End of Euro
Neville Bennett
Monetary authorities are deluding themselves if they think “This time is Different” and that the Irish bailout will succeed. It is ignoring lessons of history and common sense. A settlement which inflicts all the pain on the Irish people and does not expect the banks and bond holders to suffer cannot succeed. The settlement cannot squelch doubts about Spain, Portugal, Italy and Greece because contagion is alive.
The BailoutThe €85 billion bailout requires the Irish to contribute €17billions to supports its ailing banks. Other contributions come from the IMF (€ 22.5 bn) and €45 bn comes from bi-lateral loans and two rescue funds. The UK’s contribution is €7.9 bn. George Osborne made the usual diplomatic statement that “it is money we fully expect to get back” and, more optimistically, “it will help Ireland get on a fully stable path to growth”.Ireland is not on a stable path, and growth is almost impossible when its present recession will be exacerbated by incredibly severe budgets cuts. Moreover, I argue that Ireland cannot grow without devaluation which it cannot do while in the Euro. The package’s interest rate is 5.8%, which is stiffer that Greece’s 5.2%. Debt- servicing at this rates is very difficult without robust growth or very high inflation. The higher rate reflects Germany’s growing resentment at being asked for assistance. Germany has warned that after 2013 the private sector will have to absorb any losses on Eurozone debt. It is perhaps commendable that Germany wants to get taxpayers off the hook, but one wonders why the pain is falling so unevenly on people and taxpayers now.
The Austerity PlanThe butcher’s bill for the bailout is drastic austerity. Public spending is to be slashed by €20 bn in 4 years. The 116 page budget plan must ratified by Parliament on December 7. As the Government majority has been slashed to two, and the governing party lost dramatically in a recent by-election, I anticipate some difficulties.Ireland has already had 5 packages of spending cuts and revenue- raising of €14.7 bn. This has lowered its budget deficit from 20% of GDP to 11.7%. But European Commission requires that the deficit be below 3% by 2014. Government debt is presently 95% of GDP and will rise to 100% in 2014. Borrowing has to be strongly curtailed. These debt figures exclude further support to banks. The plan has much rhetoric about competitiveness, exports and innovation, but many citizens will regard the projected unemployment rate of 10% in 2014 as unacceptable although it is 15% now. Others will resent minimum wages falling by one euro to €7.65. But that is for starters, Government will slash public jobs (by 24,750), pay and pensions. It will cut student support and slash medical care and meter water. It will tighten taxes, reducing exemptions, introduce a new “site tax” and raise income tax rates. VAT will be 23% in 2014, and the carbon price will be €30 p. tonne. Detail http://www.budget.gov.ie/The%20National%20Recovery%20Plan%202011-2014.pdf
Can Democracy Cope?When I wrote my “new Normal” column (NBR Aug 8) and “Destruction of European Welfare ( May 28) I raised the point that the electorate would resent austerity and debt servicing so much that Governments that imposed a huge cut in the standard of living and welfare would not endure. I envisage very fragile governments ahead.We have already seen the Democrats lose a lot of ground in the last US election, although President Obama’s administration shielded much of the electorate from hardship, created some jobs and delivered a mild tax cut for the middle-class and below. President Sarkozy has been a safe pair of hands but has lost much support in raising pension entitlements from age 60 to 62. Angela Merkel is hanging on by a thread as Germans are much divided on supporting indigent euro members. In Britain, Labour lost a majority despite huge measures to keep the economy moving. Portugal, Greece and Spain have suffered crippling strike action. Ireland has had massive protest marches. There is also mounting difficulties in debt servicing at current Eurozone rate of interest. Ireland has a poisoned chalice at servicing rescue loans at the high rate of 5.8% and no guarantee that more might be required as its banks, now mostly state owned, suffer capital losses on real estate to which they are hideously exposed. Greece is already failing to meet its bailout terms. It is optimistic to expect Ireland to meet its targets.
Past crisesI have been writing in NBR regularly since 1991 during which time there were many debt crises. Some ended in default; others did not. The Euro problem seems the worst because states were given too much liberty to run up huge bills precisely because they were in the EU. The PIIGs especially were allowed, even encouraged, to take on debt for social and other purposes. Spain made unemployment as attractive as work, Greece seemed to make everyone a pensioners or a government worker in a land covered in Olympic monuments.The PIIGS are now in profound debt traps. They did not borrow in their own currency. They borrowed in a currency that really belonged to the North. They lacked control of their exchange rates, their monetary policy and soon exceeded their fiscal deficit limits of 3% of GDP. They now have huge debts but cannot grow their economies to pay them off because the exchange rate is so high. Spain will find it almost impossible to refinance in 2011-13 an estimated €350 bn obligation. The Asian Crisis seems child’s play in retrospect. Thailand, Taiwan, the Philippines and South Korea were prostrated. But they had sovereignty. They might have needed IMF help, but they were able to devalue and export themselves to solvency. The PIIGS cannot easily escape their shackles. Every hedge fund will be licking its lips as its exploits the euro’s vulnerabilities.
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