Irish budget cuts: Not speculation, or existentialism but hard-nosed finance

Lot’s of really interesting snippets in the Sunday Business Post. Two struck me as worth noting. The first notes that after a narrowing of the interest rates on the bond market, Ireland’s rate of borrowing is getting more expensive again. By Friday evening, ten year Irish bond interest rates were trading at about 4.7%, about 2% above that of German debt and above that of Portugal.

The second (and I suspect it’s not entirely unrelated) is the news that the Department of Finance in Dublin is looking for 5% cuts from each and everyone of the Republic’s government departments. This is pretty much in line with recommendations by Professor Colm McCarthy’s committee (aka An Bord Snip Nua). The departments have until next Friday to respond with their proposals.

As Alan Ruddock notes, Minister Lenihan’s biggest problem may be that:

“…despite two years of recession, a banking collapse of epic proportions and a horrendous rise in unemployment, the true awfulness of Ireland’s predicament has not dawned on many of his government colleagues or the public-sector trade unions.”

He goes on to summarise the scale and the nature of the problem:

“The unions and their members, however, do not seem to realise that the world has changed. A government that spends €20bn more than it earns in tax revenues cannot continue to function, particularly when the investors it borrows from demand ever higher rates of interest, or simply refuse to lend. Even with the benefit of a weak euro, the Irish economy will not grow so quickly that the gap is closed by booming tax revenues.

“The gap between spending and tax revenues will close when recovery is strong, but recovery will not eradicate the underlying problems. By the time that happens, the size of the national debt will have swollen to levels that exceed Greece’s current level. Layered on top will be the debts associated with the massive banking rescue — the cost of funding the National Asset Management Agency and the recapitalisation costs of the failed Irish banks.”

And at the heel of the hunt, as things are currently configured, it looks like McCarthy’s cuts will be far from the end:

…next year Lenihan will have to do it all over again. There is no quick fix to Ireland’s difficulties (short of a debt default) and the next decade will be a long, hard slog to reduce borrowings, pay down debt and restore competitiveness.

That is why the markets have taken fright: investors look at the eurozone and when they get past the fog of confusion that swirls around its leaders they see a mountain of debt on the periphery of the eurozone which is compounded by a loss of competitiveness. The natural reaction is to sell euro assets because the risks attached to them are too high.

This is not speculation, or existentialism at work, it is hard-nosed finance at work. The message from the markets is that our immediate future is grim: spending cuts, higher taxes, jobless growth when the recovery comes.

We can expect little sympathy from the Germans who have already been through the tough post-unification years, suffering cuts in their standards of living as the periphery partied. Now we have the hangover and they look askance at our problems, reluctant to foot our bills but knowing they have little choice.

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  • Cormac Mac Art

    For me, it demonstrates the disconnect between Ireland and Northern Ireland that this post, with all of its implications, did not get a single comment till this. The border is not so much physical as a mental block.

  • Mick Fealty

    It’s partly because we’ve been pre-occupied with other, UK, things. So we’ve probably lost some of the attention we had before from southern commenters. But that’s not to obscure your original point.

  • Alias

    This has all been overtaken by events, and there are only four options available:

    (a) The Euro will collapse within 6 months, and drive all EU economies (not just Eurozone economies) into deep depression.

    (b) The Euro will be temporality propped-up by states surrendering their fiscal sovereignty to the EU and imposing the austerity measure that are now demanded by the markets. But will collapse within 2 years (max) as loss of fiscal sovereignty means – among other things – loss of sovereignty over tax policy and the creation of EU taxes.

    (c) The Eurozone member states that have been bankrupted by surrendering sovereignty over their macroeconomic and monetary policies to the EU are forced out of the Eurozone as broken entities and left to the mercy of the markets.

    (d) Wayward states can dander for a while and wait for the EU to bail them out, thereby making a virtue out of the moral hazard.

    In the meantime, anyone who regards himself as a member of the Irish nation should now prepare to emigrate since the battle for a sovereign nation-state is lost, and there is little point residing in non-sovereign region of the EU just to pay high taxes to the central EU government. I transferred by funds (modest as they are) out of the economy when the state guaranteed the banks, and I can’t see myself still living in this backward region of the EU in 2 years from now.

  • Itwas SammyMcNally whatdoneit

    Cormac Mac Art,

    re. ” did not get a single comment till this”

    there have been a few similar threads by Mack in recent times. What is suprising, at least to me is that although it is very difficult to get economists to agree on anything, given the scale of the current problems there are still conflicting views on how they should be resolved.

    As I mentioned on Mack’s last thread politically, an election should be held and ideally a government of National untiy installed to at least ensure the bad feckers are all pushing in the same direction at taking the least worst course of action.

