Category: Sunday Times
Your correspondent, Justine McCarthy, in your edition of 17 August, gives a classic example of why it is so difficult to find serious discussion of real choices in the Irish media. Instead of dealing with the points I made she just wants me “remove the silver spoon and button my lip”.
Because of what she considers to be my personal financial circumstances, apparently I should not express any views at all about current economic choices facing Europe and the rest of the world.
I served as an elected representative for 35 years, much of that at a time when the country was poorer than it is today, so I fully understand the difficult circumstances many families face. I also care about this country.
If we want to preserve our welfare state, we must face facts.
In the long run, the numbers do not stack up, unless we change things.
Arithmetic is not “right wing”. Burying one’s head in the sand is not ”progressive”.
By facing facts now, one can mitigate hardship, and generate confidence. By maintaining the “tactful silence” that your correspondent favours we do no service to anyone.
When I spoke in New York in 2013, I had in my mind the European Commission Report entitled “2012 Ageing Report…Economic and Budgetary projections for EU 27 (2012-2060)”.
It had been requested by the EU Summit of March 2011.
It covered the sustainability of pension, healthcare, long term care, education and unemployment transfer policies in the 27 EU countries up to 2060, based on current trends and unchanged policies.
It pointed out that the proportion of the population over 65 would rise from 17% to 30% by 2060. Life expectancy would increase from 76 years to 84. But the working age population in the EU would peak in 2022, and decline thereafter.
In other words, fewer workers would be paying in to support health, long term care, and pension systems for an ever larger number, of increasingly elderly, retirees.
That growing gap could be bridged either by extra taxation, by reduced services, or by extra borrowing. Borrowing would be the best course. But the more one loads up with debt now, the less one will be able to borrow later on, when this ageing gap will have to be bridged.
That is why EU leaders focussed on this problem at their 2011 Summit. It is also why Keynesian stimulus is difficult when society is ageing.
If EU states acknowledge the existence of these looming long term problems in good time, they can adjust policies gradually. This is the best way to mitigate hardship would certainly come about if the problem is ignored, and then the financial markets suddenly wake up, as they often do, and do not want to lend . This is partly is behind the need for prudent finance now.
“Austerity” has become an all purpose term of abuse. Those who use it, should first define it.
I define austerity as spending less than one is earning. At the moment the reverse is still the case.
The government plans to spend more than it will take in next year, to run a (small) deficit. But, under the Fiscal Compact Treaty, negotiated by the Government and approved in a referendum, we are committed to running a surplus from 2018 on, until we halve Government debt as a percentage of our national income. This may well take 10 years, depending on the rate of economic growth.
When I referred to this Treaty based requirement to run surpluses, it seemed to shock some in the media, and even in the Dail, who seemed to be unaware of the contents of the Treaty approved by the Irish people.
An ageing population, such as we have in most developed countries, means that there is an inbuilt tendency for government spending to rise, even without a policy decision. With no policy change since 2008, by 2013 the number of people of pensionable age increased by 13.5%, and people of that age use more health services.
The same problem arises in the United States.
Things have been difficult for many people since 2008. But life will be much harsher in the future, if we refuse to publicly about long term problems like these, because we are afraid, that when we do, we will attract the sort of personalised criticism that your correspondent and others have directed at me.
On the question of banks and bankers, if we do not diagnose our problems properly, we will simply repeat the mistakes again.
I do not believe in over simplifying issues, or in exclusively scapegoating individuals, or a class of people, for the economic downturn.
Irish bankers are indeed to blame for bad lending decisions, and some for worse things than that. But that is not the whole story.
The foreign banks, who lent recklessly, through the Irish banks, into the Irish property bubble share responsibility too. They have not been called to account. So too do the bodies supervising all those banks, here and abroad, including the ECB, who failed to devise policies to detect and prevent bubbles.
Central Banks, like the Fed, who increased global money supply unnecessarily to finance the US trade deficit share blame as well. So does the then Irish Government, which increased spending levels permanently, on the strength of revenues from construction that they knew were temporary.
Only about a third of the increase in our debt since 2008 is due to bailing out banks, and two thirds of it is due to having maintained spending levels, despite the fact that tax revenue had fallen.
The remarkable thing about the article last week, and others like it, is that the author takes no stand on any issue. She prefers just to sneer, and leave it at that.
