UPDATE: A post-euro world?

The euro plunged further into crisis yesterday as investors sold off Spanish, Portuguese and Belgian government bonds in record numbers on renewed fears that those nations would follow Greece and Ireland into the financial emergency ward, undermining confidence in the single currency.

The spreading contagion suggests that the markets now view the break-up of the euro as a realistic possibility, and that shock and awe efforts to shore up individual economies with huge bailouts have not succeeded in insulating their neighbours from infection. Spain, in particular, is regarded as being too big to save. Should Spain eventually need assistance it would also imply a much larger UK bilateral loan than the £8bn offered to Ireland – perhaps £20bn or £30bn.

The extra risk premium demanded by investors to hold Spanish government debt hit new highs during trading yesterday, and the cost to Madrid of raising money over a three-month period is the same as that demanded from the German government over a five-year term, reflecting an extreme level of nervousness about the Spanish state's ability to repay its debts. The looming possibility of Spanish insolvency would dwarf the problems of Greece, Ireland and Portugal combined.

INITIAL POST: The Irish Government announces its austerity plan to deal with the current crisis:

Spending cuts - €10bn total savings by 2014

The plan aims to cut current spending by €7bn:
• The public sector wage bill will fall by €1.2bn, with 24,500 jobs being cut. New hires will face a 10% pay cut and a "reformed" pension scheme
• The social welfare bill will be cut by €2.8bn. Many welfare payments will fall, with child benefit being lowered by 10%. The age at which citizens quality for the state pension will rise, first to 66 in 2014, then 67 in 2021 and finally 68 in 2028.
• PM Cowen also indicated that the dole could be trimmed further if the government is struggling to get the numbers to add up
• The minimum wage is being cut by €1 per hour, to €7.65 per hour - a move that is meant to help get people into work
• A further €3bn will be cut across healthcare, education, agriculture, other government operation

• The plan also involves €3bn of cuts in capital expenditure.

Tax rises - €5bn total revenue by 2014

Among other measures...
• Sales tax will rise sharply, with VAT going up by 1% to 22% in 2013, rising to 23% in 2014. That should raise €570m
• Income tax thresholds are being lowered, to bring in an extra €1.9bn. This means that by 2014, income tax will be paid by people earning at least €15,300 a year instead of €18,300 at present
• A new property tax is being brought in, to raise €530m.
• Various pension adjustments are expected to bring in €865m

But, of course, the low corporate tax rate of 12.5% must be defended at all costs:

3.58pm: Britain has apparently pledged to support Ireland's decision to maintain corporation tax at 12.5% -- in the face of pressure from other European countries who believe the rate is unfairly low. This follows the meeting at Stormont between UK City minister Mark Hoban and Northern Ireland ministers.

Like Argentina, Ireland traveled down the neoliberal road in the hope of attaining prosperity for its people. As with Argentina, the consequences for middle income and lower income people will be disasterous. Ireland already has an official 14.1% unemployment rate prior to the implementation of austerity. But, so far, there is no indication of a social movement in Ireland sufficiently strong to compel Ireland to sever its economic relationships with those institutions that would impoverish it for a generation, and perhaps longer, as the people of Argentina did.

Dean Baker is persuasive when he states that the social consequences of acquiescing to the European Central Bank and the IMF are alarming:

It is worth remembering that Ireland's government was a model of fiscal probity prior to the economic meltdown. It had run large budget surpluses for the 5 years prior to the onset of the crisis. Ireland's problem was certainly not out of control government spending; it was a reckless banking system that fueled an enormous housing bubble. The economic wizards at the ECB and the IMF either couldn't see the bubble or didn't think it was worth mentioning.

The failure of the ECB or IMF to take steps to rein in the bubble before the crisis has not made these international financial institutions shy about using a heavy hand in imposing conditions now. The plan is to impose stiff austerity, requiring much of Ireland's workforce to suffer unemployment for years to come as a result of the failure of their bankers and the ECB.

While it is often claimed that these institutions are not political, only the braindead could still believe this. The decision to make Ireland's workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country's bankers is entirely a political one. There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.

This should be a huge warning flag for progressives and, in fact, anyone who believes in democracy. If the ECB puts conditions on a rescue package, it will be very difficult for an elected government in Ireland to reverse these conditions. In other words, the issues that Ireland's voters will be able to decide are likely to be trivial in importance relative to the conditions that will be imposed by the ECB.

