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EU/IMF “rescue” will intensify and prolong austerity

JM Thorn

5 December 2010 

After denying that it would apply for a “bailout” for its banking system and the running of the state, the Irish government succumbed to pressure from the EU and the IMF to accept a financial “rescue” package.  The basic mechanism within this package, agreed last Sunday night (28 Nov), is a loan to the Irish state that will be used to pay to repay its creditors. 

“Rescue package” 
Under the terms of the EU/IMF package a fund of up to €85bn will be made available to the Irish state over the next three years.  The fund will be made up of money from the IMF, the EU and bi-lateral loans from Britain, Denmark and Sweden. The European Commission’s stabilisation fund (EFSF) will supply €22.5bn; Britain will offer €3.8bn; €390m will be provided by Denmark and Sweden will lend €598m.   The IMF will provide €22.5bn in a term of up to 10 years, with a minimum interest rate of 3.1 per cent based on the current market.  The expected average interest rate for the “bailout” will be 5.83 per cent.  The Irish state is to contribute €17.5, of which €12.5bn will be taken from the National Pensions Reserve Fund and another €5bn from cash reserves.  In terms of the disbursement of the fund, the bulk of the money €50bn, will be used for the day-to-day running of the state, while €35bn will be made available to the banks.   They will receive €8bn immediately to restore their cash reserves; €2bn will be on standby and a further €25bn will be available if and when they need it.  From the immediate €8bn pot the Central Bank said Allied Irish Bank will get €5.2bn, Bank of Ireland €2.2bn, EBS €438m and Irish Life and Permanent €98m.  As part of a plan to shrink the banks, the National Asset Management Agency (NAMA) will take a further €16bn in loans, erasing all land and development loans at AIB and Bank of Ireland.  This will push NAMA’s loan book to €89 billion, adding thousands more loans and developers.  These measures bring the cost of the financial bailout to €60bn, with the potential for that to rise to €85bn if the contingency fund is drawn on in full.

While the stated aim of the package is to ease the Irish debt crisis (in the short term at least), its consequence is to immediately increase the level of the state’s indebtedness.  By 2013 the national debt is expected to rise above €200bn and by then almost a quarter of all taxes raised will be used to pay interest service costs.  By the end of the loan period, if the banks have drawn down the full amount of funding available, the Irish state will be paying out €9.66bn a year in interest repayments.  Of course, such a high percentage of annual tax revenue being used to service the loan means severe cuts elsewhere.  This is reflected in the draconian terms attached to package, which demand €15bn of cuts and tax rises over the next four years.

There are also overtly political elements to the package, which give the EU and IMF greater control over the Irish government’s economic policy.  It demands that any future government adheres to the four year austerity plan drawn up by Irish and EU officials, and that measures such as introducing a property tax, raising the pension age and cutting the minimum wage are implemented within a specified time frame.  The Dail will have to pass a fiscal responsibility law that will bind any future government to spending and deficit targets, and also establish  an advisory council that will oversee budgetary affairs. Future governments will also be restricted during the lifetime of the loan.  If they raise any revenue not budgeted for, it will have to go towards paying debt rather than additional services.  It is such terms that have given rise to claims that Ireland has lost its economic sovereignty.  And while it is true that the Irish state’s control over its economic affairs will be diminished this is not something that has happened in the last number of weeks.  It is a process that has been going for at least as long as Ireland has been a member of the EU, and certainly since its adoption of the euro.  Moreover, this nationalistic claim has been raised by those, such as the trade union leadership, who have and continue to be most in favour of the European project. 

This opportunism is reflected in criticism of the bailout package that has tended to focus on the role of the IMF.  The fact is that the IMF is the junior partner, providing only one third of the funds.  Its role, as a US dominated institution, has been to uphold the interests of corporate America by defending the low corporation tax rate in Ireland that overwhelming favours US multinationals.  In terms of the bank debts it was reported that the IMF was open to some form of restructuring, but this was vetoed by the EU.  It was also reported that "the Europeans went completely mad" when the issue was raised.  Such conflicts reflect the differing priorities of US and European capital in relation to Ireland.  However, when it comes to the bailout package the corporation tax rate is really a secondary issue, for its most fundamental component is the guarantee that creditors are repaid in full.  The role of EFSF and the European Central Bank (ECB), who are the senior partners in the deal, is to ensure this payment. 

