After weeks of speculation and debate the deed has now been done. Ireland has received an overdraft facility of just under €70 bn provided jointly by the EU and the IMF in exchange for a tough austerity package.
This is a bad deal for Ireland and a bad deal for Europe. It is misguided in principle and regarding many of the details of the austerity package. Let’s take them in turn.
The fundamental problem is that, because of a list of policy errors too long to mention, the Irish government has assumed responsibilities for its overblown banking sector that it will not be able to meet given the depth of the crisis and the economic prospects. If and when it needs to go to the market it will have to pay an exorbitant rate of interest (currently of the order of 9%). The point of the overdraft facility is to shield the country from the markets. Yet the money will be offered at a penalty rate. 5.8% according to the Irish government itself. Even higher rates had been discussed in Irish media.) Even the 5.8% rate is much higher than the cost of credit to Ireland just a few months ago and higher than the rate imposed in the Greek bail-out. Such a penal rate makes fiscal consolidation much harder.
Meanwhile Germany is currently able to borrow over ten years at a rate of 2.25%. The ECB is lending to commercial banks at 1%. This is not so much a bail-out as a deal in which the EU and IMF profit from an interest-rate differential in excess of 3½ %-points. (This does not stop some economically ignorant German commentators complaining that they are financing Ireland’s high minimum wage, when Germany doesn’t even have one.) Such economic sado-masochism makes no sense. If Ireland is making credible attempts to consolidate its finances, and if that (or rather: avoidance of outright default and a major euro area crisis) is seen as being in the European interest, what is the justification for such a penalty? The rate charged should be much closer to the European benchmark.
Even worse is what the Irish government has offered to do in return. The list is long and gory.
Part of the money is to be used to clean up the banking sector. That is certainly wise in principle, and a condition for recovery: let us hope that the involvement of external institutions means that the international money is better spent to that end than Irish taxpayers’ own money, which has been poured into a bottomless pit to little visible positive effect.
The problems lie in the deflationary package, its size and composition.
€15bn – close to 10% of GDP – is to be taken out of the economy over four years. This comes on top of past cuts of about the same size. Of this €6bn is to happen in 2011: the euphemism for this is frontloading. In fact what is needed is backloading: make credible promises now to consolidate later, when the economy is stronger. The measures focus on spending cuts (2/3 of the package) rather than revenue increases. This will exacerbate the negative distributional outcomes. Most of the revenue-side measures put the burden disproportionately on lower-income households (increasing taxes on the low-paid, higher carbon tax – welcome though the latter is on ecological grounds). Worse in distributional terms is the list of so-called ‘structural reforms’. The minimum wage is to be reduced by €1 an hour – a cut of almost 12% in the (gross) wages of Ireland’s lowest-paid workers. Net incomes will be hit even harder because of the tax changes. This has nothing to do with fiscal reform. Minimum wage earners are a small fraction of the total workforce and not employed in export-oriented industries (where a ‘competitiveness argument’ might have been made). It is hard to see how such a gratuitous attack on the living standards of the worst-off workers on the Irish labour market can possibly help with fiscal consolidation. On the contrary, it will exacerbate the contractionary forces gripping the economy, drive down demand and make consolidation all the more difficult. Exacerbating the economic downturn will, of course, also make it that much harder to rescue the banks.
Almost worse than some of the contents of the package is what is missing. Almost €70bn of external funding is in principle available but there are no plans, it seems, to invest in Ireland’s infrastructure, to put people back to work producing goods that raise the country’s growth potential and give consumers and investors hope for a better future and the state a greater capacity to raise future revenue. And, as noted above, this is a time when other governments – not to even mention the ECB – can raise finance at extremely low rates, while the crushing burden of unemployment threatens to make Ireland relive the trauma, so recently overcome, of mass emigration of young and skilled workers.
According to the government “The purpose of the external financial support is to return our economy to sustainable growth”. Neither the cost of that support nor many of the measures announced in return, nor the lack of any positive investment programme are conducive to that laudable aim. Barring vastly faster growth of export demand than anyone foresees, I cannot see how this plan will enable Ireland to dig its way out of the mess in which it finds itself. That means yet more suffering for citizens of the Emerald Isle. But Europe’s economies sink and swim together: this package is not in the interests of Europe’s citizens either.
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