Irish eyes are no longer smiling

I was outside Leinster House, the home of the Irish parliament, the Dail, along with a small group of demonstrators and all the TV cameras with their presenters queuing up ghoulishly to pick over the bones of the Irish economy.

Across the road, the troika of IMF, EU and ECB officials were ensconced in the most expensive hotel in Ireland (400 euros a night plus 30 euros for breakfast etc) preparing to go through the books of the Irish government, looking for any nasty black holes in the country’s now insolvent banks.

In Leinster House, the Irish government presented 160 pages of sheer horror for the Irish people in its four-year fiscal austerity plan, designed to put Irish capitalism back on its feet.  The taoiseach or prime minister Brian Cowen says no one would be sheltered or escape from the plan.  Of course, this is rubbish because the shibboleth of Irish capitalism’s success as a ‘Celtic Tiger’ over the last ten years has been to offer foreign multinationals a ridiculously low corporate tax rate of just 12.5% to attract them to Ireland.  At the same time, the rich will still pay very little in tax, as the capital gains tax of 20%, halved under the current government, is not being changed, while the ‘non-doms’ Irish rich who stay ‘offshore’ will continue to avoid paying Irish taxes.

And nothing is being done about cutting the ludicrously high salaries and pensions enjoyed by the politicians and heads of the banks, local government, schools and other private and public services.  The prime minister is the best paid in the OECD while local service heads are paid even more than they are in the UK.  You see, the ‘corporate ethos’ of the private sector must be applied to public services.  All these characters escape the axe.

Instead, it is the average family that will be screwed under the four-year plan.  The 45% of very low paid workers who pay no tax at present are to be brought into the tax net, while VAT will be hiked to 23%.

But even more horrific than these measures are the direct attacks on the living standards of the lowest income earners.  The minimum wage is to be slashed 12% to E7.65 an hour.  Billions are to be cut from welfare benefits; 27,500 public sector workers are to lose their jobs; the public pension scheme is to be reduced in value by 10% for new entrants; students are to pay fees for higher education.  And there will be no protection for the health service as supposedly there is in the UK: 10,000 health workers are to lose their jobs.  The austerity programme will take 11% of national income out of the pockets of the Irish people; that’s even more than in the UK’s recent budget cuts.

This draconian plan aims to get Ireland’s government budget deficit down from 12% of GDP to 3% by 2014 and to stabilise the gross public debt burden at something like 120% of GDP.  How did this huge debt burden come about?

It is the result of the public sector having to rescue the private sector after a great credit boom and bust, driven by a massive property price bubble, recklessly pursued by Ireland’s banks.  With the connivance of the politicians, the bankers and property developers went on a crazy binge.

Irish banks grew to an enormous size relative to the small Irish economy – some five times larger than annual national output!  And just like the Icelandic banks on another small island, they went on buying up assets with cheap money all around the world.  They borrowed more and invested more and more in crazy property schemes.  And of course, there was only ‘ light touch’ regulation employed on bank activities by the authorities.  The credit party never seemed to end, so the banks kept on dancing, taking the Celtic tiger with them.

The hard work and long hours of the bulk of Irish workforce had provided the income and profits for foreign companies attracted by cheap, but educated, young Irish workers and, above all, by corporate tax rates that were the lowest in Europe, bar Bulgaria.  But all this hard work was pissed away by the banks and property developers.  When the global crisis struck, Ireland’s commercial and residential property market collapsed, with prices falling 50-60%, way more than in the US or the UK.  Exports were decimated in the global downturn and the banks were left exposed to huge bad debts that they could not absorb.  They went bust.

The government had to step in.  What did it do?  It guaranteed the deposits of the banks’ customers.  Fair enough – that protected Irish family incomes being lost.  But it also guaranteed the banks’ bonds held by banks, insurance companies and hedge funds around the world.  In doing so, the taxpayer was now burdened with a huge new debt.   The government reluctantly realised that it would have to nationalise part or all of the banks in order to provide them with the capital to survive.  As a result, the public sector’s debt to GDP ratio rose from 28% in 2006 to 100% this year!  And the budget deficit rose from 1% in 2006 to 32% this year (including the cost of the bank bailout).

But the terrible property slump continued and foreign investors who own 85% of Ireland’s government debt were worried that the Irish banks were still not ‘clean’ and more money would be have to be found by the government.  The banks were unable to raise any funds themselves and increasingly relied on the ECB to give them emergency funds.    The cost of borrowing for the government  then rose to unsustainable levels and eventually the government has had to ask other European governments to bail them out.

Was all this really necessary?  Is there no alternative to the four-year austerity plan?  We are told daily in the papers that there is no other way out.  But that is because Ireland’s foreign creditors must be paid back in full, the banks’ bondholders must also get their euro of flesh (because they are just other European banks who would lose billions if the Irish government did not pay its banks’ debts).

So the cost of this disaster must be met by the taxpayer or in other words, Irish working class and middle-class households.  The people who did the damage escape, while those who have no blame must pay.   The aim of the government is to impose a huge devaluation of average living standards through the fiscal package, then as soon as possible privatize the banks by selling them off to some foreign banks with all creditors paid in full.  And then it’s business as usual.

But there is an alternative:  don’t pay the bondholders, default on the debts to the foreign banks and reach agreements on a ‘haircut’ or discount on the value of those bonds.  The bond investors take a risk when they buy a bond; they should take a hit if it goes sour.  After all, even the Germans are now considering imposing haircuts on future restructured sovereign debt. So such action by Ireland would not necessarily mean having to leave the euro.

Most important, the fiscal austerity package is likely to do more damage to the economy now that the bankers have finished with it.  Even capitalist commentators (including the IMF) are worried that the government plans could keep the economy from recovering sufficiently to meet the fiscal targets.  The forecast growth assumption is 2.75% a year for real GDP to 2014.  The cuts themselves could make that impossible.

The key to economic growth is more investment in industry and services.  Increased investment will allow employment to recover too.  But at a time when Irish private sector is unable or unwilling to invest, the four-year plan aims to reduce government investment by 40% in real terms!

Expanding public investment would be the way out of this crisis and instead of taking EU money to fund bank bondholders, Ireland could obtain loans for investment in the economy.  This could be done through the EIB , the pan-European investment bank (see http://yanisvaroufakis.eu/2010/11/19/how-would-our-modest-proposal-help-ireland/).

Also, now that the Irish people own their banks (at the cost of one-third of their annual income), they should keep them and not sell them back.  From here, the state banks should be used to provide lending for investment and growth.  The old speculation in property, stocks and bonds with crooked developers and bankers can be ended once and for all.  State-owned banking would then become a public service.  There would be public investment through state-owned banks with a plan for public works schemes instead of a bailout for banks and the rich.

The Irish coalition government is set to fall.  But it will not be replaced by one that aims for an alternative policy.  The opposition parties who will form a new coalition probably in early 2011 will continue with the austerity plan and try to implement it.  So the cost of the credit boom and bust and the ensuing Great Recession that turned the Celtic tiger into a sick cat will be paid for not by those who caused it but by those who were the victims of it.