Running on empty
IN Greece, write-offs by the ECB, as well as other official creditors, look to be inevitable.
Even then, insistence by the troika on yet further budgetary cuts as the price of some €30bn additional funding may precipitate a political crisis.
The Greek government has looked for more time — which Germany seems unwilling to give. Even if they did agree to another two years, under existing conditionality, this would simply compound the already insurmountable debt problems being borne by Greece.
The long, drawn-out struggle is now doing much more damage to the Greek people and to the eurozone than would a calm and managed exit. There has been much rhetoric and many behind the scene meetings in recent times.
But it is certain that the contingency arrangements are already in place and that the communiqués are written. History teaches that, in the face of implacable pressures, there are alternatives that may be “less bad”.
Germany and the eurozone authorities are thinking primarily of their own interests — not those of Greece — in prolonging the quite impossible position of “supporting” Greece, while simultaneously imposing impossible conditionality.
Portugal is being impelled in the same direction, as the unprecedented political reaction to its recent budget indicates.
Spain’s request for a sovereign bailout is inevitable. Even with the ESF now in place, the gathering forecasts of further contraction in the Spanish economy and recession across the eurozone, reinforced by instability and uncertainty in Greece and Portugal, imply that a Spanish bailout is “too big to be accommodated”.
The deal on bank debt provided only (another) temporary fillip to the markets.
The Greek bailout — the need for which, remember, was denied as recently as three years ago — is at the extreme end of the spectrum. But the essentials are the same in the other bailout countries: over-rapid structural adjustment, too little emphasis on growth and too much of the burden of adjustment falling on the labour market — and every “initiative”, at every step along the way, reinforcing the dominance of the German orthodoxy of centralised control and austerity. This same orthodoxy is now gambling with the stability of Europe.
In Ireland, the post-bailout relationship with the troika is one of overt pressure and short-termism and dishonoured promises. There has been no reasoned argument why the fiscal policies and the targets embedded in the 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 (well over 2%) out of an economy now running on empty will deflate domestic demand even further. Healthcare and education cuts will have the most damaging impact — the EC’s own research, as well as recent US analysis, confirms this.
The cul-de-sac down which we are being impelled is a long one: Despite the 8% point fiscal consolidation over the last three budgets, troika projections envisage a further 5% contraction 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, a position in which Ireland will be even more firmly entrenched, have a more than proportionate negative effect on growth.
So, where exactly is this adjustment going to fall? Where will the growth come from to accommodate this continued fall in capacity?
It would be delusional to believe that, for all the fine words about “protecting the vulnerable”, the fiscal deficit can contract by another 5 percentage points in three years. The most vulnerable are the unemployed.
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 current eurozone discussions on debt restructuring — in fact, the larger countries are simply compensating Ireland for paying the credit insurance. This is driving 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 current strong export performance by the multinationals is threatened by a second global slowdown.
Gains in competitiveness are being offset by the burden of debt servicing stretching out towards 2020. A significant portion of these outflows is attributable to bad credit policies of Germany and French banks.
What can Ireland do, if anything, to mitigate the intensification of recessionary pressures exacerbated by the Budget? Not a lot now — the tide is now running too swiftly and the eurozone authorities are fast running out of time and options.
Two points are important:
1) The restructuring of Ireland’s debt, including legacy debt, is long overdue. In the run up to the Spanish banking crisis, Spain locked the conference door and said “no one leaves until we get a deal for rescuing our banks”. They got a deal — one which went against the grain of the ESM arrangements then in place.
Ireland is also set to benefit on the coat-tails of Spain — but a deal has not yet been agreed and honoured. When Minister for Finance Michael Noonan said recently that even a commitment to a deal would ease Ireland’s budgetary arithmetic, it was a more generous statement than his major partners deserved.
The messing with the heads of smaller countries — the reality that a word or two by German chancellor Angela Merkel can confirm or undo prospects of agreement — is the new realpolitik of macroeconomic stabilisation in the eurozone.
2) The corporation tax issue has not gone away either. In 2011, the French government attempted to blackmail Ireland into trading off assistance for flexibility on our corporation tax rate.
The Government, to its credit, set its face against such a deal. There is a seductive argument that changing the corporation tax rate by a percentage point or two would bring in revenue and would not affect foreign direct investment (much). It is, almost certainly, one of the unpublished options.
Ireland’s corporation 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 the corporation 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 economic stabilisation and political stability.
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