Ireland exits the Bailout, but not Austerity

Today Ireland has exited the EU bail-out programme - the first country to do so - but it doesn't mean an end to austerity. Appearing on TV last night in a State of the Nation Address, Taoiseach Enda Kenny praised the sacrifices of the public and said that Ireland had regained its international standing. However, "prudent budgetary policies" will continue, meaning that there will be further austerity. The transport minister has also cautioned against any "giveaway budgets" on the basis that the public will be skeptical of them.

Ireland still needs to repay the bail-out loans and reduce its debt, and monitoring of the national finances will continue at the EU level (although now it will be based on the semester system in line with other Eurozone states, rather than the more controlling Troika process). The senior coalition partner, Fine Gael (EPP), is hoping that exiting the bail-out will generate enough satisfaction that things are slowly going in the right direction, even if people aren't feeling any benefit in their lives or in their communities.

For the junior partner, Labour (PES), this strategy is unlikely to work. Having campaigned in the election on a platform of "Labour's way or Frankfurt's way", there is little gain for Labour in a slow recovery (despite its attempts to capitalise on it). And not only is the economy bad for Labour, but when it comes to popular, more liberal, stances on social policy (abortion and same sex marriage, for example), it doesn't seem to boost Labour's position.

Whatever the position of the governing parties, there is really little to be excited about on the Irish economy. The stronger export sector has been an advantage, but with the general economic malaise in Europe and high levels of private debt in Ireland, it's hard to see where the growth is coming from. The bail-out and banking debts that the public have been saddled with results in continuing austerity with Kenny aiming for 2020 as the year recovery will be complete.

Ireland may be the star pupil of austerity, but it hardly demonstrates that austerity is a star policy.

Papandreou's Gamble: a tale of two defaults

It's clear that Papandreou's decision to hold a referendum on the latest Eurozone agreement, without even informing his cabinet of his decision, is a massive political gamble to restore his authority. The further reduction of the government's parliamentary majority, and the firing of the entire chiefs of staff reveal the instability of the government.

On the European level the problem with the referendum is not so much that people are being given a say - though there are probably elements that argue that, there needs to be a democratic buy-in of the Greek people into any plan for it to work properly - rather that it crystalises the issue. When presented with the referendum the Greek people will be asked to say yes or no to the deal: a yes would mean buying into the process so far and imply support for however it evolves; a no would mean the end to the loans, complete default (along with the instant austerity that the inability to fund the deficit implies) and probable exit of the Eurozone.

While this could be a clever move by Papandreou to bounce the electorate into supporting the government in a choice between two defaults, for the Eurozone it raises the spectre of a non-negotiatable stance, and a toxic debt fallout that will force a decision over Italy. Though Greece probably needs more haircuts over time and a plan for growth so it can service its remaining debts and rebuild its economy, this slow evolution of the Greek Crisis (though not necessarily inevitably moving in that direction) has been short-circuited by the referendum announcement. A "No" would mean that Greece would be dropped so the Eurozone could deal with Italy.

There has to be a real buy-in by the Greek people in the solution to the crisis: with all the strikes and the uncollected taxes, Greece can't recover unless there is a majority for reforming the state and the economy. With, as EUObserver reports:

"Polls over the weekend put Greek popular opposition to the new EU deal at 60 percent and the viability of the government is under threat from rolling general strikes and frequently violent protests that reach almost every quarter of the country.

At the same, polls put support for retention of the euro at 70 percent."

the binary choice of default within or outside the Eurozone might pass, and offer the Greek public to decide whether or not they want to be part of the Eurozone deal - and how much they want to be part of the Eurozone. But in the absence of a real debate about other options - however workable - that a parliamentary election might allow (essentially forcing the government and opposition to set out their alternatives), it's hard to see how much a "yes" vote would signal acceptance of the Eurozone's direction, and how much it would constitute a democratic buy-in by the Greek people.

It may turn out to be a masterstroke by Papandreou: giving the people a greater say and building a wider consensus in society, or it could backfire, either as a No, or as a Yes with no real substance to it. In any case, the Greek people are caught in a tale of two defaults, with an unenviable decision.

