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EC and Irish Government draw up plans for savage austerity as “rescue” looms
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.
Satisfying the EU, calming the markets
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.
It is for these reasons, which go well beyond the immediate crisis in Ireland, that the EU is pressing so strongly for a resolution to the Irish banking crisis.Such a resolution will involve Ireland making an application of up to €80bn from the European Financial Stability Facility (EFSF). In effect Ireland will be taking a loan to pay off the debts of its banks.All the creditors will be paid off, whether they are bondholders or the ECB, before the full force of the debt falls on the Irish people.This could mean a decade of savage austerity.Even this may not be enough as the terms of such a loan would be no more favourable than those offered by the markets.It is possible that Ireland could default on this debt and the period of austerity prolonged.While the EU is supposedly showing “solidarity” with Ireland and holding out the prospect of “rescue” what is actually being proposed is the complete opposite of the conventional meaning of these terms. The member states of the EU are acting in their own self inertest and that of their ruling classes.It is not Irish people who are being rescued but the big financial capital holders who refuse to take a loss on their investments.
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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