Dublin, 19/01/2011
Thanks for the invitation to come back a second time to the IIEA.
Last time, we were talking about referendums and treaties and the reasons for Ireland to vote yes to a European future.
As someone who believes strongly in a European future, I am only grateful that Ireland does not have to have a referendum on Europe now, in relation to the current crisis.
In fact, Ireland has had a great deal of support from the EU especially the liquidity funding from the ECB, but it is also taking heavy punishment from the EU and IMF.
There are some in Brussels and some other European capitals who say you deserve it given the folly of the Irish Government in guaranteeing its banks in the way it did, despite the fact that some of them were incontinent, and one of them was worse than that, possibly criminal. “Ship of Fools” by Fintan O’ Toole has a large and avid leadership in the European Commission.
Of course, it is not just Ireland in crisis. Everyone in the EU is affected even if the extent varies. The crisis has had 2 phases so far. First was the banking crisis and the collapse of Lehman Brothers. That exposed the murky world of derivatives, tax havens, dedicated to what Warren Buffet termed “alchemy” – a world that was unstable and as Lord Adair Turner has said “socially useless”.
Of course, it is not just Ireland in crisis. Everyone in the EU is affected even if the extent varies. The crisis has had 2 phases so far. First was the banking crisis and the collapse of Lehman Brothers. That exposed the murky world of derivatives, tax havens, dedicated to what Warren Buffet termed “alchemy” – a world that was unstable and as Lord Adair Turner has said “socially useless”.
What America, British and Irish Governments had regarded as strengths in the growth of a very rich financial services industry became a weapon of mass destruction inflicting huge losses on nations. It sent Ireland into austerity two or more years ago and this year, other countries will follow the same path.
Why only now will others follow this same austerity path? After all, all countries stood behind their banks; they took the bad debts of the banks onto the public balance sheet; and additionally many countries took counter cyclical action in the classic Keynesian way during 2008/2009. The car scrappage schemes, the subsidised short-term working schemes, cuts in VAT, maintaining public spending despite precipitate falls in tax revenues, devaluation of the currency if you were not in the euro – these are the stimuli packages, some of which are now ending.
Why are they ending? Because the bank crisis became a sovereign debt crisis following the admission by the new Greek Government that its predecessor had been cheating the rules of the euro, aided and abetted, incidentally, by Goldman Sachs and Deutsche Bank.
From that moment on, market attention like a laser beam started to focus on the strengths and weaknesses of every EU economy. Ireland, whose austerity programme had been hailed as a model for others by the European Commission, was next in line after Greece. The original model plan was not enough – more austerity was required. That was not enough and Ireland had to go to the ESFS which required yet more austerity.
Even the Economist said this week “at some point it will become politically impossible to demand more austerity”.
But that is what is being envisaged in the new rules on economic governance which were agreed at the EU Summit in December; and put together in the new European Semester by the Commission last week. The various phases of its introduction announced by the Commission show that it will be no laughing matter, despite the odd title.
Incidentally the “European semester” and its terminology were invented to get round a contradiction, namely the need to respect the power of national parliaments (which vote through member states' budgets) while ensuring that national budgets respect the eurozone’s Stability Pact. How can parliamentary autonomy be reconciled with making sure each budget meets European commitments? This is why this preparatory six-month period was invented during which eurozone
countries and the other member states (which will use a different procedure) will discuss at EU level the budget decisions of each for the year to come ahead of the actual decisions being taken by the national parliament. The Commission is organising the technicalities and various stages of this preparatory period, and has just published the details.
It won't be easy to coordinate the budget policies of countries whose economic situations vary so widely. Most will have to cut their deficits without being able to use adjustments in monetary policy. By the way, contrary to the view of some British eurosceptics, it has been amply demonstrated that the deceptively simple phrase “leave the euro” is simply not feasible because debt still has to be paid back in euros but presumably without aid from EU sources. Also looming on the horizon is that in the spring of this year, the banks will be sitting tougher stress tests and this might result in them having to restructure or increase their levels of capital.
And the processes of economic governance motor on. In January, the Commission will unveil the EU's economic priorities. This will be assessed in March and decisions taken by the European Council, followed by each member state explaining how it will be introducing the EU guidelines in its own Stability and Convergence Programme. In June and July, the national programmes will be discussed in common, endorsed and sent to the national parliaments.
Ireland already knows about EU economic governance. Others are about to find out.
In the Irish case, we can see that there are major challenges to the social partners. But what we can’t accept is detailed intervention in the labour market by the EU/IMF team.
I complained last week about EU officials operating in Ireland like they were the Governor General or Grand Vizier of a quasi colonial administration. This has provoked strong objections from, among others, the Commission and Business Europe and I will meet Commissioner Rehn shortly. Particular exception was taken to my remarks about inflicting rules on the country which are more in the spirit of the Versailles Treaty which crippled Germany after the First World War than the Marshall Plan which so benefitted Western Europe after the Second World War. One was punitive, the other generous.
So far the EU has not set the balance right and the ETUC cannot support the current proposals in economic governance. They are unbalanced towards austerity and punishment with not enough emphasis on growth. Thus there is no mention of financial transaction taxes, or no commitment on Eurobonds which could prompt growth.
What does all this mean for Europe? Obviously there is a need for decisive action to protect the euro, not least to confound all those British eurosceptics who are celebrating that Britain is not in the eurozone, in fact, bizarrely, celebrating a 20% devaluation of sterling against the euro, in effect celebrating that the UK is 20% poorer. But it is a fact that this devaluation has not caused people to feel that much poorer. For Ireland, the effects of austerity are of the same order but the method is more painful than devaluation - although if the upward trend in inflation is maintained, the British position will not be so painless as some of my compatriots think that it will be.
For the ETUC, we are committed to campaign against austerity and for jobs and growth; for economic governance that is growth orientated, not creating a Dickensian Dotherboys Hall environment; for social partnership that can do the necessary heavy lifting when a country is in trouble, and for measures under which everyone contributes a fair share to national recovery, the rich as well as those on minimum wages and benefits.
For the ETUC, we are committed to campaign against austerity and for jobs and growth; for economic governance that is growth orientated, not creating a Dickensian Dotherboys Hall environment; for social partnership that can do the necessary heavy lifting when a country is in trouble, and for measures under which everyone contributes a fair share to national recovery, the rich as well as those on minimum wages and benefits.
I look forward to the Irish rich who benefitted so much in the boom paying their fair share in this period. Or will they threaten like the London bankers and hedge funds that they will emigrate if they have to take normal pay deals and pay normal tax rates.
The United States often produces glimpses of what our future might be. I was struck by an article in the New York Times last week which concluded that there is no possibility of any increases in taxation on the American rich. A combination of powerful lobbying, Fox-type media, and politicians dependent on the rich for campaign funding means that they are untouchable by democracy. The author went on to say this is government for the rich by the rich, in effect a plutocracy.
It rings true to me about aspects of life in the UK and Ireland and as well as more generally in the USA, but if plutocracy replaces democracy, what does this mean for the rest of us.
Now which way is it to that General Post Office! That’s a joke by the way!