Our loss of sovereignty a long time coming

IT’S been a year now since our economic sovereignty went west.

How’s it been for you? Do you think things would be any different if the state had managed to keep the troika at bay?

This time last year, there was much gnashing of teeth. On November 28, the final details of the loan agreement with the IMF/ECB/EU was announced, but the whole affair had been hanging over the country like a nuclear ash cloud for the preceding ten days.

Repeatedly in the media and politics, the arrival of the bail-out boys in Dublin was described as “our darkest day”. The inference is that it was the worst day in the history of the state. Many shared such a sentiment

Was it really? How dark was it compared to May 17, 1974, when 33 people were murdered in bombings in Dublin and Monaghan? Or August 27, 1979, when an elderly member of the Royal family, Lord Mountbatten, was blown up off the coast of Sligo. An elderly woman and two children were regarded as collateral damage on that dark day, not to mention 18 young men who wore the uniform of the British army, also killed on the same day?

What about Bloody Sunday, and all the other massacres that were carried out in the name of the country, or flag, or whatever it was? Over decades the island became inured to killing and dying. When referring to economic matters it’s best to remember that there have been darker days, and within the living memory of most.

At a time of austerity and genuine hardship among large sections of the populace, it is convenient to lay the blame for the state of the country on nice, clearcut events and decisions, such as the arrival of the bail-out.

Similarly, huge emphasis is placed on the bank guarantee that was given in September 2008. This is often referred to as the “worst decision in the history of the state”. So now we have two clearcut events that can be blamed for the state we’re in. We have identifiable individuals — primarily Brians Cowen and Lenihan — to shoulder responsibility for the whole shebang. There is a comfort in these certainties.

Except it’s all a little easy. Cowen and Lenihan handled the arrival of the bailout in an appalling manner. For weeks they denied that there was any possibility of it happening. It took the initiative of the governor of the Central Bank, Patrick Honohan, to go on Morning Ireland and reveal that the government had not been honest with the people on a major issue.

Leadership was found wanting, but then it had been wanting for most of Cowen’s tenure in charge. (The suspicion is that history’s considered view will be more charitable to Lenihan’s role as finance minister.)

But whatever the politics of it, there can be little doubt from an economic point of view that a bailout — and the loss of economic sovereignty — was inevitable from a long way out, possibly all the way back to the spring of 2008.

By that time, we now know, the banks were bust. Tax receipts were falling off a cliff, exercising a huge pull on the state’s capacity to borrow. Taken in conjunction with the condition of the banks — which were hopelessly bust by then — it was inevitable that the state was going to end up insolvent. Even if a different government had been in situ since the general election of 2007, it’s difficult to see how going to the IMF, cap in hand, could have been avoided in the long run.

The bank guarantee is in the same territory. By the autumn of 2008, the banks were hopelessly insolvent. On the fateful night of the guarantee, they presented their case as one of liquidity. Yet what was the alternative for the government?

Something less than a blanket guarantee would certainly have been possible, but that in itself would have made little difference to where the country is now. If Cowen and Lenihan told the bankers to take a hike that night, what would have happened? Could anybody guarantee that there would have been money in the ATM machines in the coming week? Could anybody have guaranteed the maintenance of social order?

Apart from any of that, by September 2008, the state was already reliant on the ECB for funding the economy. In the wake of the collapse of Lehmans a few weeks previously, there is simply no way the ECB would have permitted the government to allow Anglo Irish to fold. The coupling of the fate of the state with that of the banks is entirely unjust, but that coupling was decided by Frankfurt rather than the government here. Then, just as now, the ECB’s primary concern was to stop contagion. If Anglo Irish Bank went down, it would have dragged many of its creditors’ banks closer to the precipice, and Frankfurt was never going to allow that.

Even the sage of the recession, David McWilliams, was in favour of a guarantee, although he doesn’t like to be reminded of it these days.

The politics at the time was awful. Making the decision on the hoof, ringing around ministers in the dead of night, it was no way to run a country. Similarly, the honourable thing to do in the weeks after it would have been to call an election. But the decision itself, while flawed, is not at the root of the country’s current problems.

The payment last month of €700 million to bondholders had nothing to do with the bank guarantee. Most of the payments due in the next few months, totalling close to €3 billion, are also unsecured. It is the ECB’s stranglehold over the Government — and the latter’s fear of defying Frankfurt — rather than the bank guarantee, that is driving those payments.

Ireland’s economic sovereignty was eroded rather than handed over in one fell swoop. The erosion kicked off on January 1, 2002, with the introduction of the euro. Over the following five years, when conditions in this country were suited to a high interest rate, it was kept low in deference to the economies of Germany and France.

The low interest rate fuelled the bubble. Then we had a government which resembled a child left alone in a sweet shop, using the conditions to spend and cut taxes in a reckless manner.

Even the year before the advent of the euro, Charlie McCreevy’s €2bn giveaway budget was severely criticised by Brussels as being too expansionary. Instead of a counter cyclical policy, that would keep one eye on the rainy day to come, McCreevy and Bertie Ahern were focused only on the next election. That meant spending at will, cutting taxes to the bone, and allowing the banks free rein to pump up economic activity. The party continued in the same vein when Cowen replaced McCreevy as finance minister.

Economic sovereignty was flushed down the toilet in those years, not twelve months ago. The blind injustice of citizens paying for the gambling debts of bondholders and living through severe austerity did not start with the arrival of AJ Chopra in the country. But depressingly, there is little sign as of yet that real lessons have been learned.