  • Free State Barsteward

    As a public service emloyee and union member, I would like to point out to Mr. Rudduck, that both trade unions and their members are very much aware of the situation the country is in.

    In real terms, my salary has been reduced by 16%. This has been accepted as part of doing our bit but where do you stop. If I another hit comes, I will be like Alias and be gone.

    Alias,

  • Alias

    Sammy, economists are a bit like journalists: know-it-alls who know nothing other than how to converge with a vague general consensus in the hope that the majority can’t be wrong and if they are then no one will pick them out from the majority in the wrong. Just a few short months ago these folks who are now talking about the need to cut public spending were talking about the need to increase public spending and to increase public borrowing as part of a fiscal stimulus package for the economy, assuring us that any cut in public spending would devastate the economy. What has changed? Well, the UK government was borrowing like there was no tomorrow and telling them that Gordon had saved the world by so doing, and so they all defaulted to that popular consensus. Now that it is shown as horseshit, they default to the consensus that says its horsehit and that governments need to cut public spending rather than increase it.

  • DC

    Cormac, the trade between the two countries in terms of Britain and Ireland is strong and at a high level.

    I don’t think people here in NI do forget this partnership.

    It is just that in NI the status quo (i.e the lack of any cuts) lingers on, but this will soon change. A few brutal truths are on the way. I think personally that when the Westminster government makes these cuts the knock on effect in trade between the countries will be damaging, placing hardship on both sections of Ireland, crudely speaking those north and south.

    So I do think people here in NI recognise what has happened in the Republic and realise the painful consequences there, but are still dancing away just waiting for that ‘music to stop’.

    And who can blames us as the weather has been sweet over the last few days.

    But all joking aside, it won’t be long till ‘we are all in this together’.

    The challenge across Ireland, north and south, will be to innovate both in relation to the public sector and private sector and to seek out effective partnerships. So that the output on the whole can be bigger and better than the sum of the (different jurisdictional) parts.

    We can’t go on like this

  • Anon

    “Even with the benefit of a weak euro, the Irish economy will not grow so quickly that the gap is closed by booming tax revenues.”

    This misses the point though. With growth, you don’t have to make cuts in the size of the state to make real savings, simply maintain it below the level of growth — an dif growth is signoifoicant simply holding things down makes real savings quickly. Similarly with people salaries don’t have to be cut, simply held below that level. Given the stickiness of wages, this is a big advantage. Growth also implies inflation of some degree, which mean debts reduce in real terms and do not get larger. Investors will be more bullish about the economy, so charge higher interets rates.Many countries have carried burdens that are being projected, so it’s not un precedented; Japan is the biggest example. It is a mugs game projecting doom now to better times.

    Ireland’s problem is that just to survive now it has to pursue policies that postpone growth. Another round of 5% cuts? Is there any question Ireland is in a deflation spiral here? The Euro looks to be the straight jacket keeping it there. The value of a default is not in what it does to debt, but what it does to competitiveness.

  • Itwas SammyMcNally whatdoneit

    Alias,

    I prefer to compare Economists with Psychologists. Both can pick and choose the theoretcial basis for their ‘proof’ depending on wind direction and threy spend more that 50% of their time attacking each other and in the case of Psychologists also attacking their academic-enemy-number-one – the dreaded Psychiatrists.

  • DC

    It is all the same at the European level Sammy.

    I heard an interesting comment made by a group leader in the Euro Parliament suggesting that national leaders should attempt to focus more on the actual social side. For it is that which could well unify us.

    I believe this holds more sway as well, because the shared circumstances that awaits us across the UK and Ireland and indeed Europe (in terms of the cuts in public sector services and jobs and the increased taxes to come) is more unifying. It may actually hold more potency and clout because it is an experience about to be shared. One we can believe in. The grievances. The disgust at the financial services sectors. More clout than any talk of ‘political, monetary and technocratic ‘wider economic and fiscal union’.

    The underpinning and unifying issue is of course that of this under-performance of capitalism based on financial services greed (for example before the crash Spain had a budget surplus as its government managed the public finances quite successfully based on the figures available – it rationalised public money appropriately, it did more than balance the books – till the financial crash).

    The blame cannot be placed on governments entirely but some strong blame comes from the governments’ and its regulatory bodies putting blind faith in the ‘let to be’ laissez faire management of the economy. However this ought to be juxtaposed against the actors, the actual agents in the financial markets who generally did misbehave and used national deposits in banks to trade at a global level – inappropriately. Inappropriately because they over-stretched themselves and their banks (leveraged to the hilt). Crashing the financial services sector and property boom in the process.

    Behaviour which would normally warrant criminalising if not heavy regulating centrally, regulation that would happen faster if perhaps the wealthy were not all over the political system preventing it to happen, at least preventing it from happening apace. Even though deeper regulation seems to be quite appropriate and much needed.