Edit: While I'm slightly sceptical of the referendum because of its limited choice, Polscieu has written a great post in favour of it.

Financial Transaction Tax and Multispeed Europe

The UK government's stated opposition to the FTT was hardly unexpected. With the City of London acting as the financial heart of the EU, and a sacred (cash) cow for the UK government in terms of tax receipts, the UK was always going to be resistant to the idea. Barroso, in his State of the Union speech, seemed to recognise this and generally supported a two-speed (or multi-speed) EU.

When the national interest is invoked as a reason for a policy position, it shuts down debate. However, while national interest is part of it, since the UK government supports the idea of FTT in principle, provided it is applied globally, there has been a bit more debate on the idea. I have to admit that I don't fully understand the mechanics of how the tax would puch financial businesses outside the EU and outside the UK: my understanding is that the proposed tax would be applied to transactions where one side of the transaction was in the EU - so even if the financial businesses and banks moved outside the EU, they would have to pay the tax if they wanted to do business in the EU. It would only make sense to move if the business did most or all of its business outside the EU. However there are good points on the fact that a large proportion of the tax would be collected from the City of London, and this would be unfair if the Eurozone mainly benefited. If the income was used to build a safety net for the banking and financial system across the EU (to reduce the burden on taxpayers in the real economy), than that would probably be fairer.

While the Labour party in the UK will probably support the government's resistance, it would be interesting if they decided to support an EU FTT in some form - after all, their leader Ed Miliband has referred to businesses which were "bad" for the economy: would the FTT not make sense in rebalancing these ethical issues by making the financial industry pay a bit more tax to insure against the danger of being (ultimately) underwritten by the taxpayer? The BBC's Robert Peston has an interesting take on the FTT here.

In any case Member States have a veto on the matter, so the UK can block it. But the implications for the EU of a Eurozone FTT haven't received much attention. We already have a multi-speed EU, with some countries in or out of the Euro, the Schengen Zone, the EEA but not EU Members, etc, but these have been in different areas of integration. If you start to adopt different speeds to the internal market in a way that affects the four freedoms, then it could cause some political headaches. It would raise the EU's West Lothian Question. Why should MEPs from the slower countries have votes in areas where their countries aren't affected? Already the British Commissioner couldn't (politically) be the Commissioner for monetary policy since the UK is not a Eurozone member. The more the Eurozone countries pull ahead, the less influence those outside Euroland will have.

It's not a bail-out, but it might need to be

Jon Worth has a good post (and also pointed to this great post by Henning Meyer) on why the bail-outs are not actually bail-outs: they are loans to countries which will be paid off, with the creditor countries getting a profit at the end of the process. However, a problem with this can be seen in Meyer's post when he explains this:

"It is a widespread myth for instance that the European bailout fund is giving away money for free to countries such as Ireland and Greece. This is simply wrong! The ‘bail-out’ is a lending facility that lends money at rates with which the underwriting countries will make a profit if the debtor countries do not default. This is far from giving away money for free from presumed ‘responsible’ countries to ‘irresponsible’ countries to support their luxurious lifestyle."

"If the debtor countries do not default" looks like a big if to me. The structure of the bail out is such that it reinforces the austerity model that the debtor countries have been trying to enforce. This has been done with varying degrees of success when it comes to sticking to the programme. However, the plan is to change the EU structure so that countries can have a managed default after 2013, which means that there will be many voices (as there is currently in Ireland) questioning why they have to go through the harsh readjustments of austerity when after 2013 default would be the accepted option. Surely only a fool would go through that pain for no real reason?

It doesn't help that the rescue loans are structured so that they have fairly high interest rates, even if they are below the market rate - Europe seems to be caught in between solidarity and ensuring the hair-shirted redemption of the debtor states through some cleansing punishment. With the rates higher than the growth rates of the debtor countries, it may be that their debt could grow - particularly in Ireland. The Irish case seems to be different from the Greek case, in that the European system has stepped in to prop up the Irish banks to ensure that their debts to British and Eurozone banks are repaid. As they cannot be bailed out directly, the loan facility means that essentially the Irish government borrows money from the EU to give to the banks to pay off their loans to private continental banks, and the Irish taxpayer picks up the tab at the end of the process.

