Controlling the levers of power

Policies forced on bailed-out states are about showing the ‘big boys’ are in charge, writes Ray Kinsella

THE shape, and severity, of the forthcoming budget is being determined, not in the Dáil but in Karlsruhe, seat of the German Federal Constitutional Court.

Today the court will publish its findings regarding whether, or not, to issue an injunction delaying German approval of the European Stability Mechanism (ESM) and the provisions of Fiscal Compact, in order to consider whether they are contrary to the country’s constitution — effectively whether there has there been too much of a transfer of power to outside unelected institutions and political forums.

The decisions of the court will impact, directly and immediately, on the stability of the euro and the future of the eurozone. They will also have a wider resonance. Firstly, in terms of what has been called ‘fiscal self-determination’.

Secondly, in relation to the possible exposure of Germany, as the main funder of the ESM, to possible deficiencies in the mechanism, including an inability to reverse the financial and economic contagion across, and beyond, the eurozone.

Concurrently, the European Court of Justice is also considering the reference to it by the Irish Supreme Court in the historic appeal brought by Tomas Pringle TD, earlier this year and argued by Cork solicitor Joe Noonan.

Mr Pringle has essentially argued that the ESM is contrary to the EU treaties and also that the people should have been consulted by way of referendum.

One way or another, these decisions will have a greater impact on the future of the eurozone, and its governance, than all of the ‘crisis summits’ over the last three years.

The courts may be the instrument which finally forces eurozone governments to engage with their people on the governance of their countries and of the eurozone, in the wider interests of preserving the great post-war ‘European’ vision, which has been wracked by ongoing turmoil and division in the eurozone.

The financial markets will be looking to see whether the decisions of the courts will the catalyst for a shift away from the failed policies of austerity, policies which threaten the welfare of families and the stability of businesses.

For example, how far will the operation of the ESM — which has already been reshaped for reasons of political expediency in connection with the Spanish bailout — overlap, and be consistent with, the mandate of the ECB, whose recent decision to engage in unlimited bond purchases subverts its own treaty?

Equally, who conferred on the IMF, or the troika, a mandate to determine the delivery of healthcare in Ireland in the forthcoming budget?

The Government’s case for presenting its troika-determined budget is this: previous budgetary ‘adjustments’ have reduced budget deficit; Ireland has received good ‘school reports’ from the troika, who are breathing down their necks, even unto the Cabinet rooms. Ireland is widely admired for our resilience in the face of continued — and deepening — austerity. Also, the (implied) yield on government debt has declined. Surely that shows that we are on track?

There is another way of looking at this.

The reduction in the budget deficit has been achieved by cutting the capacity of the economy to recover. Domestic demand, including Government investment and household expenditure, continues to contract. This is eroding the platform on which domestic business depend for survival.

A consequence of this is that Government revenue is almost certain to come in below target this year, adding to the burden of indebtedness.

The nation’s reputation for stoicism in the face of austerity has helped sustained the myth that the eurozone economic policies are working. They are not. The data over the last year shows sovereign downgrades, downward revisions to growth forecasts, and historically high levels of unemployment in the eurozone.

There have been destabilising capital flows across, and out of, the region. This clearly signals that whatever about the froth on the surface as we lurch from one crisis resolution meeting to another, at the level at which companies try to function and people live out their lives, the eurozone policies — the very same one on which the budget has been based — are actually prolonging the recession.

In recent weeks, the Government have been making the case the debt restructuring. They made the same case in spring last year, and they were, of course, absolutely right. Their argument was summarily dismissed, notably by France.

However, during the summer, when Spain and Italy faced down the Franco-German hegemony, they were listened to and received special treatment for Spanish banks. Ireland was then allowed to tailgate on the Spanish deal.

The concessions — promises and half-hints — are presently being finalised. Some form of debt relief will be grudgingly conceded to Ireland, probably next month, but is likely to come with even more conditions. This ‘concession’ will then be used to justify the further austerity in the forthcoming budget. This is a classic example of Neolithic economics and the politics of power and expediency.

The decision by the ECB to buy unlimited amounts of short-term government debt from peripheral countries, (ie Spain and later Italy) is the last shot left in the eurozone armoury.

We have had recapitalisation and ‘firewalls’; the ESFS and the ESM; ECB injections of €1tn into stressed continental banks — but, as the data make clear, absolutely nothing for the real economy for the eurozone.

This most recent ECB ‘initiative’ — still only an announcement — has helped to (temporarily) bring down bond yield in peripheral countries, but not to the levels that will be required to regain sustainable market-access; yields of around 6% and growth rates tending towards zero, tell their own story.

More fundamentally, the action of the ECB is wholly contrary to its own statutes. Whether, or not, the ECB should have been given such powers is beside the point. What it is doing under its existing treaty is clearly wrong.

In this respect, at least, both Germany and the Bundesbank, who oppose what the ECB are doing, are clearly right.

The forthcoming budget is based on the eurozone policies being right. Clearly, they are not. There are three flaws in eurozone policy:

nThe first is the absurdly short timeframe for adjustment.

nThe second is the failure to strike an appropriate balance between growth and reform.

nThe third is simply that eurozone policies are based on bad economics.

It’s not just that the policies willfully ignore the insights of Keynesianism, which was forged in conditions pretty similar to those now prevailing. It’s also that there is a willful denial of the need for symmetrical adjustment; ie the burden of adjustment must be reflected not just in the policies of the debtor countries but also those in chronic surplus.

Back in Ireland, in the run-up to the budget, there seems to be an unwillingness to acknowledge anything other than that upon which the troika insist. It is almost as if the mindset behind the troika are saying: “Okay, we know that our policies are not working in the eurozone and we know that in a country such as Ireland, which has enormous spare capacity they make no sense; we also know there is a widespread view (and the OECD have been saying this) that we should change the balance from austerity towards growth. We accept that there are significant ‘casualties’. But we believe that all this is a price worth paying to make sure that Ireland and others gets the message and that you know your place.”

The message is this is not just about repaying the bailout. It’s about control. Our (larger) ‘partners’ don’t trust Ireland’s ability to get its collective act together. They are saying: “We are not going to have you mess up us larger countries — especially our banking systems. You are a small marginal country. The big boys make the decision, the medium-sized ones who get the concession.”

The decision of the German court and the ECJ may prove to be more effective in restoring stability than all of the futile ‘power brokering’ and ‘summitry’ of the last three years. The markets will listen to the courts.

Watch the weekends — that’s when the decisions are made.

* Ray Kinsella is on the faculty of the UCD Michael Smurfit Business School.