November 19, 2010
Who Are The Real PIIGS?
The Guardian Unlimited, November 19, 2010
As another one of the so-called “PIIGS” countries is being led to the slaughterhouse, it is worth asking whether all the carnage advocated by the European authorities is really necessary. Ireland is in its third year of recession and income per person has already declined by more than 20 percent since 2007. Unemployment has more than tripled from 4.3 percent at the end of 2006 to 13.9 percent today.
The baseline projection from the International Monetary Fund (IMF) is that debt will stabilize at close to 100 percent of GDP by 2014, but even that depends on the volatile and sometimes contradictory sentiments of the “bond vigilantes” – who don’t always seem to know what they want. One day the bond markets are happy because the government is cutting the budget and laying off workers, the next day they re-learn their national income accounting and realize that this will shrink the economy and make the deficit and debt burden bigger relative to GDP.
Unfortunately the European authorities do know what they want: They want to squeeze Ireland, they want more fiscal tightening and they want to shrink the size of the government. And they want it now, even if it means that Ireland will sink further into recession.
So it is understandable that the Irish government would resist an agreement with these authorities – which include the European Commission, the European Central Bank (ECB) and the IMF. The European Financial Stability Facility was set up in May with the proviso that contractionary conditions would be attached to any “bailout.”
Is there an alternative? Yes — in fact there are many. It is perfectly feasible for the European authorities to help Ireland recover from its recession without subjecting the economy – and the people – to further punishment.
Ireland is a small economy of just 4.5 million people with a GDP of about 166 billion euros. With just a small fraction of the funds already set aside for this purpose the European authorities and IMF can loan Ireland any funds needed in the next year or two at very low interest rates. We are talking about some 80-90 billion euros over the next three years, out of a 750 billion euro fund.
Once these borrowing needs are guaranteed, Ireland would not have to worry about spikes in its borrowing costs like the one that provoked the current crisis, in which interest rates on their 10-year bonds shot up from six to nine percent in a matter of weeks. This creates self-fulfilling prophecies in which a debt burden becomes unsustainable because the “bond vigilantes” think it might be.
The European authorities could scrap their pro-cyclical conditions and instead allow for Ireland to undertake a temporary fiscal stimulus to get their economy growing again. That is the most feasible, practical alternative to continued recession.
Instead, the European authorities are trying what the IMF, in its July 2010 Article IV consultation with the Irish government, calls an “internal devaluation.” This is a process of shrinking the economy and creating so much unemployment that wages fall dramatically, and the Irish economy becomes more competitive internationally on the basis of lower unit labor costs. This would allow the economy to recover from the stimulus of external demand, i.e. by increasing its net exports.
Aside from huge social costs and economic waste involved in such a strategy, it’s tough to think of examples where it has actually worked. And it’s even less likely in this case when you look at Ireland’s major export markets: the Eurozone, UK, and U.S. – who don’t look like they will be sources of booming demand for Irish exports in the immediate future.
If you want to see how right-wing and 19th century-brutal the European authorities are being, just compare them to Ben Bernanke, the Republican chair of the U.S. Federal Reserve. He recently initiated a second round of “quantitative easing,” or creating money – another $600 billion dollars over the next six months. And today he made it clear that the purpose of such money creation was so that the Federal government could use it for another round of fiscal stimulus. The ECB could do something similar, if not for its rightist ideology and politics.
While Ireland may seem outgunned in any confrontation with the European authorities, it is far from powerless. The European authorities and their banker allies do not want to see Ireland default on its debt or exit from the Euro. This is true for all the “PIIGS” countries; although they all face different situations. But Ireland has already lost more – in terms of output and employment – that it might have lost in a restructuring/default and possibly even an exit from the Euro. The question is, how much more are they willing to sacrifice in order to satisfy the wishes of the European authorities?