"From an Irish perspective, what looks to [Sarkozy] like financial assistance from Europe could as readily be characterised as a bailout of European investors foolish enough to lend to Anglo Irish Bank and other insolvent banks, courtesy of the Irish taxpayers. The markets having declined to finance this commitment on top of the Irish sovereign debt, our European friends have kindly provided “assistance” in the form of loans at a mark-up of three per cent."
This is as good a summary as any of the distributional consequences and extortionate terms of the EU-IMF deal. McCarthy also correctly identifies the fact that the deal won’t work on its own claimed terms: ‘With a distressed borrower, any solution which does not offer a realistic prospect of a return to normal functioning is a temporary fix, and will have to be re-visited.’ David McWilliams, another improbable revolutionary, has made the same point
: ‘The markets will support this move [defaulting on bank debt]. Markets want an economy with less debt and some growth potential, not one that is intent on strangling itself with other people’s debt.’
McCarthy expresses more or less the same idea when he talks of money ‘being routed from Irish taxpayers to European private creditors of Irish private banks. Indeed, a substantial portion has already been paid over, to be replaced with sovereign debt.” Here, he has put his finger on a very serious aspect of the issue, and one that the Left needs to engage with – that the debt is already largely socialised. This has very important political implications, on which more anon.
McCarthy goes on: ‘The beneficiaries of the Irish Government's imprudent guarantee of Irish bank liabilities are… the creditors of Ireland's insolvent banks, including bond and wholesale money market investors who, in the main, are not Irish. Many of them are French and German.’ The high interest rates in the Greek and Irish ‘bail outs’ are justified as warding off 'moral hazard' – the Greek and Irish governments need to pay a price for their economic mistakes or else they (or others) will repeat them. But the application of the ‘moral hazard’ principle, McCarthy notes, is asymmetric – the reckless German and French lenders who funded the Irish banks get fully paid off, not punished. This disjunction lay at the heart of the recent entertaining exchange
between Joe Higgins and José Manual Barroso in the European Parliament, which has prompted even John Bruton
to write to Barroso pointing out that European banks (and the ECB) might bear some responsibility for the mess we are in.
McCarthy concludes as follows:
"None of this is to argue that the Irish politicians and officials who negotiated the bailout held a strong hand of cards. Threats of economic suicide are not credible. But any financial rescue package which fails to afford a plausible exit strategy to the distressed borrower is a temporary arrangement and this game is not over. A difficulty for Ireland is that private debt (the bank bonds) is being steadily paid off and substituted with official IMF and EU debt."
And this is where we reach the limits of McCarthy’s understanding and/or usefulness to us. First, the Irish negotiators held a very strong hand of cards indeed – in fact, they held the fate of chunks of the European financial system, perhaps even the future of the euro, in their hands. Second, the substitution of public for private debt is not a ‘difficulty’ according to the logic of the scheme’s architects - it is the point. Again, I will come back to this later.
But McCarthy does get a lot of stuff right, and it’s a salutary lesson that we can learn a lot from ‘reading with the enemy’ and not just people we think we will agree with. For example, McCarthy is absolutely right about the EU being more hardline than the IMF (a point
he has returned to on the irisheconomy.ie
website more recently. We adverted to this in our Afri paper: on the issues of resistance to senior bondholders taking a ‘haircut’ and the cutting of the minimum wage, the EU took a tougher line than the IMF. That’s also the case with the EU-IMF ‘rescue’ packages for Hungary, Latvia and Romania – there, the EU determination to protect the interests of mainly Swedish and Austrian banks has seen them demand ferocious austerity programmes. Indeed, a paper
last year from the London School of Economics talks of the ‘European Rescue of the Washington Consensus’ i.e., the determination of the EU to maintain neoliberal economic principles even as the IMF shows some (limited) signs of willingness to compromise on them. That, in turn, has important implications for how we approach the EU politically, which Gene Kerrigan, also writing
in the Sunday Independent of 16th January, puts his finger on when he says: ‘[A]ny politician claiming to represent the interests of the citizens needs to throw a political hand grenade into the cosy club at the heart of the EU…’ That would certainly be a more productive approach than the ‘Claiming Our Future’ initiative
of writing a letter to EU Commissioner Olli Rehn complaining that the ‘bail out’ deal violates stated EU commitments to equality.
