The Irish crisis is now, temporarily at least, over, but the blame game is already underway. And for most commentators in the UK and in the USA, the prime suspect is the Euro. If only Ireland, like clever old UK, had stayed out the Euro, everything would be rosy in the Emerald Isle.
Now this is a bit rich coming from two countries that have not exactly covered themselves with glory as regards banking collapse. As I see it four countries have been at the forefront of the banking and financial meltdown. Iceland, Ireland, the UK and the USA. Now only one of these countries is in the Eurozone, so what caused the failures in the other countries? The only thing they all have in common was/is an almost mystical over reliance on a neo-liberal approach to economics and finance, in particular the virtues of de-regulation bordering on no regulation. Not to mention a too cosy relationship between politicians and the captains of high finance.
If the Euro by itself were to blame then we would expect similar banking and financial crisis in all or at least most of the Eurozone countries. Which has not happened. Sure there are problems for some Eurozone countries, but no one has explained how it is the Euro what has done it.
Now of course our anti Euro and anti EU friends in the UK are not content with blaming the Euro for Ireland’s current woes, they also claim that the Euro is preventing Ireland from getting out of the mess. Their solution is for Ireland to leave the Euro, devalue and hey presto, once again all will be rosy. Just as it is here in the UK? Talk about misjudgements.
This idea that devaluation is the panacea for all countries with economic woes is pretty stupid. This is not to say that devaluation has not and cannot help some countries. Devaluation has worked in the past and no doubt will prove useful in the future. However there are four important caveats about all this.
In the first place devaluation can only really work if it is just one or two countries which devalue. If everybody or lots of countries all devalue at the same time, then nobody benefits at all. Secondly the success of devaluation depends on rising demand somewhere else, preferably from your major trading partners. The UK has devalued, but ironically its success depends on a strong recovery in the Eurozone. A weak Euro negates much of the benefits expected from the UK’s devaluation. While a collapse of the Eurozone and the return of national currencies would probably lead to the collapse of the UK economy as well. This is why the UK government and even some of the right wing anti Euro press are keen to help Ireland.
A third point to make is that devaluation does not in itself solve anything. To the extent that it works, it offers temporary respite for an economy. But unless the underlying causes of the economic woes are dealt with then the country faces a bleak future of successive devaluations in a vain attempt to become competitive. My view is that the measures needed to be taken for a country to become more competitive should be taken anyway, with or without devaluation.
The fourth caveat to devaluation as a policy tool, is that it does bring with it some serious downsides. While exports should be cheaper, imports will become much more expensive. Think of the recent rises here in fuel and heating prices. Not to mention all the other rising prices, many of which are a direct result of the devaluation of the pound. To the extent that devaluation works, it does so through a reduction in spending power of individuals and households, thus leading to a reduction in living standards for most of the population.
This is what is happening in the UK just now. Wage freezes, tax rises and rising prices. Not that much different to what is going on in Ireland just now. Though there the fall in spending power is more obvious as it comes through cuts in wages. The cuts in Ireland are more severe than in the UK, but this is all due to the continuing rise in the national debt. Which in turn is pretty much all due to the need to bail out the banks.
Which of course should lead to the most interesting question of all - why should the Irish taxpayer bail out private banks?
Let us not pretend that this is just to protect Irish banks. As I have mentioned before, other countries have significant exposure to Ireland. The UK alone has around €150 million at risk, while Germany has nearly €140 millions. Other countries have lesser, but still significant amounts at risk if the Irish economy were to collapse. Hence the need to keep Ireland afloat. Offer the Irish government a massive loan and persuade/bully the Irish taxpayer into cutting his/her living standards in order to pay it back.
This is pretty much theft and blackmail of the worst kind. And all to protect the UK and European banks and financial companies from losses. Unfortunately, at least for the banks, but perhaps fortunately for the Irish taxpayer, this little scheme will not work. With all the austerity measures now in place there is simply no way the Irish economy can generate the taxes needed to enable the government to repay these loans. At some point the Irish will say enough is enough and refuse to go on with this charade.
The real problem facing Ireland is not a liquidity crisis but a solvency crisis. The country is essentially bankrupt. And all because of the colossal mismanagement and reckless incompetence of its private banks. Private debts which an even more incompetent government has now turned into national debts. For without the need to bail out the banks the Irish economy would already be well on the way to recovery. This year the economy had begun to grow again and exports had started to pick up. But the further austerity measures just announced will only make matters worse.
What Ireland needs to do is get rid of the banks’ debt. In a private sector market economy the way to do this is through bankruptcy. Some, at least, of the Irish banks should have been allowed or if necessary forced into bankruptcy. This would have course placed some of the losses back onto the shareholders of UK and other European banks. But, hey, this is what market risk is supposed to be about. Why should the taxpayer pay all the bills while the shareholders get all the profits?
A quick look at Iceland, one of the other small countries to be badly affected by the financial crisis, shows the benefits of this approach. Both countries have recorded similar performances but with less unemployment in Iceland. And one of the key reasons for this? According to the IMF’s latest report on Iceland - “private sector bankruptcies have led to a marked decline in external debt.” The report also goes on to praise “the focus on preserving Iceland’s valued Nordic social welfare model.”
There would seem to be some interesting lessons for the Irish to ponder over Iceland’s recent experiences. Most importantly, if Ireland wants to avoid the risk of the whole country having to declare itself bankrupt, then it needs to revoke its blanket guarantee to cover all the liabilities of its banks and allow some of them to fail. Better a private bankruptcy than the impoverishment of the whole country.
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