Allowing the private banks in Ireland to fail now is not an option as the ECB ensures that the banks keep running as the lender of last resort, but it is widely accepted that Ireland cannot pay off the debt, and the Irish government is looking to renegotiate parts of the EU-IMF deal, starting with the interest rate on the loans. Eventually Ireland may ask for some restructuring of the debt - which seems to essentially mean that some of it simply isn't paid back. Now that part would be a bail-out.

This is very different from the situations in Portugal and Greece, but with the domestic political pressures building up, it should be borne in mind that default only seems a scary prospect for debtor countries for so long. Once the pain of austerity becomes too much, with too little reward, then the option of default - which would turn the loans into lost money - becomes more realistic.

The current plan for the Eurozone has failed - it doesn't seem to be working in the Member States it's supposed to help out, as it forces them into narrow austerity plans that do a lot of damage to their economies and therefore damage their ability to pay the loans back; and it has failed to stop the debt crisis spreading. The loans have bought time to deal with the Eurozone more comprehensively, but there doesn't seem to be many good or imaginitive ideas on the table.

So while offering - and accepting - the loans was a good idea in order to buy time, if it's not followed up with effective action, then things could get worse. Not offering the loans, however, would have brought about default in the debtor countries, which would have meant that their debt would wash back into the economies of the creditor countries. This would have had an immediate effect on the economies of all the Eurozone members, since the credit originally came from their private sectors, or they would be simply affected by the damaging effects of the debt washing back into Germany and the Netherlands, etc. Which is why I think that mainstream European political parties need to put forward a realistic and effective vision - or at least start vigourous debates on options* - to combat the platforms of the populist parties. There's no excuse not to.



* I know, that will be the day.

Plan Outside: Going it alone Ireland

Today the Labour Party leader, Eamon Gilmore, was having fun down in Limerick aping the Rubberbandits by telling potential voters: "Feck the bailout, we've a plan outside". Labour's position has hardened over the past few days, perhaps due to seeing the dregs of the plunging Fianna Fáil support trickle off to Sinn Féin, rather than give a boost to the traditional third party. Labour may be polling in the early 20s - a good place to be for it historically - but when Labour is pushing Gilmore as Taoiseach, they would want to make greater headway over the next few weeks.

So Labour revealed its plan earlier this week, and it's more ambitious in its bailout renegotiation aims. Instead of the deficit-reducing plan (reducing it to 3% of GDP) lasting until 2015, as currently agreed, it should be pushed back to 2016; instead of a €9 billion adjustment, it should be €7 billion. Labour is hoping that if they reach their aims, there will be another billion for it to invest in the economy.

This isn't as unilateralist as Sinn Féin, who really would tell the IMF to take their money and go home. In the meantime, Sinn Féin hopes to raid the pension fund to invest in the economy, while raising taxes to cover the gap between tax receipts and state spending for the next year. Sinn Féin's leader, Gerry Adams, is not known for his economic competence, and has been questioned over SF's version of past events, and whether there is simply enough money to be raised to cover the whole state bill without cutting public services. (Here's a 20 minute radio interview with him on RTÉ) Sinn Féin hopes that by shutting down and amalgamating banks so private debt is separated from the public, the bond market will be kind after only a year.

While Labour may be talking unilateralist, yet standing on a renegotiating platform, there seems to be little discussion about what a real unilateralist stance may do to Ireland and the wider Eurozone economy. The original rationale for Ireland accepting the bailout was that Portugal - and perhaps even Spain - may need to be bailed out if Ireland refused, and that it was unlikely for Ireland's situation to have sufficiently improved after 6 months, if it chose to rely on its pension fund. Portugal may have survived its first borrowing test, but, if the Greece-Ireland pattern is anything to go by, it won't be long until the European Financial Stability Mechanism will need to be called on again. With France and Germany launching their own plan today, it’s clear that there's a general consensus that things in the Eurozone need to change. How would unilaterally pulling out of the EFSM affect the Eurozone and Britain, at a time when it's the export sector that is one of the few areas of the economy that we can feel good about? Surely the core of the Eurozone would be damaged financially, as they have to borrow more to bail out banks and other countries, or, conversely, they let them fail (either one or the other or both), in which case there will be a lot of economic turbulence.

