Chapter 5: Ireland: Austerity
‘Don’t be worrying – we already are working under the cosh of the Troika, so we will not be affected by the Fiscal Compact’. This is one of the main arguments used by the government to claim that the treaty will have little effect. It is partially true and mainly false.
It is partially true because, as we have seen, the terms to which Ireland, Greece and Portugal have been subjected by the Troika are the prototype for how the Fiscal Compact will work. But the statement about the irrel-evance of the Fiscal Compact is false because it hides how these policies will become a permanent noose around our necks. It will be a case of aus-terity forever. To see what the future holds, we only need to examine the austerity economics of today.
AUSTERITY IS GOOD FOR YOU!
After the economic crash, the political establishment adopted one mes-sage: ‘if we play by the rules, the ECB, the IMF and the EU Commission will look after us’. The Irish were portrayed as the good boys and girls of Europe, entirely different to the rebellious Greeks. The Finance Minister, Michael Noonan, even joked that he would print t-shirts with the words ‘Ireland is not Greece.’1 Yet the good behaviour has cost the Irish popula-tion dear as the scandal over the Anglo Irish banks shows.
In September 2008, a special late night cabinet meeting was called and a state guarantee was provided to cover the debts of Irish banks. But a year later it became clear that some of these banks, particularly Anglo Irish, were insolvent. The government began injecting funds into Anglo in tranches of €4 billion, followed by €10 billion and another €10 billion. Each of these injections was ‘approved’ by the EU Commission, even though it is supposed to ban state aid which distorts the market.
After March 2010, the funds for the Anglo bailout came via a complicat-
ed route whereby promissory notes or IOUs were printed that could be
drawn down at the Irish Central Bank. It, in turn, was able to access funds
through an Emergency Liquidity Assistance programme that was signed
off on by the ECB in Frankfurt. Today Central Banks function as agents of
the ECB so this institution must also have been involved in the scheme to
The EU Commission and the ECB, therefore helped to force through an
Anglo bailout programme that will cost €47.9 billion between now and
2031. Their primary motive was to save Europe’s bankers but they used
the story line that they were ‘helping out Ireland’. Far from putting cash
into ATM machines for Irish public servants – as the usual silly story goes -
they were running a collection racket for wealthy speculators.
As Ireland’s sovereign debt increased, concern grew over whether the
state could keep paying. In November 2010, pressure mounted on Ireland
to join an IMF-EU-ECB assistance programme so that it could keep paying
off the bankers. According to the Irish Times
, US treasury secretary, Timo-
thy Geithner made his concerns known at a G20 summit and told the EU
leaders to force Ireland into the Troika programme.2The Daily Telegraph
Pressure mounted from the United States government to under-write the debts — Timothy Geithner, United States Secretary of the Treasury, feared that an Irish bank debt default, while not threaten-ing of itself, could have spread contagion to the entire European system, to which American-backed “credit default swaps” were ex-posed to the tune of 120 billion Euros.3
Former Finance Minister, Brian Lenehan has also blamed the ECB for forc-
ing Ireland into the Troika programme because they thought Ireland
‘needed to be nailed down’. Inadvertently, he also pointed to the duplicity
in the ECB’s behaviour stating that ‘he felt the ECB was giving the money
with one hand while saying on the other hand that it did not really like
doing it’.4 The total foreign bank exposure to the Irish economy was €632 billion and British and German banks were the biggest creditors. The ECB acted
as their collection agent and refused to write down even the unsecured bondholders of Anglo-Irish even though they got a higher rate of inter-est for ‘risk taking’. The present government has continued this grovelling
to the ECB, with Finance Minister Noonan, stating that he ‘was obliged to observe advice from people such as Mr Trichet’,(the ECB chief) who
had ‘fairly good arguments’. 5The money to pay off the bondholders has literally being squeezed out of the population through cutbacks and tax hikes. Each step of the way was approved and guided by the EU Commis-sion and the ECB. Yet the Fiscal Compact will transfer even more powers over the Irish economy to these agencies.
