Welfare and Social Issues

Ireland and the EU – a relationship transformed by austerity

Within a number of weeks of the Green Party entering the Irish government in June 2007, the Taoiseach (Prime Minister) and leader of the largest party in government, spoke to the press making a statement where he took on critics of his economics policy. In it he expressed amazement that such critics didn’t ‘kill themselves’ due to their negative opinion of the economy. Outside of being extremely insensitive and far from politically correct, his charge revealed a more deep seated anxiety that all was not what it should be with the Irish economy.

The general election that had taken place a few short weeks before had seen a near unanimity amongst Irish political parties that the Irish economy was secure and would continue to be so into the future. Only the Green Party, given our ability to be difficult, raised questions about the economy not being as secure as was being portrayed, that it was being inflated by several factors, and that GDP/GNP growth would diminish in strength in the immediate years.

The Irish electorate believed what most of the political parties had told them that the good times were here and were going to stay. A number of years previously the then Minister for Finance, Charlie McCreevy, later a European Commissioner, had told the Irish people that they should ‘party’. The Irish media was proving equally uncritical. An editorial in the national paper of record The Irish Times claimed that Ireland could teach Germany a thing or two about running an economy.

Ireland’s Fiscal Problems and how they have come about

The public’s attitude was being shaped by government largesse that was given out at each election year. The December 2006 budget, introduced by then Minister for Finance and later Taoiseach Brian Cowen, increased public expenditure by 14%. The coffers were overflowing. The State through the government had a vested interest in ensuring that property prices rose to unsustainable levels as new house prices included a substantial pay back to the State in the form of value added tax and stamp duties. An unsustainable tax system helped to underpin this illusion but the context under which it existed had less to do with the Irish government than was being admitted.

Membership of the Eurozone had introduced low interest rate levels which encouraged Irish financial institutions to increase lending substantially without the necessary safeguards. Such low interest lending created an impetus to the Irish economy that could never be sustained. Without the means to control interest rates the Irish economy was expected to mirror the needs and requirements of the larger economies within the monetary system, most particularly that of Germany.

On the eve of the financial crisis in 2008, Ireland was well within the criteria set out in the Maastricht Treaty. There was no budget deficit, State borrowing was less than half of the 60% of GDP allowed and decreasing. Inflation was in around the preferred upper limit but it wasn’t anywhere close to reaching double digit levels.

Some useful actions were taken by the government to use these reserves to plan for the future, but the actions were far too few and not strong enough to stave off the eventual reckoning. A National Pension Reserve Fund was established to create a means to pay future pensions, particularly public sector pensions.  At its height over €20 billion would exist in this fund.

Having put in place some correct even virtuous things, the government spent far too much of its unplanned for windfall in many inappropriate ways. From 2000 onwards the government informed by different wings of its membership, embarked on a contradictory programme of annual increases in public expenditure over and above the rate of inflation, matched by marked decreases in total tax take.

A Juggernaut travelling in two wrong directions

The ideological approach to tax was pushed by then junior partner in government, the Progressive Democrats, and they successfully reduced tax take from all taxes to 26% of GDP far below the European Union average. This was yet another factor that made the Irish economy so unprepared for when the economic storm clouds eventually broke.

The main party in government, Fianna Fáil, also saw it as their raison d’etre to spend public money. Keeping workers in the public sector happy was politically very important to it. Traditionally public sector workers, while having greater job security, had fallen behind comparable wages in the private sector. To counteract this the Irish government set up a process known as benchmarking. This entirely secretive process put in place new rates of pay for public sector workers without ever stating what private sector pay it was being measured against. In doing this it also established escalators which over a short period of time saw public sector pay pass out and begin to greatly exceed comparable private sector pay.

Membership of the Eurozone had introduced low interest rate levels which encouraged Irish financial institutions to increase lending substantially without the necessary safeguards. Such low interest lending created an impetus to the Irish economy that could never be sustained.

For many lower paid public sector workers in Ireland there was an additional incentive to increase income. Increases in the standard of living brought about through economic growth, however superficial, also the magnified the cost of living. Ireland became the most expensive country in Europe in which to live. Inflated property values fed inflated wage rates which brought about an inflation in spending that greatly reduced individual disposable income.

Richer in wealth – poorer in spirit

Add to this the mess that is the Irish banking system and we have a very potent mix. Although the extent to which light touch regulation of the banks has contributed to Ireland’s debt crisis, would be to ignore the extent to which banking is an ancillary problem and not the dominant problem when it comes to Irish debt.

Punishment or help?

