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EC and Irish Government draw up plans for savage austerity as “rescue” looms JM Thorn 16 November 2010 Ireland’s financial crisis has finally come to a
head.While the trajectory of the
state towards bankruptcy has been set for some time, the rapid deterioration
of Ireland’s economic position over the past month, and in particularly
the last few days, has brought the official recognition of that fact much
closer. An indication of the seriousness
of the crisis facing Ireland came last month with the release of the Economic
and Budgetary Outlook document, which sketched the broad outline of the
Government’s four year austerity programme.This
revealed that the fiscal adjustment to be announced in the December budget
would be twice as much originally
envisaged, rising from three to six billion euros and to be made up of €4.5
billion and tax increases of about €1.5 billion.This
was very much a “frontloading” of
the four-year €15 billion cut-and-tax plan.In
2012 and 2013, the adjustment is projected to be less painful at €3.5
billion; and in 2014, austerity measures of €2 billion-€2.5
billion will be put in place.A cause
and also a consequence of the intensification of austerity is the lowering
of the projected rate of GDP growth over the 2011-2014 period. For
the current year growth is estimated at 0.25 per cent.The
projections for 2011 cut GDP growth from 3.3
percent to 1.7 percent; GNP growth cut from 3 percent to 1 percent; investment
from 4.5 per cent to (-) 6 per cent; and spending on public services cut
from (-) 0.5 percent to (-) 3 percent.Employment
is cut from 1 per cent to (-) 0.25 per cent, which is the difference between
having 19,000 more people at work and 5,000 less.The
projection for the unemployment rate is kept down by the assumption that
one hundred thousand people are likely to emigrate. Over the four year period the projection
for nominal GDP has been cut by over €21 billion, or over 10 percent.Real
GDP growth is cut from 4 per cent on average to just under 2.7 per cent,
while GNP growth, which was expected to be 90 percent of GDP growth, will
now only grow by 59 percent of GDP growth.If
the Government’s tax revenue ratio’s hold, underlying tax revenue by 2014
will slump by over €4 billion over last year’s projections. The projections set out in the Economic
and Budgetary Outlook highlight the poor prognosis for the Irish economy
and also the degree to which the supposed cure of austerity is actually
making things worse. Reduced growth rates, reduced employment, higher emigration
and a continuing contraction in the domestic economy will not translate
into fiscal stability.A programme
of austerity will further deflate the Irish economy, reduce tax revenues
and increase the deficit.In this
sense the policies being pursued by the Irish Government are not rational,
in that they produce the opposite of their stated objective.That
the Irish capitalist class is pursing such a strategy demonstrates its
relative weakness.It cannot see beyond
dependency on international capital, whether that takes the form of the
financial markets or the European Union.So
the bondholders who invested in Irish banks must be paid out in full, while
the deficit much be cut to 3 per cent of GDP by 2014 to comply with the Stability
and Growth Pact, no matter what the consequences for the Irish people. These two imperatives have been
conflated into the belief that reducing the deficit will reduce the costs
of borrowing on the bond markets.However,
the bond markets are not concerned so much by Ireland’s budget deficit
but by its ability to repay its borrowings.That
ability has to be proven in 2011 not in 2014.Financial
institutions are looking for evidence that the country has moved into a
period of sustainable growth, and that tax revenues and public expenditure
have been stabilised.The problem
for Ireland is that the projections for its economy, as have been outlined
above, demonstrate that it is not on this trajectory.This
is reinforced by the Irish government’s commitment to the EU Stability
and Growth Pact on deficit reduction and the adoption of policies which
are retarding economic growth.The
two imperatives that are presented as complimentary are actually in conflict.This
is because the imperatives are different in character, with the Stability
Pact forming the basis of an agreement to develop the EU as a political
and not just economic project.What
the financial crisis has exposed is the conflicts and contradictions inherent
in attempting to mould twenty seven different states into a single entity. The main reason why Ireland has
not been able to calm the bond markets is the continuing uncertainty over
the losses associated with the country’s banks.The
approach of the Irish government to the crisis in banking system, of the
state guaranteeing international investments, means that the financial
crisis has become a crisis of state finances.Although,
distinct in a technical sense, the bond markets are not making a distinction
between Irish bank debt and Irish state debt.This
is why, despite successive cost cutting budgets, the interest on Irish
bonds has continued to rise.The losses
of Irish banks, and the potential liabilities of the state, have been rising
at a faster rate than the Government can cut spending.It
is also the case that the total cost of the bailout of Irish banks is unknown.In
September the Irish Government tried to draw a line under this by announcing
a final figure of €60bn.This
was presented as another attempt to calm the markets, but the interest
rate on Irish bonds kept on rising.The
markets do not believe that Irish bank losses are at an end, and are doubtful
whether the Irish state has the capacity to bear such liabilities.This
is what is driving the rates on Irish bonds upwards and pushing the state
