Moving on from mistakes is a monstrous task
The truth, of course, is that the economy is still struggling to lift itself off the ground. Any business dependent on the consumer is likely to be in considerable stress and this will only be exacerbated by the current penal withdrawal of €550m from the personal sector to pay the full year’s property tax, not to mention the manner in which private health insurance is being priced out of the reach of many. Discretionary incomes are still being hammered. For the small business sector, these weak demand conditions are imposing considerable pain, but are being compounded by the lack of real credit availability from the banks, and the very onerous debt burden that many SMEs built up in better times.
Irish taxpayers have been forced to recapitalise the banking system and in the case of Anglo Irish Bank and Irish Nationwide to burn their money, in the process creating a dangerously high level of sovereign debt; in the face of rapidly rising sovereign debt and loss of market confidence, fiscal policy has been utterly pro-cyclical, meaning that the tax burden has increased significantly and public expenditure has been cut in the face of a deep economic crisis; and the banks have been forced to reduce the size of their balance sheets, which has seriously undermined ‘good’ lending. In such circumstances, it was always inevitable that any recovery process would be slow and difficult, and that is exactly how it is transpiring. The sad reality though is that much of this pain might have been avoided if our European masters had any understanding of how economies really work.
At a college in Paris this week, ECB president Mario Draghi delivered a most interesting speech, which among other things, considered the mistakes that had been made in Europe by European policymakers in response to the crisis, in marked contrast to the more sensible approach adopted in the US. Basically he argues that the sequencing of the response to the crisis was all wrong. He believes that at the beginning a backstop should have been agreed for sovereign and banking sector problems. Then a stress test should have been conducted on the banks and they should have been re-capitalised as required. Instead, the Deauville agreement on private sector involvement in sovereign debt workout raised immense market nervousness over the possibility that private holders of government debt could be burned. This meant that the more indebted countries such as Ireland, Greece and Portugal saw their bond yields rise dramatically, and those countries were ultimately locked out of the markets.
Then in order to try to re-assure the markets of their debt sustainability, those countries engaged in penal fiscal adjustment, which further exacerbated the slowdown. In relation to the banks, there was no EU-wide resolution mechanism in place to address capital problems. Irish taxpayers were forced to recapitalise bust banks and the banks were also forced to reduce their balance sheet size in a very painful manner.
Draghi recognises that this served to exacerbate the economic difficulties and force a double-dip recession in the eurozone. He contrasts this approach to that in the US, where the sequence of actions went from creating a backstop, to stress testing to recapitalisation.
On the bright side, Draghi recognises the massive mistakes that his predecessors made and which prolonged the crisis here and in the eurozone. Hopefully the future will be different. A resolution mechanism of sorts was agreed last week on how bust banks should be dealt with, and taxpayers will most probably never be given the honour again of assuming bank debt as their own.
