Austerity is a dish Ireland will almost certainly have to eat, hot or cold…

Markets are itching again… The Greek indecision over forming the next government is such that the Euro has slid to just under $1.30, and yields on Spanish debt are rising to $6.06… [Ms Lagarde, got yer umbrella handy? – Ed]

Scary stuff… What’s even more scary is that those economists who cast a darkening glance over the fiscal treaty as a means of getting out from under a recession that may already be hardening into a depression are not wrong when they say that more austerity alone will not work… As Michael Taft, one of those on the No side least likely to play politics with the issue, notes:

Most Eurozone countries will have to undergo substantial fiscal consolidation to meet the Treaty’s targets. The German Institute for Macroeconomic and Economic Research estimates that the effect of this will be to drive down Eurozone growth to a mere ½ percent average annual growth up to 2016, depending on the timing of the fiscal consolidation.

It is essential, therefore, that the Government provide its own estimate of (a) the additional fiscal contraction to meet the structural deficit target, (b) the impact this will have on the domestic economy, and (c) the impact on our exports, from sustained fiscal consolidation in the Eurozone.

And Martin Wolf adds that the burden of rising Youth Unemployment will likely continue:

Fiscal tightening does not improve outcomes in shrinking economies. Thus, austerity is merely begetting more austerity. According to the International Monetary Fund, the ratio of gross public debt to gross domestic product will rise, not fall, in every year from 2008 to 2013 in Ireland, Italy, Spain and Portugal. It will briefly fall in Greece, but only because of its debt restructuring.

The most frightening data are for unemployment (see chart). The proportion of young people between the ages of 15 and 25 who are now without a job is 51 per cent in Greece and Spain, 36 per cent in Portugal and Italy and 30 per cent in Ireland. France is in better shape, but even there the picture is dire, with one in five young people out of work.

Is it plausible that people will put up with this indefinitely? No. Far more likely is a repetition of the protest votes we have seen in these elections. Nicolas Sarkozy was the eighth leader of a eurozone member country to have been swept from office in little over a year.

The fiscal compact is a compensation for the fact that too few Eurozone countries (and certainly not the Germans themselves) have been able to keep to the promise of fiscal control when unconstrained by law.

It is a confidence building measure designed to sooth the fixated fiduciary soul of the German parliament (which will have the final say on what does and does not get past).

Wolf again:

What, then, might Mr Hollande do? First, he is going to have to forget almost all of his domestic promises, not only because they are not going to help France, but also because German leaders will not take him seriously otherwise.

Then the new president must embark on a serious discussion with the latter on how they expect the eurozone to end its crisis. He should give enthusiastic support to the wise recent remarks by Wolfgang Schäuble calling for higher German wages. He should then point out that there seem to be only five ways this can end.

The first and best would be symmetrical adjustment of the imbalances that built up before the crisis, along with reform in weaker countries.

The second would be a permanent transfer of resources from surplus countries to deficit ones. The third would be a painful shift of the eurozone into external surplus – a Germany writ large, so to speak. The fourth would be semi-permanent depressions in weak countries. The last would be partial or total break-up of the eurozone.

The only sensible choice is the first. But that is not the path the eurozone is now on. Austerity has to be matched to the realistic pace of adjustment and structural reform.

The chances that Mr Hollande can deliver such a changed perspective are small. But the currency union was a French plan. It was François Mitterrand, his Socialist predecessor, who signed the Maastricht treaty.

His task and his goal must be to turn hostility into hope. He may fail. But he alone of European leaders has the desire and the ability to try. [Emphasis added]

So far, so good. Except that the time for any substantial intervention is short and the counsel to abandon all domestic promises may fall on deaf ears… But here’s Stephen Kinsella with the rub from Ireland’s point of view; even if there is a growth pact for the Eurozone, very little of it is likely to fall on Irish soil, north or south.