Baker concludes that it would be better for Ireland to default and leave the euro, juast as Argentina defaulted and broke the link between its currency and the US dollar. The Argentinian economy sharply contracted by over 10% in the first year after the late 2001 default, but displayed strong rates of annual growth thereafter in the 7% to 9% range through 2008. More recently, it recovered quickly from the 2009 global recession, so much so that it had a slightly positive growth rate for the year of nearly 0.9:

The Argentine economy is making a rapid recovery after the impact of the global financial crisis last year, but experts warn about the limits to growth, which will reach a ceiling shortly unless investments increase.

After a year in which GDP grew by barely 0.9 percent, a far cry from the annual average of close to eight percent over the previous six years, economic activity in this South American country is back on track, led by industry, thanks to a buoyant domestic market and strong export performance, especially in agriculture.

The government initially forecast 2.5 percent growth this year, but later revised the figure upwards to seven percent, in line with the 6.8 percent projected by the Economic Commission for Latin America and the Caribbean (ECLAC).

Indeed, Argentinian growth has been so strong that policymakers are afraid of inflation.

Meanwhile, young, well educated Irish people are already planning to migrate to other countries:

A lot of my friends are leaving. A lot of people in their 20s and 30s who are very educated are leaving, said Elaine Byrne, a lecturer at Trinity College Dublin, Ireland's oldest university.

I teach a class in politics, and we did a poll recently in the class, and almost everybody put up their hand and said that they were leaving.

But where will they go? Perhaps, the Germans will consider them more culturally acceptable than the Turks. One has to wonder about the future of a people who educate their children so that they can depart and live elsewhere. But, not to worry, an Irish university education will soon become unattainable.

Labels: Bailout of Finance Capitalists, Europe, IMF, Ireland, Neoliberalism, Sub-Proletarianization of Europe

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It cannot be denied that Ireland has lost its status as a sovereign nation. Thanks to its disastrous entanglement with the euro, it has lost any independence in domestic, foreign and above all economic policy. The Irish nation is the creature of Brussels and the European Central Bank. The Irish prime minister has effectively been turned into a pro-consul despatched to Dublin from Brussels. Brian Lenihan, the finance minister, is like an overseas manager of a Brussels subsidiary. For those of us who love Ireland, this is miserable and demeaning – but it needs to be borne in mind that a similar fate awaits a number of other European countries. Greece already does what it is told by the IMF and the ECB; the same will shortly apply to Portugal and in due course Spain.

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Ireland could be the next Lehman Brothers. That's what has the markets worried. If Irish leaders refuse to accept a bailout from the EU's new European Financial Stability Facility (EFSF), then bondholders will be forced to take haircuts on their investments which will leave banks in Germany and France short of capital. Bonds yields will rise sharply slowing activity in the credit markets. An Irish default will trigger hundreds of billions of dollars in credit default swaps (CDS), which will push weaker counterparties into bankruptcy and domino through the financial system. Contagion will spread to Portugal, Greece, Spain and Italy widening bond yields and forcing governments to increase their borrowing at the ECB. Business activity will sputter, unemployment will rise, and growth will shrink. It will be a second financial meltdown.

But no one believes that will happen. Most people think that Ireland will take its medicine and spare bondholders any losses. Irish leaders would rather accept a decade of EU-imposed austerity measures and the loss of sovereignty, then leave the euro and start fresh. It's disappointing. The euro is not designed to meet the needs of the smaller, less industrialized countries like Ireland. They need their own, flexible currency to ease the effects of cyclical downturns. But Irish leaders are still captivated by the idea of a united Europe. So they will cast aside the independence they earned through centuries of struggle for a pipedream and the elusive promise of prosperity.

At present, the Irish government is underwriting the toxic debts of its main banks. Unfortunately, those debts far exceed the revenues of the state. According to BBC's Robert Peston, the liabilities are equivalent to an oppressive 700% of GDP when banking, public sector and private sector debts are added together. So far, the ECB has helped to keep Irish banks operating by providing 130 billion euros of emergency liquidity. But the wholesale markets no longer accept Irish debt as collateral and bond yields are in nosebleed territory. Irish politicians still maintain they have sufficient funds to get through the middle of next year, but that does not include funding for the banks. In fact, if the ECB stopped lending to the banks today, the system would crash overnight.

So the situation is tense and getting tenser. Even so, everyone expects Ireland's Finance Minister Brian Lenihan to cave in and accept a bailout. That will shift all the losses onto Irish taxpayers.

But how long before the merry-go-round stops? How long before France, Germany and the UK lose the capacity to finance these bailouts? How long before the contagion reaches these core countries of the European system? How long before public outrage makes it impossible for a government to acquiesce to institutions like the World Bank, the IMF and ECB? And when it does stop, what happens then?

Labels: Bailout of Finance Capitalists, Europe, Ireland, Neoliberalism, Sub-Proletarianization of Europe