Germany and the eurozone “authorities” are thinking primarily of their own interests in prolonging an impossible position for Greece; “supporting” it while simultaneously imposing myriad levels of conditionality.
Insistence by the troika on further cuts, to be followed by yet another austerity budget, as the price for unlocking additional funding has now precipitated a political crisis.
The long, drawn-out struggle is doing more damage to the Greek people and to the eurozone than would a calm and managed exit. It is certain that the contingency arrangements are already in place and that the communiques are written.
Notwithstanding official urgings that chaos would ensue from an exit, the reality written in the troika’s own data, and in the experience of the Greek people, is that the country is now on the precipice of political, as well as financial, chaos. History teaches us that in the face of implacable pressures, there are alternatives that may be ‘less bad’.
A managed exit would be a catharsis for the financial markets. It would concentrate the minds of the eurozone authorities in a manner that interminable summits have failed to do. It would allow Greece to make a new start based on a more balanced adjustment strategy.
In Ireland, the post-bailout relationship with the troika is one of overt pressure, short-termism, and dishonoured promises.
There has been no reasoned argument as to why the fiscal policies and targets embedded in the Irish bailout have not been adjusted to reflect the worsening economic environment, both within the eurozone and in the global economy. Who set the initial parameters and are they infallible?
Budget 2013 is set to continue where previous bailout budgets left off. Taking another €3bn out of an economy running on empty will deflate domestic demand even further. Cuts in healthcare and education will have the most damaging impact.
The cul-de-sac down which we’re being impelled is a long one. Despite the eight-percentage-point fiscal consolidation over the last three budgets, troika projections envisage a further five-percentage-point contraction in order to meet the 3% of GDP target by 2015. It will take even more than that. Recent IMF estimates of fiscal multipliers clearly point to the fact that further austerity, in the position in which Ireland will be even more firmly entrenched, have a more than proportionate negative effect on growth.
It would be delusional to believe that, for all the fine words about protecting the vulnerable, the Irish fiscal deficit can contract by another 5% in three years. The most vulnerable are those without a job. What is really at work is an ‘adjustment’ process being borne almost entirely by the labour market, which itself is characterised by diminishing marginal efficiency.
Austerity is now cannibalising not just social capital but also the capacity of the economy to grow at all.
It is important to take comfort in whatever positives can be gleaned from eurozone discussions on debt restructuring — in fact, the larger countries are simply compensating Ireland for paying the credit insurance. This is impelling Ireland towards a much longer and more hazardous adjustment than was admitted even a year ago.
Buoyancy in the domestic economy has been wiped out, as it bumps along the deep ends of excessive spare capacity. At the same time, the strong export performance by the multinationals is threatened by a second global slowdown.
Gains in competitiveness that have occurred through ‘internal devaluation’ — driving down prices, including wages, through unemployment — are being offset by the burden of debt servicing stretching way out towards 2020.
A significant portion of these outflows is attributable to bad credit policies of the part of Germany and French banks.
What can Ireland do to mitigate the intensification of recessionary pressures exacerbated by the budget? Not a lot now — the tide is running too swiftly and the eurozone authorities are fast running out of time and options. Two points are important.
Ireland’s corporate tax regime is not just about the specific rate chosen by Ireland — it’s about being seen to deliver stability and certainty to multinational companies with lots of options in the environment into which they are investing.
The scale and quality of foreign direct investment, including the IFSC, is now the only platform with real clout that is outside of the direct control of the troika, on which Ireland’s badly mauled domestic economy can hope to regroup.
The real value of Ireland’s corporate tax regime is inextricably bound up with the quality of our education — and this is now seriously vulnerable to short-term budgetary pressures that are demonstrably counterproductive not alone for recovery, but for economic stabilisation and political stability.
© Irish Examiner Ltd. All rights reserved