by side like frogs in a pan of water, closed in by IMF-style stabilization programmes, while their European “allies” turn up the heat with unsustainable interest rates. Both economies entered crisis and collapsed. How could this have happened? What did two such disparate actors have in common?

Both economies emerged from the stagflationary crisis of the 1970s and early 80s trying to successfully navigate in the context of the emerging global neoliberal order. Both countries' politics were governed by populist parties throughout much of this period. In Greece the socialists dominated the political scene, while in Ireland Fianna Fail was known for a conservative variety of populist nationalism. Both countries pursued an international model characterised by globalization, neoliberal policies, the financialisation of the economy and a weakened labour movement. This is the fundamental thing they had in common. Each country implemented this programme in its own way with initially differing results. While Ireland caught the neoliberal tide and Greece wallowed in the global shallows, both countries eventually foundered.

Both nations opened their economies to the international markets. EU membership and the adoption of the Euro were central to this strategy. Ireland attracted investment in information and communications technology, pharmaceuticals, and international services. For Greece, it was tourism, shipping and services. While Ireland often ran a trade surplus, Greece was chronically in deficit. Both Ireland and Greece would come to regret, for different reasons, their involvement in international financial markets. A pro-business globalization strategy led both nations to institute a low tax regime. In Greece income tax rates were low and indirect taxation was relied on. Widespread tax evasion was openly tolerated. The Greek government ran a continual deficit building up an impressive stock of national debt consistently well over 100% of GDP.

By contrast the Irish state often ran surpluses, but it did so by heavily relying on property related taxes. This revenue rose as international financial markets and domestic banks pumped funds into the Irish property market and blew up a bubble of monumental proportions.

A weakening labour movement in both countries failed to translate growth into social progress. Inequality increased in both countries. In Greece this resulted in pressure on an inadequate and fragmented welfare state. Coupled with low tax take, this added stimulus to the national debt. In Ireland, people compensated by going into debt. Irish household debt rose from around 40% of disposable income to 180%.

In both countries developments were justified by the aggressive importation of neoliberal ideology. In Ireland, market fundamentalism justified an over-reliance on foreign direct investment, low taxes, privatisation, labour market flexibility, and light touch financial regulation. The Irish deputy prime minister famously claimed that, spiritually, Ireland was closer to neoliberal Boston than supposedly social-democratic Berlin. In the past ten years or so, Greece has been selectively implementing neoliberal policies, engaging in asset stripping of its most profitable public enterprises and the liberalization of the financial landscape, It has been rolling back labour rights, social programmes and entitlements. It has also sought to entice foreign direct investment and to compete at the low end of the index against nations like Estonia and Bulgaria.

The globalization, the neoliberalism, the international financial markets and the rising inequality so central to the growth strategies of both nations would ultimately also prove to be their undoing. Ireland’s financially driven property bubble stalled in 2007 and the international financial crisis in 2008 accelerated the decline. This collapsed property-related revenues and the much lauded low tax regime triggered the fiscal crisis of the Irish state. The collapse of the construction industry, the drying up of credit, radical reductions in state expenditure and tax increases added to consumers lumbered with debt have decimated Ireland’s domestic economy.

Similarly, the Greek crisis was violently brought to surface when the global crisis reached Europe. Inequality in the private economy had driven a halting and uneven expansion in the public sector. A neoliberal commitment to low taxes and “competitiveness” in the global economy had dictated that revenues would lag behind. A massive national debt built up. The government had no reservations in relying on a bloated and lightly regulated Goldman Sachs in order to quietly borrow billions in order to join the euro in 2001 and later on to mask sovereign debt from public eyes through the use of fake statistics. The revelation of these deceptions hastened the EU/IMF intervention.

It is part of the Celtic Tiger myth to believe that the Irish economy was motoring along just fine until Lehman Brothers collapsed. Both Ireland and Greece collapsed very much in the context of the failure of the global neoliberal model.of which they were local variations. This should not obscure the fact that domestic institutions and local policies, supported enthusiastically by local elites, played important roles in both cases. Thus, the Irish and Greek crises are both international and local.

Now both economies are trying to escape their crises by “doubling down” on the very neoliberal policies that brought them to this pass. In both countries inequality is being pursued through cuts affecting the most vulnerable. The wealthy are being sheltered from the tax increases loaded onto the rest of the population. Greece and Ireland have become an early testing ground for the effort of the ECB (and its collaborators) to save the banks and the euro. In Ireland the banks have swallowed tens of billions of taxpayer money. Both governments surrendered sovereignty with no resistance, as if there were no alternatives, and are now trying to convince their citizens that it their “patriotic” duty to offer support to ruthless anti-labor, anti-popular measures of the kind that the IMF, was imposing in Third World dictatorships in the ‘60s, ’70s and ‘80s, under the threat of guns. Ironically, in this regard, the EU appears more ruthless than the IMF.

Further financial turmoil has demonstrated that even “the markets” know that these “bailouts” will only intensify the problem. For both the good frog and the bad frog the choices are stark. They can poach when the crisis reaches the boiling point. They can take a leap in the dark, gambling on an abandonment of the Euro. Or Europe can turn off the heat. This would first involve allowing the radical restructuring of both bank and sovereign debt. Secondly, the EU as a whole should reflate its economy led by trade surplus nations like Germany. The peripheral countries alone cannot, and ultimately will not, bear the cost of addressing a crisis affecting the whole of the Eurozone.
Terry McDonough is Professor of Economics at the National University of Ireland; CJ Polychroniou has taught in universities in the US and Greece and is an Associate in the Freire International Program for Critical Pedagogy at McGill University.


Paul Hunt said...

For a slightly different, but quite persuasive, take:

Paul Hunt said...

A slightly different, but quite persuasive, take on Greece:

paul sweeney said...

An excellent take on the reasons for the collapse of the Irish economy. I would argue that Ireland did not adopt a fully neoliberal model but one which was moderated by social partnership - rather a form of dialogue (partly with the deaf, at times) and it made other social progress, even after the Tiger years, which ended in 2001.

Did you know that the trade unions (which argued strongly against low taxes and low regulation during the boom years) actually caused the bust. So say Fine Gael on their Website under "Budget".

“Fine Gael will take on the big vested interests that have contributed to the current crisis –the bankers, the bondholders, the developers and the unions.

And we will aggressively cut the waste in our public service to keep all taxes as low as possible.”

Thus it appears that the FF/Green/PD rule was only a very mild precursor to real blue destrucitve neo-liberalism!

Paul Hunt said...

@Paul Sweeney,

I'm struggling to decide between you and FG as to who is being the more disingenuous. FG is being unfair in bracketing unions with the prime suspects - particularly when most politicians, some public officials, regulators, quite a few external consultants and many opinion-formers were more complicit. (They should have consulted Dante's Inferno which provides useful gradations of hell.)

But many of those exercising authority and influence on the progressive-left supped at the capitalists' trough and, despite securing some benefits for their constituencies, have taken a liking to the swill - and are loth to admit that they knew (or should have known) that the previous abundance of swill was unsustainable.

Robert Sweeney said...

"They can take a leap in the dark, gambling on an abandonment of the Euro. Or Europe can turn off the heat."

Terry, could you please expand on the potential merits or demerits of leaving the euro. Mark Weisbrot has being arguing consistently that the PIGS should at least consider ditching it.
It seems to me that even if Ireland significantly reduced the burden of the 'bailout' through renegotiation, that still may not save us. The deficit is so large at this stage that a stimulus package is unlikely to cover the deficit in time before we go back to the markets. As such, even in this optimistic scenario, we are still facing default.