EU pushing Ireland down wrong track
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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. – which 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 US 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?
This column was published by The Guardian Unlimited (UK) on November 19, 2010.
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