This overriding imperative, that capital holders (largely European banks) are paid out in full, shows the true nature of the rescue package. For the all the talk of European solidarity, it is the self-interest of states and their various ruling classes that are driving the process.  It is not Ireland that is being bailed out or rescued, but the European financial capitalists who face losses if there is a default.  About 84 per cent of the Irish government and bank debt is foreign-owned, with the UK and Germany holding outstanding loans of $149bn and $139bn respectively.  The British state-owned RBS bank is the biggest single holder of Irish government bonds, owning €4.9bn of these at the end of 2009 and €53bn in total debt assets in Ireland.  (When Chancellor George Osborne says it is in the British “national interest” to provide loans to Ireland he is certainly right, as a default would cost much more than the £7bn on offer.)  The European Central Bank (ECB), which has been providing emergency funding to Irish banks, has €130bn in outstanding loans. 

All the major states in EU are determined there should not be a default that would force losses on European banks and trigger another phase of the financial crisis.  There is also a determination to prevent a collapse of the euro and the broader European political project.  These are the economic and political imperatives that the Irish people are being sacrificed for. 

Four year plan

How this so rescue is to be paid for is laid out in the Irish government’s misnamed National Recovery Plan.  It was unveiled during the period of negotiations between Irish and EU/IMF officials, and many of its measures were included in the final bailout package.   The four-year plan and the rescue package are completely bound up together.  The EC has described the plan as a “cornerstone” of the bailout.   It will be “validated” by the commission and the ECB and be subject to an annual review by the European authorities, while its implementation will be reviewed quarterly. All this has been incorporated into a set of agreements, known as memoranda of understanding, which will lay down the rules governing the release of financial support to Ireland.

The four-year plan outlines one of the most severe austerity programmes ever in post-war Europe. A €10bn in cut spending over the coming four years will see government expenditure fall from 49 per cent of GNP in 2010 to just 36 per cent in 2014, which is the equivalent of a decline in budgets by more than a quarter.  This comes on top of a €14.5 billion package already implemented in the previous two years.   Overall, the Government proposes to make €15 billion of savings and bring the deficit under 3 per cent GDP by 2014.  €6bn of adjustments are to be front-loaded in 2011. 

One of the main blanks of the plan is a cut in social welfare spending of €2.8bn primarily through reductions in unemployment benefit and child support.  While there is no proposal to change the existing State pension rate, the plan seeks to increase the age at which people qualify for the pension to 66 in 2014, 67 in 2021 and 68 in 2028. There will, however, be a reduction in pensions for retired public sector workers.  The Government plans to cut public sector staff levels by 24,750, bringing it back to 2005 levels. (The fact that half of the job cuts have already been achieved is in no small part down to the accommodating stance of the trade unions.)  It also plans to reduce the public sector pay bill by €1.2 billion during the four-year period through reducing pay for new entrants by 10 per cent and introducing a new pension scheme. Cuts across the health, education, justice and agriculture departments will amount to €3 billion. The health budget, which presently stands at €6 billion, will be reduced by €1.5 billion, including a cut of 6,000 jobs.  Education spending cuts will include a 5 per cent reduction in funding for schools.  The capital spending budget will be cut by €1.8 billion in 2011, almost twice the amount set as recently as July.

In addition to spending cuts there are a raft of new taxes and charges. The plan proposes the introduction of a property site value tax in 2012 and water charges some time before 2014 once meters are installed in all homes and businesses. University registration fees will rise from €1,500 to €2,000. The entry point to the tax system for a single PAYE worker is to be reduced by €3,000 to €15,300.  An additional €1.9 billion will be raised through unspecified income tax changes that will almost certainly see the marginal rate of tax returning to 42 per cent or higher. It is likely that such changes will also see tax credits reduced and tax bands being widened.  The standard rate of VAT will be increased from 21 per cent to 22 per cent in 2013, and to 23 per cent in 2014.

The unveiling of the four-year was accompanied by the familiar rhetoric about how the burden of austerity was being distributed fairly and that everyone in society would feel some pain.  However, the reality is that the burden of the austerity measures set out in the plan falls mostly on the working class, which is disproportionately impacted by cuts to jobs, wages, benefits and public services.  On the taxation side the protection of the wealthy is brazen.  As the think tank Tasc has pointed out, someone on €300,000 a year will pay an extra €1,860 in income tax. A person on €40,000 will pay exactly the same: €1,860.  In percentage terms, someone on €36,400 will lose more than twice as much of their income as someone on €100,000.   Politicians, senior public servants and banker get away very lightly when compared with ordinary workers.  This is in stark contrast to the poorest section of the working population who face a €1 reduction in the minimum wage - the equivalent of a 12 per cent pay cut.  Such a measure really exposes the class nature of the austerity plan, for there is absolutely no relationship between the level of the minimum wage and the size of the deficit. 