For the record, much of the criticism is directed at comments I made for which I was not seeking any particular publicity at all, without a script being issued to the media to get coverage. In New York , I was speaking at a purely private event, and had no notice that my remarks were to be recorded or disseminated.
But I am happy to take responsibility for what I said.
One of the reasons Ireland, notwithstanding its budget deficit, will soon be able to borrow at bearable interest rates in commercial markets, is that it has met all the deficit reduction targets it had agreed with the EU/ECB/IMF troika.
All parties who have held office in Government since the programme was agreed deserve great credit for that.
Against that background, one or two statements, buried in the middle of a long article entitled
“No Margin for Error”,
in the “Sunday Times” on 10th November, on Ireland’s exit from the troika’s loan programme, ought to be discussed more widely.
On the question of whether fiscal discipline would be maintained, after the troika were no longer visiting every three months, the Sunday Times claimed
“One senior Labour source said he expected the government to immediately ease back on austerity once the troika left town”.
The “Sunday Times” went on
“” There are all those new EU oversight rules, but there is already a general sense that they will not be taken too seriously” said the Labour source.”
”The government will be taking the foot off the pedal as soon as we are out of the bailout. I think there will be tax cuts, maybe even a reversal of some of the unpopular budget cuts“, the source continued, according to the Sunday Times.
This senior source seems to assume that the reason Ireland had to impose austerity was because of instructions by the troika.
He or she also seems to think that commercial lenders, on whom the country will be relying future, will be much less worried about whether the government is meeting its budgetary targets, than the Troika would have been.
My understanding is that austerity came about, not because of instructions from anybody, but because Ireland was unable to borrow in commercial markets because the gap between its spending and its revenue was just too big in 2010.
That was not “imposed” by the troika, but by an Irish government’s own earlier spending decisions, decisions that could no longer be financed by commercial borrowing.
To meet day to day outgoings, there had to be seen to be a plan to close that gap between spending and revenue , troika or no troika, if the state were to continue borrowing for those outgoings……from ANYBODY.
Given that commercial lenders, or purchasers of future Irish government bonds, will want their money back with interest, just as much as the troika will, is hard to see them taking a more relaxed view of budget targets than the IMF would in similar circumstances, especially as commercial loans/bonds will be subordinate to the existing IMF loans.
I am also surprised to hear that a senior source believes that the new EU rules will not be taken “ too seriously”. I had not come across that view before, until I read it in the “Sunday Times”!
These rules have only recently been approved, after long debate, by the European Parliament and apply to all euro area states. My sense is that they were necessary to persuade EU states, with good credit ratings, to lend money or provide back stops to EU states with poorer credit ratings.
These rules are also based on EU Treaties, which the Irish people themselves approved in referenda ….. the Maastricht Treaty, and the Fiscal Compact Treaty.
The Fiscal Compact Treaty explicitly commits Irish governments to continued reduction in deficits, until we achieve a structurally balanced budget. We are not there yet.
The Maastricht Treaty commits the state to a deficit of no more than 3% of GDP, and a debt/GDP ratio of 60%. Ireland exceeds both numbers substantially, indeed by more than almost any other EU state does at the moment.
As long as it has to pay any interest rate, a government, which borrows money, will find itself repaying MORE than it has borrowed.
Repaying loans will require a future government to set aside money that it will have to raise from taxpayers, refuse to spend it on services , and instead pay it to government bondholders.
That might not be a problem if the economy is growing rapidly, but who can guarantee that, ten years ahead?
I doubt if the anonymous “source” can give any such a guarantee!
A lot of superficial commentary appears in the Irish Sunday papers.
But there are two columnists I always try to read, because they usually have something to say that you will not read elsewhere.
My favourite is Colm McCarthy, who writes in the Sunday Independent .
The other is Damien Kiberd, who writes in the Sunday Times(Ireland edition)
This week, Colm McCarthy’s article is entitled
“Now we are asked to trust the guys who screwed up EMU originally.”
Damien Kiberd’s is on a similar theme, and his article is entitled
“Austerity leaves us in No Man’s Land”.
Colm McCarthy claims that the EU single currency has been
“an unmitigated disaster”.
He refers to the recent admission by the German Finance Minister, Wolfgang Schauble, that the euro project was
” riddled with design flaws”.