We are, and will remain, peripheral to the real economic arguments of the Eurozone, no matter how many tricks of the light may persuade it should be otherwise… Austerity is a dish that will almost certainly have to be eaten, whether Ireland votes yes or no…

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  • Zig70

    If the eventual solution is as Mr Wolf says “The first and best would be symmetrical adjustment of the imbalances that built up before the crisis” Then austerity is not such a large dish. I think the current problem is one of metrics. The plan is to avoid financial instability and youth employment, political stability and common sense aren’t on the fisbone. The political deadend is at the point where it is avoid financial instability for germany and to hell with the rest. Maybe the best answer is to boot out the germans from the eu.

  • Mick Fealty

    Under what authority? They are the only ones with sufficient cash reserves to stop the whole thing from falling apart… Picked this comment up from David McWilliams site today:

    The Germans were not the drivers of the united currency, it was France who wanted that. And they did no want it because, counter intuitively, Germany always preferred to have a strongr currency than a weaker one. In fact a weak euro isn’t something well regarded in Germany, even though it benefits them. This is wha differentiates them from us Hugh. The Germans don’t look at things short term and go great, like Ireland did in sucking up the insane property boom. Part of the problem in Ireland was the fundamental misanthropic nature of the entire property boom, one which we have never faced up to the truth about. The property owner got rich by rogering his tenant with high rents and by pushing up the price of housing or the next buyer. It was a business of exploitation and gouging. We need to handle this as a society. But Germans are different, they are industrialists. They make things. they design, they trade in their enormous messe, they sell. Our problem is we only seem interested in overpriced premium markets because we are unwilling to develop the efficiencies that lead to the possibility of mass market success. Hence the death of most of the manufacturing side of ict in Ireland. And look at the number of me too, poncey spa hotels with poor service and overpriced rooms that the hotel industries crybabies now weep and whine over, as if how somehow it was never their fault.

  • erewhon

    More insight into the Keynesian prescriptions of Martin Wolf:

    http://dailycapitalist.com/2012/05/04/hand-to-hand-combat-with-martin-wolf/

  • tyrone_taggart

    “But Germans are different, they are industrialists.”

    No they are not “different”! There Govermant may have acted in a different way than the Irish Goverment did and that is all.

    You could make a cultural argument arround how people react to situations due to events such as the “Famine” and “Hyper inflation”.

  • DC

    Austerity, i’ll take it hot or cold, so long as I can still lay my hands on fresh bread and hot coffee.

    Truth is neither the left nor the right have the answers.

    So who knows!

  • Zig70

    I think your right DC, but 1. It’s no fun compared to wild economic speculation and 2 continuing down a chosen path while disaster looms is feckless. Committees are bad for technical decisions.
    The dailycapitalist omg, there should be a healthwarning, but good link, thanks.
    I work with a lot of germans, stereotypes don’t hold but it does seem to get them the business. A neat trick. They largely believe the stereotype themselves. I’d still maintain the euro is critical for eu trade, however the collapse transpires. How do the germans hold the power, do they have a veto if the indebted block gang up?

  • Greenflag

    @ tyrone taggart,

    ‘No they are not “different”! There Govermant may have acted in a different way than the Irish Goverment did and that is all.’

    No it’s not all .The German ‘economy’ is ‘different’.German home ownership rates are much less than British or Irish which makes for a more flexible workforce . Germans are still largely distrustful of credit card debt and German retailers have always been ‘content’ with lower margins than their British or Irish equivalents .

    German manufacturing much of it niche ‘engineering’ makes up 25% of their economy whereas the British said goodbye to their mid size engineering sector and major industries in the Thatcher era and the USA is now down to about 11% of thier economy being manufacturing based .What can they export except sub prime mortgages ? When a country deindustrialises to the extent that the UK did or that in the USA has now been underway for a decade or more then whats left is financial and other ‘services’ which most emerging countries will provide themselves within a generation.China is currrently building 100 modern airports – plus several high speed train lines between major cities . The USA can’t even invest in repairing it’s dilapidated infrastructure without ‘borrowing ‘ more from the Chinese 🙁

    Messrs Kissinger and Nixon must by now be ‘saints’ in the Chinese hierarchical heaven .