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Irish economy continues to contract
29 September 2010
Claims of an economic recovery have taken another knock with the publication of figures which show that the Irish economy contracted in the second quarter of the year. GDP fell by 1.2 per cent compared with the first quarter, while GNP declined by a further 0.3 per cent. GDP has now contracted in 11 of the last 14 quarters, while GNP has contracted for 9 consecutive quarters, meaning that the domestic economy has entered its third straight year of contraction.
Despite these dismal statistics the Government continues to insist that a recovery is under way. Finance minister Brian Lenihan claimed that the economy had undergone “a remarkable turnaround” and put the negative second quarter figures down to a “surge in imports”. He took consolation in the improving export numbers, citing them as evidence that “the necessary compliances improvements” were working and that Ireland could “export our way out of our current difficulties.” However, a closer look at the figures reveals the tenuous grounds for such an assertion. There is undoubtedly growth in the export sector - the value of exports rose, from a low in December last year, by €1.85 billion, or nearly 32 percent up to June this year. Yet this growth has been has lopsided, concentrated largely in the chemical sector. It made up 88.7 per cent of the net increase in exports over the quarter. The value of exports from the chemicals sector rose by 58.2 per cent, while for other sectors it was only 6.9 per cent.
Exports and growth in GDP is therefore being driven largely by one sector, making it more susceptible to changes in the world economy. Moreover, the benefits of export growth are very narrow in the context of Ireland. This is due to a number of factors. Firstly, this sector is overwhelmingly in foreign ownership, meaning that much of the value created is extracted from Ireland. This is also reinforced by the low tax regime for multi national companies operating in Ireland. Secondly, as this sector tends to be capital intensive and to import its main inputs, its growth is not likely to generate employment. For example, between 2000 and 2007, chemical/pharmaceutical exports increased by nearly €16 billion, or nearly 60 percent, but employment remained static, rising by just 300. While export lead growth will add to Ireland’s headline GDP it will do little to address high unemployment or the collapse in state revenues.
It will also do little to address the Ireland’s escalating debt crisis. Ireland is currently borrowing more than it can raise in revenue, running a deficit of 14.3 percent of GDP. This is the highest figure in the European Union, including Greece. It has come to sharp focus recently with the Government having to pay higher yields on its bonds as markets grow increasingly concerned over the financial strength of the state, particularly its ability to bear the costs of the bank bailout. While bonds continue to sell, and at the latest sale the government was able to raise €1.5 billion to reach its target of €20 billion this year, the yield demanded by the markets is increasing. The rate for 10-year bonds is now well over 6.3 percent—the highest since the adoption of the euro on its launch in 1999. The cost of insurance against defaults on Irish debt has also surged to a record high. Contracts to insure against Irish debt have jumped by 39.5 basis points to 503.5 basis points, according to data provider CMA. Swaps on Anglo Irish debt now cost €5 million in advance and €500,000 per year to insure €10 million in debt for five years.
Ireland is in a vicious spiral of increasing overall indebtedness, a widening deficit and rising borrowing costs. This is pushing the state towards bankruptcy. Yet the Government still remains wedded to the financial bailout that has largely brought this catastrophe about. It is epitomised by the guarantee on the liabilities of Irish banks that promises investors a hundred per cent return irrespective of the current value of the banks’ assets. The most extreme example of this is Anglo Irish whose assets are almost worthless.
In a recent interview with the BBC, Brian Lenihan justified the guarantee the basis that those who loaned money to Irish banks “have to be convinced that Ireland will honour its obligations and Irish banks will honour their obligations.” The fear is that if the obligations were not met “Ireland's funding position in the future will be perilous." In this schema the state and the banks are treated as one entity, with the fate of the Irish people being bound up with rotten institutions such as Anglo Irish. But this is false; a default on loans to Irish banks would not be a sovereign default. It is also not the case that the Irish government would be unable to borrow if the banks defaulted. Those who have investments in Irish banks are only a relatively small part of the market. Indeed, recent activity in the markets, in which rates on Irish bonds have been increasing, suggest the very opposite of what the Irish Government claims. The cost of borrowing is increasing because of the escalating costs associated with the financial bailout.
Various economists and publications such as the Financial Times have pointed this out, urging the Irish Government to withdraw the guarantee and reach an agreement with the creditors of Irish banks. This would involve exchanging their loans for equity and taking on the ownership and thereby the losses of the banks. It is the “rational” capitalist solution. That the Irish government should reject such a suggestion demonstrates both the relative weakness of native capitalism and the belief of the ruling class that its only option is to guarantee any foreign investment whatever the cost. This view has been expressed most recently by that authentic voice of the ruling class – arch political bureaucrat Peter Sutherland. In an address to the Institute of Directors, he rejected calls for Anglo Irish’s losses fall on the institution’s bondholders, claiming that such a “classical market” solution would not be wise. He said that the markets would punish any weakening of Ireland’s commitments to the banks. Of course the logical argument is that markets should welcome “classical market” solution he rejects. But logic plays little role in the calculations of the Irish capitalist class.
It is also the case that Sutherland’s views will be coloured by the fact that as the current chairman of Goldman Sachs he has a direct interest in the fate of Irish banks. In the same week as he may his intervention it was revealed that Goldman Sachs was snapping up discounted Quinn Group debt on behalf of clients while simultaneously advising the Government on Anglo Irish Bank's Quinn dealings. This is despite the fact that the process of evaluation of the banks is supposed to be independent and free from conflicts of interests.
As well as dismissing market solutions to the financial crisis, Sutherland also articulated the unanimous view of the Irish ruling class that workers must pay the cost. He urged the Government to cut the annual budget by more than the €3 billion already announced this year, claiming that the county’s running costs were “still far too high”. This was not a reference to the costs of the financial bailout but to public services. For him the “two issues needed to be separated”. But this ignores the reality that they are bound up together and that there have been huge and direct transfers of resources from one to the other. In addition to calling for more cuts in public services, Sutherland called for further cuts in wages. This is the ruling class solution for the crisis. It is not rational but a reflection of a class system and a class interest. While is not working in terms of economic recovery, this is really secondary to the overriding objective of making workers bear the burden of the crisis. This is the objective that is being pursed by the Irish government, and with some success. Over the past two years public services have been cut, benefits reduced and wages slashed. Likely further measures include a cut in pension tax relief, which will impact 90 percent of working people, other forms of indirect taxation, a “workfare” scheme, and further reductions in capital spending.
There is no natural end to this, and as the crisis deepens the demands for sacrifices will increase. The bailouts and the accompanying austerity drive will only be halted when met with resistance from the working class.
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