    People like Lord Ashcroft aka Cashcroft spring to mind.

  • Alias

    One other point: the markets don’t actually care about how balanced a bank’s books are. The moral hazard ensures that the state will underwrite any losses – at the taxpayers’ expense – that the markets may experience. The EU has extended the moral hazard from banks to states and this extension ensures that the markets can treat states the same way in which they treat banks, i.e. the state will be bailed out so it doesn’t matter a damn to the markets about what shape a state’s books are in either. So why then are the markets demanding that states cut their spending? They’re not: they’re demanding that the EU bails them out.

    All that concerns the markets is that they should get their money back by the EU extending the underwriting service to states from banks. The cuts that are required here are solely cuts that are designed to ensure that the money raised from taxes is not spent on public services for those who paid those taxes but is instead transferred to the markets in the form of debt repayment. In other words, the demand for cuts is simply a demand for debt repayment. As long as the markets get their money they don’t care a damn about what state your books are in.

    In reality, the markets adored the ECB’s expansionist monetary policies because these were designed to stimulate consumer demand in the economy by flooding it with cheap credit. The ECB’s expansionist monetary policies were a bonanza for the markets. They made trillions out of them. Now they want their money back, and they want the taxpayers to forego public services in order to pay it back.

    In Ireland’s case, the state nationalised the debts of banks within the eurosystem to ensure that these foreign lenders did not lose any money as a result of their reckless lending to private financial institutions in this state. Of course even the term “reckless” is redundant here because it is only reckless if there is a risk of losing your money – and the moral hazard ensured no such risk actually applied.

    It should be illegal for states to nationalise the debts of private business, and that should be so to illuminate the moral hazard but when the EU is now extending the concept of systemic risk from banks to states then that level of idiotic state intervention can only end with the taxpayers as serfs to the markets.

    What Irish people should now do is overthrow the europhile regime and declare its intention to withdraw Ireland from the EU, also removing these guarantees from the banks. It will be rough for a while but no rougher than it will be within the EU as an insignificant, debt-laden non-sovereign region of it.

  • DC

    I forgot to add my trite tory comment at the end:

    We can’t go on like this

  • Mack

    DC –

    Spain, like Ireland, was able to balance the books during the, em, credit bubble, because Spanish banks were borrowing large amounts of money to fuel the local construction boom. The Spanish regulator did a better job and did somewhat protect the Spanish banks from the fallout of the bubble bursting – but the impact on government financing was the same. Tax revenues fed by credit bubble borrowings dried up, those revenues were based on temporary, entirely illusory earnings. Like in Ireland they misread the bubble for actual growth and spent money they didn’t really have.

  • Mack

    There are other ways to cut wage costs, other than salary cuts. Voluntary redundancies for example. Brendan Howlin was almost hysterical when Constantin Gurdgiev suggested making €900m p.a. in cuts from HSE middle management. It’s entirely possible that a decent portion of staff would jump at the chance of a new start if offered a decent package (opportunity to relocate, spend time with kids, study & start new career, emigrate, travel etc. etc.). They could do it across the public sector and maybe even hire in new young people (at the bottom of the salary scale) which might help with unemployment.

    If they don’t ask they will never know.

  • BKE

    More left wing nonsense from the Sinn fein school of fantasy economics. If The Republic abandons the euro, any new currency will crash and it will still owe its debt in Euro’s. Which would be impossible to pay, and would lead to overnight interest rates of 15%+ ala Iceland.

  • Mack

    That’s the Keynesian view, alright, there are a few issues.

    Without our own currency we don’t have the same capacity to maintain deficit spending by printing money.

    AFAIK (and I’ll certainly defer to your superior knowledge here) Keynes regarded the Gold standard as part of the problem and thought that countries should devalue to maintain competitiveness.

    The other issue, is that most people are more sophisticated financial operators than in Keynes day (bond holders, and public sector workers alike). I’ve already seen agitation over on progressive-economy against any possibility of pay rises coming in below the rate of inflation.

    This statement may not actually hold true in practice –

    inflation of some degree, which mean debts reduce in real terms and do not get larger.

    It depends on the rate of interest levied – which was one of the points made by Hugh Hendry in the Stiglitz & Hendry video..

  • Alias

    I’m impressed that you have a matrix that allows you to calculate the policy rate that the central bank might set if the punt is restored. Did you find it in a Christmas cracker? Whatever the rate is to be, it won’t involve turning this state into a debt-repayment machine for nationalised external debt contained in the eurosystem. The state guarantees for the losses incurred by private business will be the first thing to go. Other private businesses who owe their debts in euros will enjoy the conversion of those debts into punts and a rapid devaluation thereafter will cut those debts substantially.

