Even With a New Boss, Ireland's Prospects are as Bleak as the Potato Famine

Feb 16, 2011Marshall Auerback

Marshall Auerback sees little hope for Ireland as it remains confined by its devil's pact with the eurozone.

Anybody who had hopes that an election in Ireland would provide at least the beginning of change from the current ruinous set of policies has to be disappointed with the Opposition Party Fine Gael's proposals for "reform." The objectives sound absolutely marvelous, but one wonders how the new government will achieve them (as reported by the Irish Times):

Fine Gael today published its election manifesto, which party leader Enda Kenny claimed would help transform Ireland.

Among the proposals contained in the document is a promise to create thousands of new jobs, an overhaul of the health service, a reduction in the number of national politicians, protection of State pensions and payments to the most vulnerable members of society and public sector reform.

"Every section of the manifesto has been prepared with a view to maximising job creation, growth, and the transformation and modernisation of our public services," said Mr. Kenny this morning.

Sounds wonderful, doesn't it? So how does Fine Gael hope to achieve this economic nirvana? According to the Guardian:

A government led by Fine Gael would be committed to driving down Ireland's budget deficit to 3% of gross domestic product by 2014, its leader, Enda Kenny, has pledged.

Referring to slashing the budget deficit, he said: "Irish people don't like to think there is an interminable night in front of them in terms of this economic burden."

Kenny said he believed the public wanted the national debt dealt with sooner rather than later.

"The next government must pick up the pieces," he said. "It must steer the country away from bankruptcy by solving the debt crisis in a way that protects the most vulnerable and distributes the burden fairly."

In other words, more of the same neo-liberal nonsense that has driven the country to the precipice.

With unemployment now standing at 15% of GDP, one of the largest cumulative contractions ever recorded in Irish history, the EU/IMF "rescue package" has surely hammered the final nail into the coffin of the Republic of Ireland. The country is being saddled with a punitive 5.8% interest rate on a multi-billion euro loan, which will largely be used to repay German, French, and British bondholders. Irish taxpayers, by contrast, receive nothing.

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As Argentina demonstrated in 2001, sovereign governments are not necessarily hostage to global financial markets. They can steer a strong recovery path based on domestically orientated policies -- such as the introduction of a Job Guarantee program -- which directly benefit the population by insulating the most disadvantaged workers from the devastation that recession brings.

But a necessary precondition for Argentina's salvation was the abandonment of its currency peg regime, which effectively had limited the country's room to maneuver fiscally.

Ireland must do the same. Let's be clear: there is no public debt crisis without the euro. As Bill Mitchell has highlighted, Greece has a public debt ratio of about 144 percent of GDP with Italy at about 118 percent, Belgium at 102 percent, Ireland at 98 percent, France at 83 percent, etc. Japan is now over 204 percent, the UK is at about 75 percent, the US is at about 59 percent, etc.

But in the latter three countries, in spite of ridiculous statements to the contrary, there is no public debt crisis. Why not? Answer: because, as Mitchell notes, "those nations have all retained currency sovereignty and have little or zero foreign debt exposure. This means they can always find the wherewithal to honor all outstanding public debt commitments."

By contrast, none of the EMU nations have the capacity to honor their public debt commitments under all circumstances because their debt is effectively in a "foreign currency" -- they ceded their individual currency issuing monopolies when they entered the eurozone. First, they have given up their monetary sovereignty by giving up their national currencies and adopting a supranational one. By divorcing fiscal and monetary authorities, they have relinquished their public sector's capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues, and this applies perfectly well to Ireland, Portugal and even countries like Germany and France.

Additionally, by entering the eurozone, these countries have also agreed to abide by the Maastricht treaty, which restricts their budget deficit to only 3% and debt to 60% of GDP. Therefore, even if they are able to borrow and finance their deficit spending like Germany and France, they are not supposed to use fiscal policy above those limits. Of course many did, including Germany and France. But if we are correct that domestic income deflation will be the end result of fiscal retrenchment colliding with private sector attempts to net save, then surely more desperate citizens will turn to even more desperate acts.

The bottom line is that growth is needed for the deficit to fall. Growth comes with spending. If the private sector doesn't want to spend in sufficient volumes to promote growth, then the public sector has to. Otherwise you get stagnation and large deficits. But to engage in spending, a government needs full fiscal sovereignty. Only then can the state push-start a very recessed economy and restore private confidence.

But having given up its fiscal sovereignty, there is little hope for Ireland. The only way out of the current mess is not through more of the same tired neo-liberal nostrums being offered up by Fine Gael, but the imposition of a loss on bondholders. These are the same who engaged in speculative financial activity yet continue to demand unlimited compensation off the backs of the Irish people for their gambling losses. Until this step is taken, Ireland hasn't a hope of stabilizing its finances, and its prospects are as bleak as they were during the potato famine.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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