The economists who advocate support for the Fiscal Compact are normal-ly the most enthusiastic supporters of the current austerity programme. They have justified austerity through three main arguments.
1. The Irish state can cope with its sovereign debt. There would be a few
hard years but the finances of the state would eventually recover.
The Economic and Social Research Institute’s Quarterly Economic Com-mentary
in the Spring of 2010, stated that the debt was ‘manage-able’ and ‘would in no way threaten the solvency of the state’. 6
2. We have to export our way out of the recession. The domestic econo-
my may shrink for a period and it will recover through increased ex-ports.
3. Wage cuts are the key way to increase exports. They increase the con-
fidence of international investors and so help re-start the economy.
Kevin O Rourke, Professor of Economics at Trinity College Dublin, suggested that ‘the cross-country evidence from the Great De-pression is unambiguous: the more wages fell during the 1930s, the less output declined.’7
None of these arguments have held up and the state’s strategy is gradu-ally coming unstuck. Ireland’s debt ratio is better measured in GNP terms because the alternative GDP measure includes repatriated profits. Accord-
ing to Karl Whelan, Ireland’s debt to GNP ratio will hit 150 % by 2013.8 This is an astounding level of debt and has major implications for the future.
Ireland has already the fourth highest debt ratio in the EU but if the debt ratio increases to 150 % of GNP this will put Ireland second after Greece. It will therefore become the prime target for international speculators if it ever returns to the bond markets after 2013, as the government claims.
The reliance on exports has also put the economy on a very shaky ground. The European economy is entering a new recession as other countries fol-low Ireland’s austerity model and cut back their public spending. Ireland’s exports are concentrated on a small number of sectors dominated by mul-tinationals, with two thirds composed of chemicals, pharmaceuticals and medical service devices. If one pharmaceutical company has falling sales orders it can dramatically affect the Irish economy. In December 2011, Irish exports figures fell by 9 % because a Pfizer produced drug, Lipitor, came out of its patent protected period! According to Bloomberg, sales of top selling medicines produced in Ireland will fall by 52 % shortly as their patents are due to expire.9
Nor is there any necessary link between export success and low wages. The pharmaceutical industry pays above the average industrial wage and is an export success whereas textiles pay below and generates little. Yet wage cuts have deeply affected the domestic economy as workers can spend less and fewer are employed.
The result of this disastrous policy is growing inequality and a continued recession. The deprivation rate – which is defined as those experiencing two or more types of enforced deprivation according to a common EU index - has nearly doubled from 11.8 % of the population in 2007 to 22.5 % in 2010.10
And despite the periodic announcements that a recovery is just around the corner, the economy has shrunk again. At the end of 2011, GNP was declining by 2.2 %, despite the prediction of governments and neoliberal economists that growth was to be expected. One of the key reasons has been the investment strike of the wealthy. Table 2 illustrates the pattern.
Table 2: Gross Domestic Fixed Capital Formation (€m)
Source: CSO, Quarterly National Accounts Table 3
A decline in investment has occurred even though profits and holdings of wealth have increased from €35.2bn in 2009 to €37.8bn in 2010.11 The Sunday Independent
rich list also indicates that wealth of the top 300 rich-est people has increased by €12 billion since 2010.12
All of this demonstrates the fallacy of the pro-austerity economists who claimed that the private sector capital would lead the way out of the re-cession though increased investor confidence and higher exports. Private capitalists have been given the wage cuts they want but they still refuse to invest.
Yet if investment is falling and domestic consumption has fallen consis-tently for 36 months, how can an economy grow? The obvious answer is that the state must step in to fill the vacuum but the Troika prevent that from happening.
HOW THE FISCAL COMPACT WILL WORSEN MATTERS.