The package entered into by the Irish government with the European Central Bank, the European Commission and the International Monetary Fund, was an €85 billion package. €17.5 billion of this would be from the Irish State’s own resources, the residue of the National Pension Reserve Fund. The €85 billion was to be divided €35 billion to restructure bank debt, sadly largely dead money brought about through private speculation, and €50 billion to allow Ireland to exit the international bond market and secure a funding at a lower rate from this facility. There is still no realisation among the Irish public that public expenditure is a bigger problem for the country than the banking crisis.

However that banking crisis has not solely been of Ireland’s making. The phenomenally low interest rates brought about through membership of the Euro saw Irish banks and financial institutions lend far in excess of their reserves. To meet the difference these banks and institutions began large scale borrowing from their European counterparts. These European institutions have also been guilty of recklessness in their lending practices by providing money that helped further fuel an economic fire that was already out of control.

Much of the anger that exists in Ireland is aimed at these European financial institutions where responsibility continues not to be acknowledged and sharing of the burden shows no sign of being put in place. Subsequent actions to control Ireland’s public expenditure have in part been about protecting the Euro currency and by implication the viability of many European financial institutions.

In government as the package with the ECB/IMF/European Commission was being negotiated, it was a source of great frustration to us that the approach being taken by the thought of Great Satan of the IMF seemed far more sympathetic to Ireland than that of the ECB/European Commission. The European institutions seemed more intent on a more punitive than collaborative approach.

Back to the future…again

Ireland as a country had been here before. In the late 1980s Irish national debt exceeded 130% of GNP, a ratio far higher than likely to be reached during this crisis. The then government embarked on an austerity programme affecting health and education spending in particular. Between 1987 and 1992 the country’s finances slowly began to return to a more healthy state. Of course other economic tools were still available to the then Irish government. Linkage to the European Exchange Rate Mechanism limited what could be done in terms of devaluation, but control over interest rates and money supply gave the government some additional leeway in dealing with the then crisis.

One major difference between the Irish debt crisis of the late 1980s and that which is being dealt with now, was the ratio that existed between public and private debt. In the late 1980s private debt, that owed by individuals, was a only a small proportion of the national debt. From the beginning of the 21st century this began to reverse so that now private debt is a multiple of the Irish national debt.

The culture of private debt in Ireland has changed significantly during that period informed partly by the property boom, and the need of many to acquire more property, especially property for speculative purposes. Add to this greater use of credit cards and accessing personal loans for cars and holidays, and we now have individuals and families in Ireland dealing with levels of personal debt that have never been seen or lived with before.

So far I have tried to explain how Ireland has come to where it has in this crisis. For the rest of this article I will try to explain how quick fix austerity policies cannot work in Ireland, and most probably cannot work in the rest of Europe either.

In the first instance the rapid increase in public sector wages and social welfare payments has created an expectation that cannot be easily taken away, much less understood. Large scale reductions would also affect spending by a significant number of consumers within the economy, spending already undermined by a cost of living that has reached for many unbearable heights. To bring these payments into line with European wages and rates would require a freeze in rates or increases over several years that are less than the rate of inflation.

Secondly encouraging across the board cuts can be counter-productive. Identifying waste and rolling back areas of over-expenditure is obvious. Stopping expenditure in areas that were meant bring about future positive activity creates unnecessary financial black holes. While in government the Irish Green Party put up a strong defence to protect education spending believing that education was economically as well as socially important.

Greens in Ireland would have concerns that money invested in renewable technologies, which had seem a marked increase during the period the Green Party had been in government, would now become less. This investment was beginning to offset the dangerous dependence that the country has had on fossil fuel imports, which have been 90% of energy requirements being imported.

My third point would be that building confidence is more important than subventions of money to an economy. One of the better effects of the Celtic Tiger economy was creation of a sense of confidence in the Irish economy for the first time since the foundation of the State. However superficial the economic indicators that underpinned the Celtic Tiger, for the first time Irish people were prepared to believe we could cast off our post-colonial economic baggage and compete in the global economy.

An indication of how far Ireland had come in this regard could be seen by progress achieved since the country had entered the then European Economic Community in 1973. At the time of the country’s accession Irish GDP per capita was 70% of the EEC average. By 2005 this had improved to the extent that Irish per capita GDP was well above the EU average and second only to Luxembourg.

This confidence has also been an important factor in attracting foreign direct investment into Ireland. It would be wrong to think that this has been largely caused by Ireland’s low corporation tax rate. There are other, probably greater reasons, why US based multi-nationals have chosen Ireland as their European base. Undoubtedly having a base and being able to trade in the European Union is the best reason many of these companies have chosen to locate in Ireland. As an English speaking country with a well-educated workforce, there are other strong factors that have led to Ireland’s success in attracting this investment.