Colm claims the “design flaws” were put in place because powerful lobbies in the French and German banking industry lobbied against effective banking union.
He calls for a public enquiry into how these design flaws came about, because, he argues, the EU public will be unwilling to vote for greater EU powers, unless they can first see that the reasons for the original mistakes have been honestly explored. I believe he is right in this.
He also says that
“During 2010, the Irish Government was bullied and harassed by the ECB, acting beyond its powers, into bankrupting itself through paying off foreign investors in bust banks”
This is a reference to the Irish state being required to pay back , in full, the senior unguaranteed bondholders of banks ,like Anglo Irish Bank, that were already bust.
Again he is right, and I agree with him, but he overstates his case a bit.
It was indeed senseless for EU institutions to have insisted on private investors, in a private bank, who made a mistake, getting 100% of their money back from the Irish taxpayer, when bondholders of the Greek sovereign state were subsequently required to take a large haircut.
Surely those who lend to Governments should have got preference over those who lent money, for a good potential rate of return, to private banks!
On the other hand, financial confidence was much more fragile in 2010 than it was in 2012. Perhaps the ECB was afraid of a knock on effect if unguaranteed bondholders were not paid back in 2010. But if the burden of the ECB’s caution has fallen on the shoulders of the Irish taxpayers alone, that burden should be relieved now that the panic is over.
But I think Colm overstates his case in suggesting that this has “bankrupted” the Irish state.
Ireland’s financial difficulties derive, to a much greater extent from the gap, which still exists to this day, between tax revenue and daily spending on things that have nothing to do with money put into banks, or even interest paid on past debts.
THE IRISH STATE STILL HAS A PRIMARY DEFICIT… THAT IS IT IS SPENDING MORE, EVERY DAY, THAN IT IS TAKING IN, EVEN IF IT HAD NO INTEREST TO PAY ON PAT DEBTS, AND HAD NOT PUT A SINGLE CENT INTO RECAPITALISING A BANK!
This awkward fact is not much mentioned by Irish economic commentators. I do not know why. It is only fair to add that, while this primary deficit still exists, it has been dramatically cut since 2009 by the budgets since then, and will probably disappear altogether in 2014, if all goes according to plan
In his article, Damien Kiberd attacks what he calls “austerity economics”.
He says these austerity policies have been
“dictated by EU leaders who are totally unaccountable –just like the elites that caused the First World War”
He complains that Irish banks were ”forced” to dump non performing loans which resulted in these loan losses being “crystallised within a very short time and at a very high cost”.
Damien’s thinking is a bit loose, to put it mildly. The elite, who” caused” the First War, WERE held accountable, actually. Several lost their thrones. The British Liberal Party never recovered. The Italian Liberals never saw power again.
Did he really think the Irish banks could have continued carrying those big losses on their books, without recognising or quantifying them, and carried on lending as before? Of course, they could not have done so without a risk of a run on their deposits.
As far as “austerity” being “dictated by the ECB and EU leaders”, as Damien claims, the question he avoids is a simple one…..If the EU, the ECB, and the IMF did not lend Ireland money in 2010, to bridge the gap between day to day spending and day to day revenue, where else was the money going to come from? Who else was going to lend the money?
And if the answer is no one, that would that have meant more, and faster, austerity, to achieve an immediate and complete bridging of the entire gap between revenue and spending in ONE year, or even one month.
It would be more accurate to say that what the EU, the ECB and the IMF “dictated” to Ireland was that it bridge the gap between its own spending and its own revenue more SLOWLY than it would otherwise have done, by lending Ireland the bridging finance.
If Damien is saying Ireland should have refused the EU/ECB/IMF money, then he is saying we should have had a huge dose of austerity in 2010, and risked a crash in our entire social system.
Some argue that, while austerity is inevitable for Ireland, Germany, Sweden and the Netherlands should run bigger deficits. Maybe.
But how easy is for them to do that if they are also having to put money aside, to lend to countries that may get into difficulty, and to provide funds for all their own baby boomers who are on the brink of retirement?
German incomes grew at about one fifth the pace Irish incomes grew in the 1994 to 2005 period.
That is the reality German politicians have to face, and Irish economic commentators should address themselves to German voters, because those are the people who now have to be convinced.