  • Alias

    By the way, when did it become a hallmark of the “left wing” to condemn the nationalisation of banks and to condemn state intervention in the economy? *laughs*

  • DC

    Mack

    Ei bloß wegen dem Schingderassa, Bumderassasa!

  • Alias

    The external debt of Greece expressed as a percentage of GDP is 167%. Let’s compare this “debt-laden basket case” with the supposed paragon of fiscal correctness, Germany: The external debt of Germany expressed as a percentage of GDP is 155%. The external debt of France expressed as a percentage of GDP is 188%.

    So why is the focus on Greece when France is considerably more debt-laden than Greece and Germany only marginally less debt-laden? Because the markets are making their point to Germany and France via Greece: cut spending on public services and give us the money instead or you’re next. And Germany has good reason to obey the markets: its banks are the most over-leveraged and under-capitalised in the world.

    Ireland’s external debt expressed as a percentage of GDP is a mindboggling 1004%. Prior to joining the Eurozone, its external debt stood at 11 billion punts. It now stands circa 10 years later at 1.67 trillion euros. While Ireland economy was booming with a tiny external debt, its economy has collapsed less than 10 years later with a massive external debt. Joining the Eurozone utterly destroyed the Irish economy.

    Exiting the Eurozone and regaining sovereignty over economic policy and banking regulation is essential for Ireland to repair the immense damage that Europhiles have inflicted upon it. The nation has no hope of every generating 1.67 trillion in wealth in order to repay the external debt. It will have some hope however it that external debt is cut by 80% or 90%. Devaluation will cut will go a large part of the way towards that as will removing the bank guarantee and making the bonholders responsible for their own losses.

  • BKE

    So to take on the costly programme of pulling out of the Euro, reissuing a new currency, revaluing all goods and services in the economy to that new currency, reducing our buyer power (economy of scale leveraged from Europe), our supplier goodwill, our ability to enter new markets and sustain the ones we trade into (nobody will trade a new currency until it proves its worth – maybe ten years worth of history?), etc., at a time when we have no money to spend but have to spend other’s money – how do you think we pull out of the Euro – by borrowing even more Euros/Dollars/Sterling?

  • Alias

    You’re forgetting about that 1.67 trillion that we borrowed. For every sod who paid 500k for a shoebox, another sod made 500k for a shoebox. No one said some set fire to a big pile of eurosystem money, kid. The issue is that the profit/loss account of private bsuinesses is no business of the state.

  • DC

    Ei warum? Ei darum!
    Ei warum? Ei darum!
    Ei bloß wegen dem Schingderassa,…Bumderassasa!

    @(mack – i give up. hoffnunglos verloren!)

  • Anon

    I’m not suggesting Ireland has many other options at the moemnt, simply that what it is having to do will likely prolong the problems, and that you can’t make statements about the situation with growth when you have none.

    I’m not sure about Keynes, but Krugman has a pretty convincing graph that shows the longer you stayed on the Gold Standard, the more trouble you had getting out of the depression. The only rebuttal I have seen was nit picky, and still admitted that it may not have been he Gold Standard, but the Gold Standard’s majking it harder to devalue.

    High inflation had almost certainly means debts will drop in real terms. Obviously there is a line, but the other side of that line leads to default, so if youa fre a bond holder I don’t think it gets any better..

    In any case Mack, are you arguing against the idea Irelan d is in a
    deflation spiral?

  • BKE

    Much of this external debt is offset by holdings of foreign financial assets, and this is administered in the IFSC in Dublin. While our national debt stands at 70 billion. I think you are confusing the two

  • Alias

    I didn’t mention national debt: I mentioned external debt. If there is any confusion between the two, then it is you that has introduced it. The state has, however, seen fit to de facto nationalise circa 400 billion of that external debt, converting it into sovereign debt. The state might like to fiddle the books so that, for example, the 100 billion of debt it nationalised at Anglo does not show up on the books as sovereign debt but make no mistake that it is the taxpayers who are liable for every single cent of that 100 billion due to the government nationalising that external debt.

    Hundreds of billions of that external debt vanished in bubbles of a plethora of economic varieties, so it is not a case of those who borrowed it and converted it into devalued assets liquidising those assets and paying the money back: it a case of them generating new wealth to replace the devalued wealth, and it is a case of them doing that in an economy where GDP is shrinking in recession and where the wealth within the state is being extracted in the form of debt repayment rather than being reinvested into the economy. The policy that borrowing wealth and spending it creates wealth is deeply flawed but that is the macroeconomic policy that was in operation for the last 10 years. All that borrowing wealth and spending it creates is debt, not wealth. So alas the 1.67 trillion of borrowed wealth is spent and there isn’t 2 or 3 trillion in wealth created by it as the ECB theory held that there should be, so just as the last 10 years was squandered spending borrowed the wealth the next 50 years will be squandered paying it all back. Oh, and don’t look for the next generation of entrepreneurs to save you: they’re too busy working part-time as Supervalu to repay the mortgages on properties that generate zero income.