The disastrous legacy of austerity will be sealed into Irish economy policy for another decade if the Fiscal Compact is accepted. This will occur in a number of ways. First, the current strategy of the government is to reduce the public finance deficit to meet the EU Growth and Stability require-ment by the end of 2015. It claims that it can achieve this if the economy grows, as it predicts, by 2.4% in 2013, 3.0% in 2014 and 3.0% in 2015. Yet governments have got it wrong in the past and their figures are already over optimistic now because they take no account of the new recession in Europe and the problems in the pharmaceutical industry.
Even on these optimistic predictions, the Department of Finance’s Eco-nomic and Fiscal Outlook
states that the structural deficit will be 3.7 % in 2015.13 This is way above the 0.5 % target set in the Fiscal Compact. The difference in the two sets of figures can only be made up by a €5.7 billion adjustment.
The toughest budget up to now has never hit that figure – so even harsher measures will be required. There will be even fewer Special Needs Assis-tants in schools; waiting list in hospitals will increase further; social wel-fare benefits will be cut be again; even higher property charges will be ap-plied; public sector wages and pensions will be slashed. And the economy will enter another tailspin.
Second, when the public spending deficit overshoots its target, greater control shifts to the EU Commission. Article 3.2 of the Fiscal Compact gives it the power to determine ‘the nature, size and the time frame of the corrective action to be undertaken. ’ In other words, they will dictate what is cut, when the cuts will be applied and by how much. Their record to date in both Ireland and Greece shows that this unelected body has little concern about social suffering.
As we have seen, the EU Commission and the ECB imposed massive suf-fering on Ireland in order to ensure that bankers got their pound of flesh. Why should the Irish population vote confidence in agencies that have ‘approved’ the Anglo bail out?
In Greece, the EU has imposed austerity on top of austerity despite clear evidence that it is not working. Greece had already experienced the worst decline in living standards in Europe since WW2, when the EU Commis-sion issued a ‘compliance report’ in March 2012. Incredibly, it demanded a further €12 billion in cuts in 2013 and 2014 in an economy that already been severely weakened.14 Greek pensioners will receive less, hospitals will supply fewer drugs and even more public servants will be sacked. If
Ireland votes for the Fiscal Compact, it will face similar compliance reports in the future.
Third, as Ireland’s debt to GDP ratio stands at 120 % in 2013 and it will become a prime target for the rule that prescribes a rapid reduction to 60 % of GDP. According to the Fiscal Compact, the gap has to be cut by one twentieth each year. So here is yet further ground for giving the EU Com-mission an open space to dictate, while remaining impervious to public pressure.
One implication is that the Irish state will not be able to engage in any ma-jor capital spending programme for at least a decade. Capital spending means longer term investment in infrastructure that can both develop an economy and provide jobs in the short term.
An obvious area for investment is Ireland’s dependence on imported fu-els at a time of high energy costs. Oil currently accounts for 61 % of final energy demand while only 5 % comes from renewable energy.15 There is a clear case for state investment in wind, hydro and biomass renewable en-ergy as well as greater state involvement in developing Ireland’s natural gas and oil deposits off its coast. Reliance on the private sector has not en-sured rapid transition away from fossil fuels or provided energy security.
Yet the Fiscal Compact will effectively ban the type of state investment needed to make the transition.
Fourth, one of the main problems that Irish capitalism faces in the future is the drain on the economy through the payments of interest on debt. These will increase from €3.3 billion a year in 2011 to €5.7 billion in 2015. This is the equivalent to paying out the whole primary school budget in 2011 and the combined budget for primary and secondary schools in
It is by no means clear how the concept of the ‘structural deficit’ will take account of these interest payments. It does not fall into the category of ‘cyclically adjusted’ spending and so reference would have to be made to ‘exceptional circumstances’ but only the EU Commission will have power to permit this categorisation. Would they define spending that will persist until at least 2030 as ‘exceptional’?
If they did not, how could Ireland possibly pay out these huge amounts of interest – primarily to the ECB – and still meet demands on the structural deficit?
