Monday, 22 November 2010

Ireland in crisis

Today was a dramatic day in Dublin. First came the news that the government was giving in and accepting an EU bail-out, prompting angry demonstrators to swarm government buildings in protest of the decision. But as the day went on Ireland’s financial crisis morphed into a political one. The Green Party, a junior partner in the governing coalition, announced it was pulling its support - prompting a collapse of the government and a general election. The Irish government now appears to be in complete meltdown.

Since last week Ireland has been under pressure from the EU to accept the bail-out as it became clear that Ireland’s banks were in so much trouble that the Irish government was going to be unable to borrow money. Brussels was afraid this insolvency would spread to the other vulnerable so-called “PIGS” countries, causing the euro currency to collapse. If such a crisis were to spread to Spain, the eurozone's fourth largest economy, it could spell the end of the euro and as a consequence, some leaders have suggested, the end of the EU. After spending a week denying that they would take the money, today the Irish government accepted a rescue package worth up to €90 billion ($124bn).

So why the initial resistance, and why the protests today? Surely Ireland getting money is a good thing for Ireland right? Well the rescue package comes with a lot of strings attached, and they will be painful strings for the Irish population. In exchange for the aid, Ireland must make €4.5 billion in public spending cuts and €1.5 billion in tax increases. Overall, the country will have to save €15 billion by 2014. This will undoubtedly cause an increase to the unemployment rate, aleady high at nearly 15%. Essentially, it doesn’t matter who the Irish public elects in the general election that will likely be called in January (after the bail-out has been approved by the current parliament). The country will be governed by the International Monetary Fund and the European Central Bank for the next three years.

The bail-out has its share of critics, both in Ireland and outside of it. Several commentators have questioned how the EU can expect this to stop a spread of the sovereign debt crisis to the Iberian peninsula when May’s bailout of Greece didn’t stop it spreading to Ireland. Some commentators have even said Ireland's best strategy now would be to defy the IMF and the EU, take itself out of the euro and spend the next several years as an financial pariah state while it sorts out its problems.

Others have said it is wrong to make Irish taxpayers pay for the mistakes of Irish banks. After all, the situation in Ireland is very different from that of Greece. Before the crisis hit the previous conservative Greek government went on an out-of-control spending binge while at the same time lying to the EU about how much it was borrowing. The Irish government, on the other hand, ran an ostensibly tight fiscal ship before the crisis. But the country's banks were not so disciplined, creating a housing bubble in Ireland so big that the country was disproportionately impacted by the global economic crisis. Many on the left are saying today that the Irish banks should be the ones paying for this bail-out. Angela Merkel had wanted to make the banks pay a large part of EU bail-outs, but economists warned that any such move would spook the markets and make the situation even worse. The left also finds it obscene that the Irish government is not being asked to end its policy of incredibly low corporate tax rates in exchange for this aid, which the rest of the EU has long complained about as being unfair. It was expected that Merkel would make this a precondition for receiving aid, but the Irish prime minister was insisting today that such a precondition is "off the table."

Meanwhile on the right, conservatives in Britain spent the weekend gloating that Ireland's troubles are vindication for their crusade against the euro, insisting that the Irish would never be in the situation they're in if they hadn't joined the common currency. Of course every serious economist would tell you that Ireland's problems have little to do with the fact that they joined the euro. In fact the main connection between the current crisis and the euro is that it is only because Ireland is in the Eurozone that it is getting this bailout. It seems British conservatives have forgotten about Iceland, which collapsed financially last year after its banks went bust, having engaged in the same risky bubble economics as the Irish banks. Back then, the joke went, "What's the difference between Ireland and Iceland?" "One letter and six months." It took longer than six months, but eventually Ireland did end up in the same position as Iceland. But Iceland, not being part of the EU or the euro, received no bail-out. The fact that it consequently had the freedom to devalue its own currency and set its own interest rates, put forward by the Tories as the solution that would magically save Ireland right now, did not stop the country from going bankrupt - and it remains in that situation today.

Indeed many on the left are pointing out that it was not the decision to join the euro which caused Ireland's problems, but rather the neoliberal free-market ideology prevalent in the Anglo-Saxon world. British conservatives spent years championing the very economic model in Ireland that ended up causing a collapse of the country's finances. The current chancellor (finance minister) George Osborne wrote an editorial in The Times back in February 2006 entitled "Look and learn from across the Irish Sea" where he wrote praised Ireland's model of low taxes and high spending. "In Ireland they have doubled spending on public services in the past decade while reducing taxes and shrinking the State’s share of national income," he wrote. "In Britain, the Left have us stuck debating a false choice. They suggest you have to choose between lower taxes and public services."

In reality, the fact that Ireland is in the euro has little to do with how it got to the mess it's in, but it will have a lot to do with how it gets out. Like it or not, this small country's economic troubles are now priority number one for Brussels because its debt problems could spread to the rest of the eurozone countries. This may prove a help or a hindrance to Ireland's own economic recovery, but one thing is for certain - Ireland would be in for several years of misery right now whether it was in the euro or not.

But that misery is real, and it is palpable. Besides the economic effect that all of this is going to have on the country, the cultural and demographic effect is going to be huge. Over the past decade Ireland went througha kind of giddy self-examination as it went from being a net emigration country to a net immigration country. For the first time, thousands of immigrants were coming from Eastern Europe to work in the booming "Celtic Tiger" economy. That flow of immigration has all but completely dried up now, and in fact the Eastern European immigrants are largely leaving and returning to where they came from. Mass emigration, that old familiar Irish tradition, has returned with a vengeance - especially among young Irish people who are unable to find a job in this economy. The phenomenon has become so widespread it is now even starting to be featured in commercials like this one below. It's a depressing time in Ireland, a world apart from the heady days at the beginning of the millennium.


Eurocentric said...

I'd like to point out that those measures that the Irish government are hoping to pass through the Dáil in 2 weeks (the €15 billion plan), was in the pipeline before the IMF crisis - Olli Rehn was in the country saying that it was a good plan before the ECB turned off the tap.

The talks haven't been finalised to decide what extra measures, if any, might be necessary. At the moment bank restructuring looks to be the major change.

french derek said...

Eurocentric is right. According to Garrett FitzGerald, in today's FT, the tightening measures already taken by the Irish government are taking effect: and that exports have risen to such a level that Ireland will soon be in a trading surplus position again.

The problem that is causing the big headache is the banks. (see GF again).

Captain Kid said...

off the topic, but concerning the EU:

Bigvic said...

The EU is becoming a classic case of Accumulation Through Dispossession. "The country will be governed by the International Monetary Fund." You mean the banking elites will be running another country? This mess IS going to spread to the rest of the poorer countries of the EU, until the IMF is running half the EU. If the EU is ever, and I mean ever, to work it is going to require a lot more cooperation on tax, education, and welfare policies, from a much more centralized authority. Second it will require a huge tampering down of capitalism, in which these messes don't just get moved around but actually get solved (if Ireland defaults, those losses will be on German, American, French, and British books, which would cause a separate sovereign debt crisis in those countries). Third, and most important for the EU to survive is that it will have to focus on a better way to distribute wealth in its society. The current distribution in these countries have not worked, if economic growth is going to continue for the EU, then this paradox of Capital Accumulation needs to be restrained.

I see the EU as the last hope for the survival of Western ideals. The United States abandoned these ideals long ago, and China and India are on the rise. If the west and its ideals are going to survive then it needs to reconsider the direction it is going in.