    Incidentally, it may well be the case (in addition to the 4 options I sketched out above) that Germany of France exits the Eurozone, leaving those states who have been bankrupted by surrendering control of their macroeconomic and monetary policies to the EU within it. The French president threatened to withdraw his state from the Euro if the German president did not yield to his blackmail in regard to Greece. While the German parliament duly passed the bill committing circa 140 billion of German taxpayers money in dodgy loans to dodgy EU states that is now before Germany’s federal constitutional court in regard to violations of the Maastricht Treaty. If you think that Court will summarily dismiss that challenge then I advise you to read its verdict on the Lisbon Treaty. There is every likelihood that it will strike down the Bill and also strike down any attempt by the German Chancellor to transfer fiscal sovereignty to the EU.

    If that happens the Euro will instantly collapse as there will be no bail-out fund for bankrupt Eurozone states. That is the best thing that could happen to Greece. All it is now doing is borrowing more money that it can never repay, and causing hardship for its own nation by delaying the day when it must default on debts it can’t repay and duly withdraw from the Euro. Even the IMF is now admitting that Greece’s debt will rise from 120% of GDP to 150% of GDP by 2014, so all the bailout is doing is propping up the Euro in the short-term and passing the debt from one market to another.

  • This is an interesting development and suggests what we are seeing is a transition. The Hedge Funds, thanks to the bailouts, now feel confident enough to not only mount an extensive campaign against restrictions which have been long proposed e.g. by the Germans/French on their trading but feel the ability to now profit from the ongoing turbulence.
    But there’s more to this I think. In every recession since the mini-depression of the 1970s, the financial services have used the downturn to restructure the underlying economy and make it more profitable for investors. Most people will know of this in South/Central America – see for example Naomi Klein’s Shock Doctrine. For decades, the financial services sector has looked upon the European labour market as unduly inflexible and the social welfare provisions as too extensive. We all know about the Boston/Berlin dichotomy.
    What we have seen in Greece (and now in Ireland/Portugal) is the market targetting bond markets thereby upping the ante on the immediate challenges facing the country. There is absolutely no fear of difficulty with Irish bond sales this year (in the most recent sale uptake was very strong) yet the market is now beginning to push Irish bond interest upwards. Commentators are falling into the trap of immediately making causal relations between the two and this itself helps to make this a self-fulfilling prophesy.
    So, this is a two-fold move – the first is the urge to force profits through a self-fulfilling downward pressure (this is why the Germans have moved against naked short-selling) but there’s also the wider agenda to restructure the European economy.

  • Alias,

    On your use of net external debt ratios. They’re not really the limiting factor here. What matters more is the amount of debt that needs to be rolled over and the anticipated costs of doing that in the future.

    Undoubtedly, the net external debt will be a major factor in ensuring a long contraction as demand continues to fall as private savings goes up but they do not mean what you imply.

    While you are right that eurozone membership certainly accentuated and extended the debt-financed bubble at the end of the Celtic Tiger period, I would suggest that it would be wrong to suggest that this is the main or even primary cause of the collapse. Therefore, the solutions you pose are not necessary correct, indeed, as we will find out they are fatuous in the extreme.

    Leaving the euro would quite possibly force Ireland into immediate default as it would be unable to secure bond purchasers outside the Eurozone. Ireland’s new currency would rapidly devalue and the return on bonds would have to match (at least anticipated future devaluation) hence yields would need to skyrocket.

    While I believe that default is now all but a matter of time, a default at this stage would simply reinforce global instability. And being that Irish net external debt is so high then the impacts outside Ireland would be severe and its not likely to be allowed by the EU ruling class. That is the meaning of the €750bn Eurozone bailout package – it provides an architecture for the IMF to move into countries as they default.

    Furthermore, leaving the eurozone would likely force a severe devaluation – which you believe to be a good thing. However, the reality is that a severe devaluation of a currency other than the euro would destroy the Irish economy altogether as our debt is largely denominated in euro and its value in euro would remain fixed whilst our GDP in euroterms would fall dramatically.

    “Joining the Eurozone utterly destroyed the Irish economy.”

    I disagree. Of course, Ireland was out of synch with the Eurozone economic cycle and this exacerbated our expansion through artificia

    Exiting the Eurozone and regaining sovereignty over economic policy and banking regulation is essential for Ireland to repair the immense damage that Europhiles have inflicted upon it. The nation has no hope of every generating 1.67 trillion in wealth in order to repay the external debt. It will have some hope however it that external debt is cut by 80% or 90%. Devaluation will cut will go a large part of the way towards that as will removing the bank guarantee and making the bonholders responsible for their own losses.

