Tuesday, 26 February 2013

Ireland Drowning in Private Debt (4 of 4)

Paul Sweeney: Ireland has many core strengths. It has a well-educated workforce, albeit with too many unemployed, skills are being lost, there is high emigration and very high debt, much of the public which was run up as private corporate debt. It one of the most open economies in the world; we export a high proportion of our GDP and these exports are high value added and are largely recession-proof, and include a high proportion of service exports. We are running a balance of payments surplus. The programme of public sector reform is progressing well.

In spite of the severely damaged reputation of Irish business, the World Bank listed Ireland as 9th best place to do business out of 183 countries. Taxes are extremely low on business and employers’ social contributions are amongst the lowest in the world. Ireland has a barrage of state agencies devoted to assisting businesses. The rise in productivity (ULC) and on the much more useful wider definition of competitiveness , Ireland performs very well, though there are issues with our international reputation for business, and also serious problems for domestic firms in access to credit and also due to the collapse in domestic demand. The official “pro-business” culture was so uncritical that it contributed in a major way to the economic collapse and to the collapse of many viable businesses too. That mind-set needs to be addressed.

This relative stability in real incomes, in welfare rates and in public employment is the key to the explanation of why there has been no rioting in Ireland, despite our travails. In the circumstances, these are equitable income and welfare policies.

It is crucial that the core EU economies which are performing well should act in solidarity and not in punishment to the underperforming peripherals.

The best action would be an EU-wide coordinated stimulus. There is no shortage of social and infrastructural needs and refurbishment in Europe. But the cut in the EU Budget last week does not auger well for such intelligent action at EU level. However, large countries may yet take action, individually or in concert.

A Common Fiscal Policy in Europe (and a coherent Banking Union) is key to addressing inequality, sorting out the banks and boosting demand by underwriting an EU-wide stimulus programme. It may begin with a small budget overall, but a small budget in EU terms is still a lot of cash.

It would be preferable to have tax coordination rather than harmonisation where member states may set rates within bands, though a common tax base for companies makes sense in a single market. This means that Ireland’s low Corporation Tax regime should be re-negotiated as part of the deal on the socialised bank debts as we move towards greater fiscal union. The Irish government is making a policy error in its undying defence of its low Corporation Tax rate and against the FTT, while it simultaneously seeks assistance on Ireland’s unsustainable bank debts.

So what can the IMF as a key part of the Troika do to further assist the Irish people?
It is the view of Congress that the IMF has been the least negative member of the Troika in Ireland, with more pragmatic view of what needs to be done. However, there are some issues on labour market “reforms” with which we are unhappy.

It is our impression that the IMF would have insisted that the Irish people should not carry the total burden of the banking adjustment alone. Regrettably, the ECB, while moving considerably from its initial position, has insisted that the Irish Government/taxpayer repay the bank bondholders in full, in order to safeguard the European banking system. Last week’s deal on the promissory notes on the two dead banks, while a great improvement, still means the bondholders are left untouched.

While the EU banking reforms are progressing, it is unclear whether they will go far enough to address the Geithner Doctrine that no big bank must fail nor any bondholder must be left behind. It is vital that the sovereign and public debts are separated and that Europe assists Ireland on its socialised debt. We are being punished for being the first in dealing with our failed banks and for the foolishness of the government which guaranteed all the creditor as well as the depositors of the banks. The people threw that government out for that and for its appalling economic policies, which squandered much of the real sustained progress of the Celtic Tiger period.

Without a significant deal on Ireland’s €64 billion bank debt burden, there is little chance of economic recovery in the near future. Figures from Eurostat show that Ireland has paid more for the bank crisis than any other EU state. So far, the bank bailout has cost us €41 billion, while Germany – with an economy almost 20 times our size – has paid €40 billion. We have also paid more than the UK, France, Portugal and Spain.

The Irish people’s recent experience of capitalism is that when wealthy bankers and bondholders take risks that fail, the public bails them out. Combined with the decline in labour’s share of national income over the past three decades, economic policies and governance must change fundamentally.

While the IMF is not in favour of domestic stimulus, especially in crisis countries, there is a strong case for an EU-wide action for a stimulus. The IMF commendably revised it multipliers in the light of the depth of the recession and other factors and this means that a stimulus in Europe would work every effectively in reducing its vast unemployment of 26.06 million.

However, the lack of interest by the European elite in dealing with the vast level of unemployment in Europe threatens its institutions, including democracy itself.


Anonymous said...

I know I'm nitpicking here, and finding fault with an article with which I basically agree, but it distresses me to see a reference to the public sector 'reforms' going well.

The enornous cuts in pubic spending over the last few years have included few 'reforms'. Maybe the small changes to the redeployment system are better. Can't think of much else.

Mainly we have being cutting back services, welfare payments and wages. You can argue about the rights or wrongs of that - but I really don't think we can call them 'reforms'.

paul sweeney said...

You are correct. The massive cuts in public services are not "reforms." You make a very valid point. I should not call them "reforms" - the use of language is important.