The Consequences of Adjustment
The consequences of what the EU has been doing in countries like Latvia are ruinous
. Liberal US economist Paul Krugman, in a long and thoughtful piece
on the crisis of the Eurozone in the New York Times of 12 January, compares ‘adjustment’ in central and eastern Europe to Tacitus’s observation about the Roman empire’s claims to have brought ‘peace’ to conquered lands: ‘They make a desert and call it peace.’ A recent IMF report
(and the IMF is still deeply complicit in all this, minor differences with the EU notwithstanding) is entitled ‘Toughing it Out: How the Baltics Defied Predictions’. The following tragicomic quote is drawn from that report:
"It is too early to pass final judgment on the success of the Baltic strategy. Adjustment is still far from complete, and the current problems in the eurozone may yet complicate recovery. What is clear, however, is that the most dire predictions have not come true. Despite an unprecedented economic downturn - cumulatively, GDP has shrunk by about a quarter - devaluation and banking crises have been avoided."
So a 25 per cent fall in living standards is a ‘success’ because the banks did alright and the currency did not fall in value. They made a desert and they called it a currency and banking peace.
And a desert is also what they are trying to make of Greece
, where the EU-IMF package
involves spending cuts (including public sector wage cuts of 20-30 per cent); raised taxes; labour market reforms, such as the abolition of collective bargaining; and the privatisation of ports, airports, railways, finance, water supply, energy and public land. The Greek economy will likely contract by 3% in 2011, having already been shrunk by an estimated 4.2% last year. The deficit-GDP target ratio of 8% for 2010 came in at 9.4%. Inflation is at 4.6% (well above target), unemployment is 11.7% and rising.
These figures have prompted many prominent economists, such as Nouriel Roubini
, to call for an acceptance of the need to restructure Greek debt on the grounds that it is unpayable (in its entirety at least) and that the country is de facto insolvent. (Roubini has made a similar call regarding Irish debt
, as has former IMF Chief Economist Ken Rogoff. A November 2010 Citigroup report
makes the same argument for Greece, and points out that at the end of the 3-year ‘adjustment’ period, debt restructuring will have to take place anyway – though by then half the Greek sovereign debt will be on the books of the Greek ‘rescue facility’ and the ECB. And that, again, is the point – the plan is to socialise as much of the debt as possible and consider a write-down
only when it is taxpayers, not private creditors, who are in line for a haircut.
The Uses of Adjustment
What the mainstream analysis (valuable as it can sometimes be) misses is the instrumentality of the seemingly unsustainable approach to the European debt crisis. It is instrumental, first, because in ‘shock doctrine
’ style, it allows sectors of economies to be cracked open to commercial exploitation (especially through privatisation), controls and regulations on business loosened or abolished, and social protections dismantled. We see a version of that looming in Ireland when Bertie Ahern sits on the board
of an international forestry fund that looks set to buy Coillte land on its privatisation (a privatisation recommended by Colm McCarthy’s ‘Bord Snip Nua’). And we see it at the wider European level with the EU Commission using the excuse of the crisis to lock neoliberalism even more deeply into the EU economic governance rules through new and/or harsher surveillance and punishment powers
over national governments and budgets.
The second way that the approach to the crisis is instrumental is through the aforementioned socialisation of debt, so the private sector is less exposed at the end of the road when fundamental restructuring of that debt might actually occur. What is happening here is well summarised by TCD economist Kevin O’Rourke
"The real cleavage in Europe is between European taxpayers and bank creditors… But since the powers that be are ruling out bondholder haircuts and quantitative easing, the only cleavage we are left with in practice is the one between core and periphery taxpayers. Of course ordinary French and German taxpayers are going to be angry at lending their money to an insolvent state with lower tax rates than their own. Why wouldn’t they be? [And they’re also worried that when debt restructuring occurs, they will be the ones holding the debt] Of course ordinary Irish taxpayers are going to be angry at having to pay for high interest loans designed to bail out foreign banks. Why wouldn’t they be? And while ordinary Europeans get angry with each other, with unpredictable political consequences, capital walks away scot free."
This cleavage between peripheral and core taxpayers is similar to the divide the Irish government and media constructed between private and public sector workers here – a classic ‘divide and conquer’ strategy. How do we get around this? We have to find a Europe-wide solution that claims the money back from the financial sector and this will require very serious networking and campaigning right across (and beyond) the Eurozone. And while mainstream analyses are of considerable help in identifying the challenges ahead, the practical solution of such pressing political problems remains a task for progressive activists alone.