  • Those last three paras starting ‘Joining’ should be deleted as they have been inserted by error. Apologies.

  • Mack

    Domhnall –

    What we have seen in Greece (and now in Ireland/Portugal) is the market targetting bond markets thereby upping the ante on the immediate challenges facing the country. There is absolutely no fear of difficulty with Irish bond sales this year (in the most recent sale uptake was very strong) yet the market is now beginning to push Irish bond interest upwards

    The market is targeting itself?

    So, this is a two-fold move – the first is the urge to force profits through a self-fulfilling downward pressure (this is why the Germans have moved against naked short-selling) but there’s also the wider agenda to restructure the European economy.

    This is undoubtedly true, but I’m not sure I agree with your conculsions about which direction the market is forcing the restructuring. I doubt very much that the hedge funds and other speculators care which economic model prevails in Europe – they are exploiting weaknesses (in a way that becomes self-fulfilling) in an attempt to make money. But the pressure that genereates is more in the direction of Europe moving more to Germany’s Social Market Economy (Social / Ordoliberalism) as opposed Orthodox free market liberalism. That is – if the Eurozone’s other nation states can stomach it..

  • Mack

    In any case Mack, are you arguing against the idea Irelan d is in a deflation spiral?

    I don’t think that is true, at least not yet.

  • Thanks mack. My apologies for that error – I am not used to commenting here! (My first time – I’m going to try and post here more often and under this name).

    Yes, the hedge funds are targeting the bond market for profits. I think you understand that but it was just my faulty formulation of words.

    As for your second point, I understand why you might say that but I would tend to disagree.

    There are a number of reasons:
    (a) Financial Services want to reduce the cost of doing business in Europe e.g. inflexibility, high labour costs, generous pension allowances. These funds live on dividends (or other related returns e.g. interest) and these will only increase if labour costs can be reduced, ‘productivity’ increased and competitiveness against foreign markets sustained/achieved. The wider reality is that the bond market is enforcing market discipline on Europe in what is likely to be an extended ‘race to the bottom’ with competitors operating with very different social welfare systems.
    (b) As I said above, history will confirm that every single recession has been used as an opportunity to restructure the industrial base and lower operating costs. Just consider the Latin American experience of the 1990s. I see no reason to believe that this will be any different.

    I believe the governments of the peripheral EMU economies and those of the accession states (and the UK) will be forced to submit to harsh austerity – above that which might be simply necessitated by the fiscal pressures they face.

    Europe has been judged by a handful of hedge fund managers to be unable to afford old social welfare provision. That is the meaning of the NY dinner party meeting of hedge fund managers on Feb 8th – it wasn’t Greece alone that was targeted but the eurozone and a range of countries.

    At the same time, the very forces who were central to winning the current social welfare model – organised labour and social democracy are at a historically weak point (both socially and ideologically). So the cuts are likely to proceed largely unopposed for some time.

    All the evidence would suggest that the German government would be only too happy to foist a touch of Chicago-school economics onto Greece and Portugal. That way they can hope to guarantee the low inflation status of the Euro and who knows at some point given their commitment to extreme fiscal rigidity, this may allow employers for a Hartz V reform?

  • Anon

    http://www.publicaffairsireland.com/news/details/?ID=494

    http://www.csmonitor.com/Money/Stefan-Karlsson-s-Blog/2010/0416/Deflation-is-pushing-Ireland-to-restructure-faster

    “Painful, but healthy” apparently. Now I’m not convinced of that.

    How long will deflation go before it’s embedded? How many more rounds of 5% cuts would it take to convince you? Is inflation likely anytime soon?

    Perhaps Ireland can be more successful than Lativa: http://krugman.blogs.nytimes.com/2010/05/14/they-have-made-a-desert/

  • Mack

    Inflation has been positive for some months. It’s unlikely there’ll be any more pay cuts – (and it wasn’t public sector pay cuts that were causing the deflation – yes they are deflationary – but a housing bust, and a severe contraction in the money supply and bank lending are much more so!)

  • Mack

    There’s a lot in there – but I think the interpretation is overly negative.

    (a) Reducing the cost of doing business is generally a good thing. Businesses are more likely to thrive and grow in such an environment and there are other ways to manage costs.

    I disagree there is a race to the bottom. We trade with poorer countries and in so doing help raise their living standards up to ours. Ireland, itself, has benefitted significantly from outsourcing. As consumers we benefit from cheaper products and services too. It’s not neccessarily a simple task for Western firms to outsource or off-shore and in many cases the real competition comes from indigenous foreign firms in less developed countries (esp. China). Pensions and the like are paid for by domestic workers and don’t really depend on foreign trade (i.e. the value stays the same regardless of the purchasing power of the Yuan), but being able to import goods cheaply might help in the delivery of services (i.e. it’s useful that medical supplies themselves remain affordable). There are significant benefits both to us and the developing world from global trade.