Fifth, the Fiscal Compact will give a greater role to right wing economists to supervise governments. The treaty states the EU Commission will link up with independent institutions such as Fiscal Councils to monitor gov-ernments for observation of rules. The Irish Fiscal Advisory Council called for even deeper spending cuts in the 2012 budget than the government’s own €3.6 billion. This is not surprising as it has a very select composition.
It is chaired by John McHale, an economics professor and former consul-tant to the World Bank. He has claimed that ‘oversimplified claims that senior bondholders are being protected to protect foreign banks are un-dermining support for necessary fiscal adjustments.’16 Other members include Donal Donovan, a former deputy director of the IMF, who has claimed that the ‘firm hand of the IMF will steer us in the right direction17; Alan Barrett, of the ESRI who has advocated pay cuts; and Sebastian Barnes, from the OECD, who has argued that ‘social benefit payments will need to fall in cash terms’18 and that greater labour activation measures are required. The so-called ‘independence’ of this body is a sham.Giving right wing economists a greater say over policy can only mean further pressure to reduce social spending for the poor.
Sixth, the Fiscal Compact will reduce the political choices available to the Irish people for dealing with the crisis. Left wing policies will be effectively criminalised as the Fiscal Compact contains a provision that allows one EU government to bring another to the European Court of Justice if they are
seen to breach the agreement. If any future Irish government advocated increased state spending on a public works programme, they could be fined by this court. In the case of Ireland the fine would amount to €160 million.
Fining governments for their economic policies is a sinister development because it raises further question about what would happen if a govern-ment refused to pay an unjust fine. Would gunboats have to be sent in to collect it?Overall, therefore, there is no good reason to vote for a treaty that brings permanent austerity. But there are many bad reasons.
‘Noonan: We are not Greece. Put that on a t-shirt’ Irish Independent
23 June 2011.
‘ Irish bailout programme was resisted for months by Cowen and Lenehan’ Irish Times
‘Obituary: Brian Lenihan, The Telegraph
, 10 June 2011.
‘Lenihan says ECB forced bail out’ RTE News
24 April 2011.
‘Noonan backs off imposing losses on Anglo bondholders’ Irish Times
, 19 September
Barrett, A., Kearney, I., Goggin, I., Confrey, T. (2010) Quarterly Economic Commentary
O Rourke, K. ‘Currency Devaluation may look an easy option but it is a trick
on workers’ Irish Independent, 26
K. Whelan, Ireland’s Sovereign Debt Crisis
, Dublin: UCD Centre for Economic Research
‘Ireland faces €26 billion export headache as drugs stop working’ Bloomberg
ber 22, 2011. http://www.bloomberg.com/news/2011-11-22/ireland-faces-26-billion-export-
Central Statistics Office Survey on Income and Living Conditions 2010
Central Statistics Office Institutional Sector Accounts 2011
Dublin: CSO, 2011
‘Richest 300 now worth €62 billion’ Sunday Independent
, 11 March 2011.
Department of Finance Economic and Fiscal Outlook
‘Greece will need more austerity, EC report Says’ ekathimerini.com
13 March 2012.
Sustainable Energy Authority of Ireland, Energy in Ireland 1990 -2010
Protecting Senior Bondholders on Irish Economy.ie http://www.irisheconomy.ie/
‘Firm hand of IMF will keep us steering in right direction’ Irish Times
‘Ireland Economic Outlook’ OECD Observer
, November 2009 http://www.oecdob-
a n T h e m . c o m Most Commonly Used Prescription Drugs These days, television, magazines and even your mail is filled with ads promoting prescription drugs. But are you getting all of the facts? There are a variety of prescriptions available to you and some you may never have even heard about. Stay informed about your options, it can help you get control over your condition and your presc
Birthing Basics, LLC Class Syllabus Lisa-Marie Cook RNC-OB, BSN, ICCE, CD Cook CounterpressureSM This five hour long childbirth class is designed to provide the mother and father a comprehensive, informative session covering all aspects of childbirth beginning with the last trimester, covering labor and delivery and newborn childcare. Topics in labor and delivery include the newest evidence-based