towards bankruptcy. The parlous state of the banking
sector and its implications for the future of the country was set out starkly
in an article in the Irish Times by the economist Morgan Kelly.For
him Ireland is “effectively bankrupt” and has ceased to exist as an independent
fiscal entity.He highlighted September
as the point of no return for the Irish banking system.During
this month €55
billion of bank bonds matured and were repaid, mostly by borrowing from
the European Central Bank.With the
€55 billion repaid the option of sharing the losses of the banks
with their major bondholders has disappeared, and the Irish state is left
with the bill.The problem is that
the losses of Irish banks haven’t ceased and exceed the fiscal capacity
of the state. Kelly points to the disparity between
the estimate of the cost of the Anglo rescue (set at €30bn) and
that for the other major banks (set at €16bn).He
claims that these estimates are inconsistent because they fail to recognise
that AIB and Bank of Ireland had the same exposure to developers as Anglo.While
they did start with more capital to absorb losses than Anglo, they also
face substantial mortgage losses, which it does not. The likelihood is
that AIB and Bank of Ireland together will cost the taxpayer at least as
much as Anglo. When the same assumptions about lending losses are applied
across the banks, the likely cost is€16
billion for Bank of Ireland and €26 billion for AIB.Kelly
estimates that the final cost of the financial bailout will be €70
billion.He contrasts this figure
with the€15 billion in spending
cuts and tax rises set out in the four years plan to demonstrate the futility
of the efforts of the Government to save the state form bankruptcy.The
critical argument made by Kelly is that it is the bank bailout that is
pushing bond yields to record levels not the budget deficit.To
pay for a €70bn bailout would require every cent in income tax
over the next six years.Of course
this is impossible and serves merely to illustrate that the Irish state
is insolvent; that its liabilities far exceed its ability to repay them.The
formal recognition of this fact has only been delayed by the Government
building up a large pile of cash in anticipation of it being shut out of
the bond markets in early part of next, and the ECB stepping in with emergency
funding to keep the Irish banks going. Kelly goes on to chart to next
phase of the crisis, in which the bad loans will be mortgages and the foreign
creditor who cannot be repaid will be the ECB.Rather
than a few large developers, the next round of the crisis will involve
hundreds of thousands of families with mortgages.This
has been held off by the banks maintaining an artificial floor on house
prices by issuing mortgages at a lower rate than their own long term borrowing
costs. Without
this trickle of new mortgages, prices would collapse and mass defaults
ensue.However, with Irish banks likely
to come under direct ECB control next year, they will be forced to shrink
their balance sheets to a level that can be funded from deposits.A
halt to new mortgage lending will cause house prices to collapse.This
will be reinforced by a wave of foreclosures as Irish banks seek to retrieve
as ECB’s money by whatever means necessary. Kelly forecasts that by next year
a formal bailout will have been agreed and Ireland presented with the bill
along with the terms for repayment.Whether
Ireland can survive will depend on the interest on the bailout loan and
rate of growth of the economy.A
sufficiently low interest rate combined of economic growth and inflation
will eventually erode away the debt.However,
in the wake of a massive credit boom and bust, and a weak global recovery,
the prospects for growth are poor, and prices are likely to be static or
falling.In such circumstances an
interest rate beyond 2 per cent is likely to sink the country.If
Ireland were forced to repay the ECB at the 5 per cent interest rate imposed
on Greece, debt will rise faster than the means of servicing it, and state
bankruptcy will be unavoidable. In
his conclusion Morgan Kelly says that Ireland had a choice between imposing
a resolution on banks or becoming insolvent and chose the latter.As
a result it had now lost its sovereignty and its ability to make any policy
choices. The most obvious symbol of this
loss of sovereignty has been the overt intervention of the European Commission
(EC) in policy making in Ireland.This
was illustrated by the recent visit of European Commissioner for economic
and monetary affairs Olli Rehn to Dublin to endorse the Government’s four
year austerity programme.While he
denied that EC was dictating the terms of Ireland’s budgetary policy, his
admission that he is in contact with Irish
authorities at least once a day and reports that his officials are working
in the Dept of Finance indicate that the Commission is now playing a major
role in policy formation.Ireland
is now subject to what Rehn describes as “economic and monetary
surveillance”, with all major decisions, such as the budget and four year
plan, requiring EC approval. What
was notable about Rehn’s visit was his engagement with opposition parties
and trade unions and his emphasis on creating a consensus around the measures
that would be implemented.He said
that reducing
Ireland’s budget deficit would require “determined and sometimes painful
decisions, political courage and political and social dialogue”.This
was a clear reference to social partnership and the role that trade unions
have played, and are expected to play in the future, of supporting austerity
and the assault on workers living standards. He surely wasn’t disappointed
by his meeting with trade union leaders, and they themselves presented
very a positive account of the encounter. ICTU general