    (b) Restructuring in recessions isn’t a bad thing. It helps businesses become more competitive and better able to meet their customers needs.

    The Germans are strict on balanced budgets and they don’t want to bankroll the profiligate PIIGS. That much is reasonable. In Greece austerity also means that for the first time many of Greece’s wealthiest will pay tax. Their upper middle class tax evaders will also be forced to pay their fair share.

    In the USA the democratic party is improving health care for the masses. In Ireland austerity has also meant increases in the tax rates (middle income earners would pay _less_ tax in Germany) and there will be more. It is unsustainable that 50% of workers (the _lowest_ paid) pay no tax (it may surprise you, though, Milton Friedman would approve of lower paid workers paying no tax – he proposed a negative tax credit that would _increase_ their gross pay after tax), Ireland is probably unique in the Western world in not having a property tax – that will be remedied.

    Yes there are cuts – but tax rises too.

    The ECB can engage in EU wide monetary stimulus to offset the harsh austerity measures. My guess is, that once the Germans get the changes the require to ensure that club-med and Ireland become fiscally responsible, that this is what will happen. (Either that or some of the PIIGS or Germany will leave the Euro).

  • Mack

    I’d also point out that both dividends and interest payments are at or near historic lows & that in Ireland at least real wages have risen significantly in the recent past.

  • Watcher

    The Government departments and the Trade Unions often live in a different planet. Supposedly both are for the greater good, now is the time to show it.

    But we know what will happen – there will be talks, recommendations, delay, threats of strike and ultimately some form of cut but not as drastic.

    However I do believe that the majority of people, in the South (I believe only a minority in the North understand), understand the importance of controlling public spending and national debt and cuts are necessary. Cowen has done well to steady the ship. The ship in the north is just setting sail.

  • RepublicanStones

    Five Live’s ‘Wake Up To Money’ this morning had some economist on who commended Cowen et al for recognising the problem and weilding the axe early and accordingly. Which you can’t disagree with (even if yours truly got hit).

    Apparently the early action provided a bit of breathing room for either the freeze to 2014 or further cuts down the road (most likely).
    But TBH to give credit to Fianna Fail for that would be like praising a rapist for helping to bath his victim afterwards.

    Then we have the guy who predicted the crisis (name escapes me) claiming the Govts guarantee of the bank accounts will bankrupt the country by 2012 (John Cusack are you listening?).

    I’m at a loss with the teaching unions and this one hour thing. Some people still don’t seem to realise that in the words of Lt Lockhart –

    “… it’s a huge shit sandwich, and we’re all gonna have to take a bite.”

  • Glencoppagagh

    Did any public sector trade union in RoI ever suggest that pay increases for their members should be restrained because the tax revenue which financed them was not sustainable?
    Irish tax revenues fell by a staggering 30% between 2007 and 2009 and are on schedule to decline by a further 10% this year. That was more than enough by itself to justify severe austerity measures.

  • IAM YUE

    I would suggest that anybody with an interest in Ireland’s future takesome time out to read Richard Koo’s Lessons from Japans great recession. Ireland is finished.

  • Mack

    I would also hazard a guess that the real reason hedge funds began focusing on Greece at the start of Feb this year, was because the ECB tightened the rules for the collateral it would accept for loans starting March 1st 2010.

    http://www.bloomberg.com/apps/news?pid=20601068&sid=avfEaCuAvN_4

    Prior to March 1st 2010, Greek banks were able to dump all shorts of shite at the ECB in exchange for hard cash which they used to purchase Greek government bonds which in turn were used to support prolifigate borrowing.

    The hedge funds of course, were aware of this change, and it’s implications. As I would imagine were the ECB, and the French & Germans…

  • Mack

    I would also hazard a guess that the real reason hedge funds began focusing on Greece at the start of Feb this year, was because the ECB tightened the rules for the collateral it would accept for loans starting March 1st 2010.

    Prior to March 1st 2010, Greek banks were able to dump all shorts of shite at the ECB in exchange for hard cash which they used to purchase Greek government bonds which in turn were used to support prolifigate borrowing.

    The hedge funds of course, were aware of this change, and it’s implications. As I would imagine were the ECB, and the French & Germans…

  • Mack,

    I really have to question your timeline here. Firstly, the real pressure on Greek bond prices only commenced after February 8th which was the date of that Hedgefund Dinner party. By March 2nd, the ECB and IMF had agreed a package.