Would Ireland have enough money, or be able to raise enough, in such an economic climate to sufficiently invest in and revive the domestic economy before we need to go back to the bond markets? Of course, I could be way, way, off in many of my assumptions here: I know little of economics. However, shouldn't these issues, and how the Eurozone is going to be run in the future, be debated more?

What shine there was on austerity has now definitely come off, and despite the resignation to fixing the deficit, parties of all colours are now talking about investment to some degree. The consensus is that Ireland will eventually have to default and cannot continue to pay of the private debt it has accumulated. If unilateralism doesn't work, then negotiation will have to. So there's the fundamental question of how each of the parties are seeking to influence opinion and shape the debate: through the Europarties; contacts with other governments; shaping plans for how the Eurozone should be run?

I've heard very little of this from any of the parties here. "We must save our corporate tax rate", is the line in the sand we draw, but a simple "it's good for Ireland", is unlikely to be an endearing stance. There is very little argument about why tax competition is a good way to run a currency union - and surely this is the best way of attracting allies and forming a coherent vision of the Eurozone. It's sad to see that the response to other countries debating our taxes, and Eurozone taxes in general, is mostly "they should mind their own business". We also contributed to the Greek bailout, and were at the table when the conditions were drawn up, so we have to give aid as well as receive it: shouldn't we focus on the Eurozone as something we have an equal right to have an opinion on and argue about, rather than sulking that other people dare discuss our corner?

Fine Gael has tried to show that they have strong European connections - and imply that they're best placed to renegotiate the deal - when Enda Kenny met Barroso last month:



The hyped-up music - a mix between The Incredibles and Mission Impossible - may detract from the credibility (you can skip to 1.16), but at least it shows an awareness that negotiation means convincing others, not just ourselves.

Ireland the Symbol and Sovereignty the Ideal

For a small country, Ireland has been a very symbollic country in the world. As an oppressed nation under an empire, as a rebellious and feircely independent people, as an example of the terrible consequences of famine, as one of the "angelic states" (very supportive of the UN & UN missions), as what a small country could achieve in the EU, and as a model for how to deal with the economic crisis. It seems we've been good at promoting our own version of history, but Ireland the symbol has become internationalised, and - especially now - Ireland is an example to be held up in argument.

To the left in the UK, Ireland is an example of the dangers of austerity; to Eurosceptics the example of a loss of sovereignty.

I think both are crude uses of the Irish situation. Though I oppose severe austerity measures, and feel the UK government is going too far, the Irish case cannot be compared so easily with the British: in Ireland we've continued borrowing because of the banks, so the deficit is still growing. Similarly, I think any IMF-EU bail-out would be incredibly tough and would entail the loss of some decision-making powers. Ideally it will never happen, but it appears more and more certain with each passing day. However, Ireland is in this mess because of the choices Ireland made.


Sovereignty is...

Increasingly it appears to me that sovereignty is touted as a panacea that ignores the globalised world, as if countries can act like the characters in spagetti Westerns. Van Rompuy's attack on Eurosceptism and nationalism (which I felt was directed more at the increasing popularity of Geert Wilders-like figures and parties when I read it), may have struck people as an out-of-touch thing to say about nationalism, and some have described it as defeatist, but we do live in a globalised world. Sovereignty cannot mean freedom from responsibility. Whether you've signed treaties, joined the EU or just have a bad banking system with international links, you have taken on duties and your room for manuever is limited. In a global villiage with a global market place, we can't all be cowboys.

Countries have to deal with the circumstances they find themselves in, and, particularly for small countries, pooling sovereignty can mean gaining the ability to really influence outcomes, rather than merely being the subject of them. As was said of the Dutch central bank before the Euro: the job's easy; just do what the Bundesbank does.

Now, most people do not have the narrow, populist view of sovereignty, but it is important to note how arguments are being made on the basis of what are essentially buzzwords. Sovereignty, democracy, etc. These words are invoked in political debate increasingly to tar actions and events as illegitimate. But legitimacy, like justice, is a complex concept that depends on several factors. The buzzword arguments are not really how most people see the world, but as simplistic arguments they seem to spread very easily and quickly.