secretary David Begg praised Rehn for acknowledging that the approach
to deficit reduction not 'exact science' and displaying
“considerably less arrogance” than Irish politicians. Yet
despite his polite persona, Rehn wasn’t really saying anything different
on the necessity for austerity.In
some ways he was even more hard-line than Irish politicians, making implicit
threats about what would happen if
the sufficient austerity measures were not adopted.He
warned that “member state governments must commit to prudent fiscal policy
making—and accept that if they deviate from such path, there will be consequences.”He
said:“This is necessary, if we are
serious about containing the risks to financial and economic stability
in the euro area—and we are very serious about this.”Such
statements leave no room for doubt that Rehn and the EC are playing the
role of liquidator when it comes to the Irish economy.Their
objective is to retrieve as much money for Ireland’s creditors (the ECB
and various European Banks) by whatever means necessary.The
position Ireland finds itself in was summed up Central Bank governor Patrick
Honohan: “we have to jump to what the lenders expect and convince lenders
we can get to the situation where debt is not spiralling out of control”. Alongside
discussions on the budget and four year plan EC and Irish officials have
also been holding talks on the rescue of the banking sector.Indeed,
this is the most pressing and immediate concern, given that it is Irish
bank losses which threaten to overwhelm the state and undermine the whole
European project.This has taken on
a greater intensity over recent days as the rate on Irish bank and state
bonds rose to record levels.The Irish
state faced the prospect of defaulting on its debt and being frozen out
of the financial markets.The danger
for the EU is that such a scenario could trigger a second wave of the financial
crisis as European banks take losses on lending to Ireland (for example, Irish
banks owe German banks alone €127bn). Moreover,
there is the potential that the crisis could escalate and there would be
defaults by bigger states such as Spain and Italy.Sovereign
debt defaults on such a scale would shatter the European banking system,
destroy the value of the euro and put the whole existence of the EU in
question. Political
reaction The political reaction in Ireland
to the deepening of the financial crisis and impending “rescue” has taken
a number of forms.One of these has
been a crude nationalism that has sought to deflect attention away from
the responsibility of the Irish ruling class for the debacle.This
has found expression in anti-German sentiment and claims that German chancellor’s
Angela Merkel’s comments on bond holders sharing the losses of the banks
were responsible for the intensification of the crisis. Former
Taoiseach Garret FitzGerald said the German comments had been “totally
destabilising”.Joan
Burton of the Labour Party said Germany had to recognise that it could
not just take the positions of larger states such as Italy and Spain into
account. However,
such claims really do not have much credibility.As
mentioned above, German banks have been one of the major lenders to Irish
banks.The reality is that the German
state is trying to protect them from a loss, and that such an objective
would not be advanced by an Irish default.Merkel
was engaging in populist rhetoric directed at German taxpayers who are
concerned they will be asked to fund another bailout.She
was no more sincere than her Irish accusers where. A more accurate expression of the
position of the Irish political class was the fawning reception given to
EC commissioner Olli Rehn and the eagerness of the various political parties
to promote their credentials as implementers of austerity.When
Rehn was calling for a consensus he was really pushing at an open door
for such a consensus already exists amongst the parties.Despite
the rhetoric they are largely agreed on the broad programme of austerity. This
can be seen in the manoeuvring over the budget, with opposition parties
saying they will vote against even though they will be in agreement with
its contents.It has even been suggested
that Fine Gail and Labour are hoping that the Coalition staggers on long
enough to past the budget and take the blame for it in the upcoming general
election. The manoeuvring between the Dail
parties is really a side show for when the “rescue” package and its terms
are formally announced Ireland will have ceased to be a sovereign state
in any meaningful sense.The “Government”
will not be making decisions on major issues, but administering a programme
determined by the EU and international capital. Almost
one hundred years on from the Uprising and the creation of the southern
state Ireland will under greater foreign domination than ever. This
represents the complete failure of the nationalist/ republican project. In one sense the “bailout” will
be a setback for Irish workers as it diminishes further the limited democratic
rights which exist in the state and ushers in a period of intensified and
prolonged austerity. However,
it also serves to discredit the Irish ruling class and the populist ideology
(most closely associated with Fianna Fail) that has held sway over a large
section of the working class.The
strengthening of the EU over Ireland will also serve to highlight the fact
workers across Europe are facing a common enemy and that the struggle against
austerity has to take place on a pan European basis.Of
course the most important thing is that Irish workers do engage in struggle
and push back against what is being imposed on them by the EU and the Irish
ruling class.This is where hope lies. James
Connolly’s claim that “the cause of labour is the cause of Ireland”
is as true today as it was in 1916.
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