    Certainly the announcement that ECB collateral change was coming up might have loaded the dice somewhat but the ECB moved away from this position since and it has made no difference. Furthermore, the ECB collateral change was the opposite of what you said. It allowed the ECB to continue to accept Greek govt debt for euros – rather than accepting bank credit instruments for euros for debt. Looking at it this way, there’s no way the ECB could reverse that decision before agreeing the terms of a bailout. Before that point, however, they had hoped to avoid it through forcing greater discipline on Greece themselves.

  • Mack this is in answer to your large piece below. Firstly, it was you who argued that the consequences was towards social liberalism rather than free market liberalism – I think you have accepted that this is not the case.

    I disagree with your analysis of the impact of global trade. Far from trade raising third world countries up it actually pushes them further down. Sub-Saharan Africa is lagging ever further behind. The economics behind this has been studied extensively by people like Andre Gundar Franck in theories of UnderDevelopment.

    It’s actually the case that this has generated counter-strategies from some governments who are seeking to use globalisation in their own interests e.g. China, South Korea. But abstract these and the story is very much the same.

    We obviously disagree on economics but for a Friedmanite, I don’t understand your position on monetary stimulus?? The ECB are already buying sovereign debt but are attempting to ‘sterilise’ its impact. Monetising debt will inevitably lead to an inflation (it’s already 5% in the UK) through devaluation and imported inflation. I doubt the Germans will want that! So far every step they have taken has been to safeguard low inflation.

    The markets are pricing in Greek default in the next two to three years. The ECB calculate that the markets will be more able to withstand a default at that point – that much is openly admitted by most mainstream analysts and that’s the point of the IMF/ECB bailout package to keep the show on the road for that long.

    The question is what happens if Ireland and perhaps Spain move to default. I think that this is what has the markets spooked. I cannot see how leaving the eurozone is an option as I have stated above but we’ll see.

  • Mack

    Domhnall –

    The changes, and hence the vulnerability of Greece, were telegraphed well in advance. Markets being forward looking and all..

  • Mack

    Firstly, it was you who argued that the consequences was towards social liberalism rather than free market liberalism

    Actually I was arguing that the pressure is forcing it the direction of the particular German model of Ordoliberalism (see – http://en.wikipedia.org/wiki/Ordoliberalism). That would include greater regulation of financial markets, higher taxes (which eventually will be used to fund services), balanced budgets, a hard currency and also at it’s core market based competition.

    The socialist, non-market alternative, demonstrated time and again, simply does not work. Scandanavian and German living standards were forged by hard choices, Irish leftists seem to want to avoid. By the way, I am not a Friedmanite (or a slave to any long dead political / economic philosopher) – I know a little about him and his ideas, but have yet to read a single book. I will get around to Capitalism and Freedom someday..

    You are right the Germans won’t want inflation, and Ireland, Spain, Portugal and Greece will not want to be caught in debt-deflation death spiral. There are large tensions in the Eurozone so something will probably give eventually. Much of Greek sovereign debt (and the debt of the other PIIGS) is held by German banks. There is a trade off as to whether Germany would be more badly affected by a default or by putting up with some inflation on the condition that the Eurozone is reconstituted on a more solid footing. I don’t think the PIIGS can live with debt-deflation so on that basis either some of them will leave (or Germany will leave) – or – the Germans will put up with some inflation.

    Sub-Saharan Africa is lagging ever further behind

    Sub-Saharan Africa is bedevilled with other problems such as a lack of civic institutions on which to build a credible society, a lack of democracy, nonsensical borders leading to religious and ethnic tensions, a lack of infrastructure compounded by corrupt leaders, foreign aid making local investment unpopular & war – countries can prosper with one or two these problems perhaps, but not the gamut that afflicts that region. But even in sub-Sarahan Africa there is hope – Botswana, a reasonably well run country and nice place to visit has living standards just below those of Latvia.

    Stable countries that engage in trade see their standard of living rise (just compare South Korea with North Korea, never mind the staggering improvements in China, India etc).

    I doubt I’ll change your mind, but I am really confused by the stance of Socialists on this issue. The refusal to take up the opportunity to raise living standards elsewhere, because it slows wage growth within domestic industries (while providing a wider range of cheaper goods and services) is hardly demonstrating international solidarity (FWIW, I am impacted by this personally, and maybe 5 years ago took this race to the bottom nonsense very seriously). If every country refused to trade, how poorer would we all be if we had to make our own cars, search engines etc?

    But is the argument here – really saying that we shouldn’t trade with the Chinese (or any other country trade benefits), and help raise living standards there because of problems in Sub-Saharan Africa?

  • Mack

    Incidentally this is a good article on what form a Greek default might take. Not neccesarily going to work out as well for the Greeks as for the Argentines.

    http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0601/1138283678319_6.xml&TYPE=interior&er=dgcDetail&c=primary/resource/1005/1273775941043_858.xml