BUSINESS OPINION:The sort of austerity we are being asked to take in one year is what the UK plans to do over four
ONCE again the Government has found itself, or put itself, in a position where its policy choice seems to deny the reality of the situation.
In 2008 it was the insolvency of the banking system arising from the property bubble. This time it is the very real prospect that the austerity measures being contemplated to reduce the exchequer deficit could backfire and further depress the economy.
A number of our better known economic Cassandras have been banging on about this issue for a while. It has also been the consistent position of the Irish Congress of Trade Unions, although they turned the volume down somewhat when for a brief period it looked like the policy of aggressive cuts might be working.
However, the case for a more gradual approach to cutting the deficit got a big fillip on Thursday last when the Economic and Social Research Institute (ESRI) nailed its colours to the mast on the issue.
Politics pretty quickly kicked in. The Minister for Finance, who presumably was aware of the ESRI quarterly’s contents, got his retaliation in first. He seemed to leave the door open about the prospect of seeking an extended deadline from the European Commission when he addressed the Irish Banking Federation on Wednesday morning. However, the door was promptly slammed shut by Oli Rehn, the economic affairs commissioner.
The Government – as is the way of governments – found itself in the happy position of being able to blame someone else: ie, we hear what you are saying about the dangers of the pace of deficit reduction but these lads in Brussels are not for turning.
And there matters rest; meaning that in order “to preserve our sovereignty” we are to pursue a policy at the behest of outside interests that runs contrary to the considered view of the State’s most respected economic research organisation, and a great many others.
Thus we have in reality already surrendered sovereignty to some sort of IMF-Lite in the form of the commission.
But, leaving aside the sort of jingoistic nonsense being spouted in some corners, we need not worry too much about this as there is no real danger the commission – or the IMF if it came to it – will not hand us back our sovereignty as soon as they possibly can!
The real danger is we have surrendered control of our economic affairs to somebody who does not really know what they are doing; or more worryingly knows exactly what they are doing and is not overly concerned about the consequences for Ireland.
It is safe to assume – at least one hopes it’s safe to assume – that the commission’s economic advisers are as aware as the ESRI of the down side risk of the sort of extreme fiscal adjustment being contemplated in Ireland.
To put it in context we are being told to do in one year what the UK government plans to do in four, starting from a much better place. And there is no consensus in the UK that what they are embarking on is not an act of folly.
Europe of course is not monolithic. There seem to be several forces at play. One camp would clearly have the bond market in focus and is determined to avoid a rerun of the sovereign debt crisis which in turn threatened to bring down the euro and the rest of the house. They, as a result, favour the sort of “give us back our money” economics demanded by the bond market. Hence the reflexive ‘no’ to any suggestion of an extension of Ireland’s deficit reduction deadline for fear of scaring the market. This group appear in the ascendant and for the time being there appears an alignment of interest between the Government and this group but for rather different reasons.
The Government presumably believes this approach is in the best interest of its citizens despite what the ESRI and others say.
However, Brussels and Frankfurt are more concerned about what it means for the euro and the euro zone in the short term rather than the longer-term consequences for Ireland.
If by some happy chance the market was to change its mind and start punishing Ireland for cutting too deeply then this policy would quickly reverse. But for the time being it’s hard to see it being abandoned as long as the bond market wants it.
The 2014 deadline must hold, at least in public.
This is where high euro politics come into play and believers in the project still see a a way for Europe to deliver us from evil. Somewhere in the midst of the complicated bargain struck by France and Germany over new fiscal rules for euro zone members lies some wriggle room for Ireland.
Germany may have got French support for tough sanctions such as the suspension of voting rights, but because they require treaty change they will need ratification by Italy, Spain, Portugal and of course a referendum in Ireland. And that is when the horse trading starts and we will be able to seek an extension if needed, which on balance looks like being the case.
But, for the time being, everybody must play along and as a result the next budget is going to be – to paraphrase the late Saddam Hussein – the mother of all budgets in order to please the market. But hopefully it will not kill the economy before the euro horse trading gets going.