Will it work?

The rescue package and the accompanying austerity plan are supposed to finally resolve the financial crisis and lay the foundation for the recovery of the Irish economy.   But will it work, even in the terms it has set for itself?   The first point to be made is that every other strategy put forward, from the bank guarantee to nationalisation and NAMA, made the same claim.  There is no reason to believe this one will be any different.  Indeed, an examination of the terms of the rescue package, suggests it too will fail. 

The EU/IMF rescue plan, based on the assumption that bank debts should be repaid in full, is fundamentally flawed.  First of all, the basic mechanism of the deal, of making a loan to pay a debt, doesn’t resolve the debt problem but only moves it down the road.  Secondly, the interest rate of 5.8 per cent over the time period it is supposed to be paid will actually increase the overall level of indebtedness not reduce it.  In 2014 Ireland’s GDP will be €183 billion.  At the end of 2009 national debt stood at €75 billion. This year’s deficit plus the deficits to 2014 plus the bank re-capitalisation will bring the national debt up to €183 billion by 2014, 100% of GDP, according to the government’s four-year plan.  The €183 billion is the principal owed and doesn’t include the interest. The bailout will fund the €35 billion bank re-capitalisation and €50 billion in deficit repayments and is in line with the governments own projections in its four year plan.  The interest on the deal will be €45 billion. The total €69 billion plus interest amounts to €114 billion. This is to be paid by the start of 2020 and covers nine years. It forms part of the national debt from next year onwards. A further €50 billion will be added to the €100 billion which is not part of the EU/IMF deal and which already exists. The total government debt in 2019 without anything paid off will be €264 billion or 129% of GDP.

The government’s own four-year plan shows it will run a deficit by until 2014.  It will be lucky to gather €1 billion a year in surplus from 2016 to 2019. This will give the state a tiny repayment capacity of €4 billion to the EU/IMF who with interest will be owed €114 billion. Even the sale of all semi-state companies would only pay off another €5 billion.  All the extra tax revenue will have been used to bring down the deficit to 3% by 2014 to conform to EU rules, so there will no other means for the government to raise the rest of the money.  Under such circumstances the government cannot come even close to paying.   (the figures above are taken from Implications of the IMF deal, progressive-economy@tasc, 17/11/10)

On technical grounds alone the terms attached to the EU/IMF loan are impossible to satisfy.  It is compounded by the accompanying programme of austerity that will serve to retard economic growth, increase unemployment, reduce tax revenue and increase the deficit.  This has been the pattern over the past two years in which time a total €14.6bn was removed from the economy.  The effect of such deflationary polices has been to increase the burden of the debt and reduce the capacity of the state to repay.  Now we are being told that more debt and more austerity can somehow produce a different outcome. 


The rescue of Ireland’s economy will fail and there will be a default.  Indeed, the markets are already indicating the likelihood of such an outcome with Irish bond yields remaining high and Moody’s saying it may downgrade Irish debt.  The fact is that debts that can’t be repaid won’t be repaid. However, between now and the recognition of that reality the capital holders, the EU and any Irish government will continue to bleed workers for all they are worth.   It is therefore in the interests of Irish workers to force a default sooner rather than later.  This means putting forward the demand for a repudiation of the debt.  There are no easy routes out the circumstances that Ireland now finds itself in, and a default would not be without consequences, but it is preferable to the unending austerity demanded by the Irish ruling class and the EU.     

European Union 

If the financial crisis hasn’t ended for Ireland then neither it has it ended for the EU.  The pressure on the peripheral states in the eurozone hasn’t let up, and there is the possibility that Portugal or Spain may require their own rescue packages.  This would present a major challenge for the EU, as the resources required for this would exceed the provisions of the stability fund and the ECB.  In such circumstances there is a possibility that the euro could collapse or the EU fracture.  However, the current crisis has revealed strong centralising tendencies within the EU and greater control exerted over the peripheral states, Ireland and Greece being the best examples.  The proposals to avert future financial crises, such a common euro bond, also point to a strengthening of the bureaucratic structures of the EU.  All this serves to highlight that workers across Europe face a common enemy and are engaged in a common struggle against austerity and for democratic rights. 


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