And Ireland? Irish traditions and threads of identity are not a simple as the stories that we tell ourselves, never mind the stories we tell others about ourselves. We may be famous for being rebels, but our rebellions were small and largely ill-prepared and unpopular: constitutional nationalism dominates the span of Irish history. We did not protest like the Greeks nor cheer like Tory backbenchers when austerity came. The "ourselves alone" movement - Sinn Féin - is one aspect of the story. [Interestingly the old Sinn Féin party (not to be confused with the current one) was based on German ideas of autarky and Hungarian ideas of parliamentary absention (which resulted in the Ausgleich)]. Other threads include a certain idea of neutrality (inspired by WWII experience and the US refusing a post-war bilateral alliance), and an internationalist thread, which admires the ideals and goals of international co-operation and community. It's a complex mix of admiration of autonomy and of a true, working, international community in which Ireland should be embedded. (And, of course, that's simplistically put as well).

Given the economic dependence on Britain in the period after independence, and the freedom of movement and empowerment European integration has brought Ireland, there is something distasteful about British politicians and commentators holding up Irish struggle against British rule as a rallying image for rejecting the EU.

So beware of simple answers and symbols. In my opinion - and, judging from the papers and letters to the editor, this seems to be broadly in line with the current mood - the vast majority of the fault lies with the Irish government. (Though for the boom we all share blame for taking part). The Irish place the blame for our current crisis at the door of, well, Ireland. And the blame will be with the Irish government, not Europe, if the bail-out takes place. Accepting and needing any bail-out, after all, would be a consequence of the decisions we made in the running of our economy.

If the IMF-EU fund steps in, then we'll blame them for the mistakes they make.


UPDATE: See today's [Thursday, 18/11/2010] Irish Times editorial here. Emotive over the loss of sovereignty, yet clear that it was ours to squander.

Will the European Parliament block Barroso's Plan?

Barroso's plan for €5 million of unspent EU budget funds in energy projects, etc, could be voted down in the EP, Claude Turmes told EurActiv. It was never exactly a brilliant plan, although to be fair to Barroso, he's never claimed to be imaginative or competent enough to come up with one in the first place (See comments).

I don't know how viable or effective the idea of pumping it into the EIB is, but if it can be done, I do like the idea of using it to generate more money to help the member states.

Most of all, I'd like to see more initiative from the EP on this matter - as well as running candidates for Commission President in the elections.

Or am I misguided on the practicality of the Commission being more assertive and bold in its plans during the economic crisis? Is it now institutionally and politically impossible for the Commission to show leadership?

(In other news: the Commission and Irish officials will meet to decide how the Commission can help in the Lisbon debate. Is it hoping that nobody says anything stupid too much to hope for?)

Don't worry, the Commission has a cunning plan

The Commission apparently has a plan to aid Eurozone countries that default, though it will not reveal them to the public. Though since there can be no buying up of national bonds or bailing out of defaulting governments, the balance of payments scheme seems to be the only mechanism available (that I know of - not being an economist, I can't say for definite). If that's true, it seems the amount of money that is involved is minuscule (unless the ceiling is raised significantly: at the moment the ceiling is €25 billion).

I'm not too impressed by the claim that they're "equipped intellectually, politically, and economically to face this crisis scenario", either. First of all, I would question the fact that the aid (under "The Plan") seems to be on offer only after the country has defaulted, or at least it is only spoken about in these terms. Second, the Commission's performance over the last few months hasn't been inspiring. If its defence of the single market, the heart of the EU, is so weak, then I don't expect much ambition in this area either. That the Commission has proved so inept in demonstrating the usefulness of the EU to the public by taking a pro-active stance is, in my opinion, the most damning aspect of Barroso's Commission.

Never mind the lack of political promotion and initiative during the referendum campaigns, etc. as highlighted by the Anyone But Barroso campaign, though these reasons are by themselves important - this failure to act effectively cannot be rationalised away with the idea that the Commission shouldn't be assertive in the national political arena; the crisis is huge, and the need for effective common plans and co-ordination has never been greater. If the Commission cannot summon up the courage and ambition to act in an area where it is so desperately needed, then I can only assume that this one has a death wish.