The unified 12.5% corporation rate was introduced in Ireland in 2007. The reason for a unified rate was because of an agreement reached by the European Council of Ministers that each EU member country should only have a unified corporation tax rate. Prior to this Ireland had had a 10% corporation tax for exporting companies (which mainly benefitted multi-nationals) and a 25% rate for all other companies. Among the companies that had their corporation tax rates dramatically reduced by this decision, were banks and financial institutions. It was a European Union decision that brought about this decision.

My fourth point would be that the road to recovery for the Irish economy has to be export led. This depends on maintaining and attracting new foreign direct investment, through which most Irish exports are produced. Of course global investment is mobile but in the short term it is vitally important that Ireland maintains incentives in this area. There is a longer term policy at play here. Multi-national investment creates much secondary economic activity in the Irish economy, they also create an opening for parallel development for indigenous companies to grow in these areas. For these reasons successive Irish governments have been very protective of the country’s corporation tax rate policy.

In government the Green Party’s contribution to a policy to deliver on this potential was to strongly influence the Delivering the Smart Economy document. This argued that targeted economic growth would follow strategic investment in key areas such as renewable technologies, information technology, food production and tourism.

This leads to my fifth point following austerity for austerity’s sake become a self-fulfilling prophecy. Citizens need to believe that change has positive consequences. The collective Irish psyche up until the Celtic Tiger period has been predisposed to negative thinking. We are sadly seeing signs of this attitude beginning the re-emerge especially with the unwelcome return of emigration that is seeing many thousands of young Irish people leave the country – a veritable brain drain.

Inward thinking has led to feeling of isolation which leads me to my sixth point. Some of Ireland’s debt particularly its banking debt is also Europe’s responsibility. There has been increasing frustration in Ireland, that while the Greece crisis has been given a European dimension, Ireland has been commended for doing the right things, but there have been few signs that a collegiate response is being taken by the ECB and the European Commission in relation to Ireland.

However superficial the economic indicators that underpinned the Celtic Tiger, for the first time Irish people were prepared to believe we could cast off our post-colonial economic baggage and compete in the global economy.

Acceptance by the Irish government of the ECB/IMF/European Commission package in November 2010 was also accompanied by an unspoken feeling, at least on the Irish part, that repayment could not be met over the course of the facility without a restructuring of the debt. The basis of this thinking is that while debt that had been acquired through the mismanagement of Irish public spending would and must remain an Irish responsibility; the banking debt has resulted from European banks who lent recklessly to their Irish counterparts. In repaying this debt the Irish State is ultimately protecting those European Banks and as a result helping to secure the future of the Euro as a currency. The Irish banking debt must be restructured to reflect this. To do otherwise is to expect the Irish economy to continue to swim in still choppy waters with a ball and chain attached to the ankle.

My final point is that these are problems that can be all solved through time. It took ten years for Ireland to overcome the debt crisis of the 1980s. This was followed by fifteen years of the greatest period of prosperity that the country has experienced. It is unfair to expect a similar level of recovery over half that period of time.

With difficulties with Greece continuing, Ireland has been portrayed as the country that has observed its penance best, as the country that has coped better with austerity measures that can bring about an early and strong recovery. Like many elements of the Celtic Tiger economy this does not tell a true picture.

Green Lessons in Government?

The scale of the problems that remain are such that they cannot be dealt with by Ireland on its own. The Irish public is feeling isolated in having to cope with these policies. Far from feeling part of a European solution to these difficulties there is a growing, dangerous, drift from a common European identity – a feeling that Europe through the European Union is leaving the country to deal solely with these problems.

The upcoming referenda on whether Ireland should participate in the Fiscal Compact will encapsulate this debate. The degree of public consultation that is constitutionally necessary in Ireland may make others in Europe uncomfortable but what is probably truer is that the lack of such consultation in other EU countries has helped to increase the distance between the European Union and its citizens.

The result of the Irish referendum will be close, and it cannot and should not be taken for granted. What the vote will reveal is that the relationship of the EU with the Irish public has been considerably damaged and will take a lot of effort to repair.

There is a denial still in accepting responsibility in Ireland. The political system has not and is still not being honest with the Irish people. However within the European Union there seems to be a parallel denial that the economic difficulties of Ireland cannot compromise other economies but more worryingly dealing proactively with the Irish debt crisis, runs secondary to the political calendars of those countries that have identified themselves as more important to the European Union project.

The on-going problems of the Irish economy are more than a little local difficulty of a small country on the periphery of Europe. How this crisis is dealt with will have huge ramifications for the future of the Euro currency, and even for the future of the European Union itself. The approach currently being followed will make that doomsday situation more likely. There is still time and opportunity to take a different approach. The future of Europe may depend on that.

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