The Fine Gael-Labour coalition in Dublin is currently discussing a proposal from Finance Minister Michael Noonan, which imposes austerity budgets until 2020.
Although the programme has not yet been published, government officials have made clear that its purpose is to intensify the spending cuts under the bailout agreed with the European Union, European Central Bank and the International Monetary Fund after the programme expires later this year.
Referring to the dictates of the troika, which have ensured the implementation of a large part of the more than €28 billion of austerity measures since 2008, Noonan said, “When we leave the programme we won’t have that kind of discipline within our system any more and I want to make sure that, because of more loose arrangements, that we don’t lose impetus.”
Specific savings are expected to be outlined by the proposal, and fiscal targets will be included. Spending ceilings for the coming three years are to be presented in the 2014 budget, which will be announced in October.
Minister for Jobs Richard Bruton, like Noonan a member of Fine Gael, was explicit that the government’s strategy would be to step up the downward pressure on labour costs in order to build a “competitive economy.”
“There isn’t a crock of gold that you can dip into and create an alternative to building sound enterprises that are oriented to export markets and who sell innovative products,” he proclaimed.
The Labour Party’s Public Sector Reform Minister Brendan Howlin is playing a leading role in slashing government spending. A letter was recently issued by him to each government department, detailing percentages of budgets to be cut in the years 2015 and 2016. These are thought to include annual savings of at least three percent in the budgets of the health and social protection departments. Other departments could face annual targets of five percent.
The state pension fund will be bled dry to offer incentives to foreign investors and private equity firms to come to Ireland. The Financial Times reported that the remaining six billion euros in the National Reserve Pension Fund would be used by the government to create a “co-investment” fund.
There has been hardly any public discussion on these new developments, which will condemn Irish working people to unending austerity for years to come. These policies will worsen the conditions of misery which already prevail, including an unemployment rate standing at 14 percent.
Essential to the enforcement of austerity is the full support of the trade unions, which the government can be assured of. The Irish Congress of Trade Unions (ICTU) has been locked in talks with the coalition since February to reach an agreement to impose the latest round of savings on public sector workers. The successor to the no-strike Croke Park Agreement between government, employers and the unions, which expires next year, aims to save €1 billion by 2016.
The unions are currently trying to force through the Haddington Road Agreement in the face of widespread opposition among workers. In the first vote on the deal in April, a large majority of workers rejected it, including an overwhelming number of teachers, medical staff and emergency service workers.
The bureaucracy then entered new talks on a union-by-union basis in order to divide the emerging opposition. They accepted as good coin the claim from Howlin that the three year agreement would be the last time workers would be asked to sacrifice their wages and working conditions to pay for the collapse of the banks, even as he prepared to outline with Noonan proposals which will see austerity and labour market reforms continue for at least another four years thereafter.
The deal now being voted on by the public sector unions retains all of the cuts demanded by the government. It contains reductions to overtime pay, longer working hours, redeployment measures designed to cut numbers in the public sector, and the freezing of pay increments.
These measures will exacerbate the exploitation of workers who have suffered significant pay cuts since 2008. In the public sector, average wages have fallen by 14 percent, while in other economic areas it is even more. This has been an integral part of the drive by the ruling elite to permanently lower labour costs. According to one study, labour costs in Ireland fell between 2008 and 2012 by 8.4 percent.
On this basis, the Irish stock market is achieving its largest rally since the crisis. Stock values have more than doubled since a low point in early 2009, and companies are predicting that they will secure their biggest profits since that time. One trader bluntly pointed to the source of these renewed gains, telling Bloomberg, “We have to give Ireland credit for actually sticking to the reform programme and taking the levels of painful social adjustment that few countries in Europe have come close to.”
The continued expansion of profits is unsustainable, and there are already clear signs of the danger of another banking collapse. Last week, it was revealed that €3.5 billion of funds loaned to Allied Irish Bank during the near collapse of the banking system in 2008-09 would not be paid back to the state, but would be converted into preferential shares. One press article pointed out that this one move would see the state lose more money than the total savings it had planned in the 2014 budget.
The banks will likely require access to even more financial support from the government, another important factor driving the cuts. Noonan discussed this possibility at his last meeting with the IMF, in the event the banks fail stress tests scheduled for early 2014. The tests, initially planned for autumn 2013, have been pushed back amid concerns over the stability of the banks. Fitch released a report this week stating that “significant risks” still remain in the financial system.
In the absence of agreement within the European Union on allowing the EU’s bailout fund to lend directly to banks, Dublin would be faced with taking even more debt on to the state balance sheet in order to cover the capital requirements of the financial institutions, under conditions in which state debt is already greater than 120 percent of GDP.
In an ominous report released at the end of May which indicates the scale of the developing crisis, Ireland’s Central Bank pointed out that a total of €25.8 billion of mortgages were in arrears by more than 90 days, and small businesses had fallen behind with payments on loans totalling €10.8 billion. The banks have only €9.2 billion in capital to act as a buffer.
While the banks can expect to obtain full access to billions more in state resources, the latest figures point to a sharp rise in severe poverty. One in ten are suffering from food poverty, defined as an inability to afford a meat or vegetarian equivalent meal every other day, or having missed a meal over a period of two weeks because of money problems. The real number of those living under such circumstances is certainly much higher, since the figures from this report were collected in 2010. In a separate study, the Irish League of Credit Unions revealed that almost 50 percent of the population have to borrow money to meet the cost of basic bills.
The International Monetary Fund has admitted that some of the decisions it made in the wake of the 2007-2008 financial crisis were wrong, and that the €130bn first bailout of Greece was “bungled”. Well, yes. If it hadn’t been a mistake, then it would have been the only bailout and everyone in Greece would have lived happily ever after.
Actually, the IMF hasn’t quite admitted that it messed things up. It has said instead that it went along with its partners in “the Troika” – the European Commission and the European Central Bank – when it shouldn’t have. The EC and the ECB, says the IMF, put the interests of the eurozone before the interests of Greece. The EC and the ECB, in turn, clutch their pearls and splutter with horror that they could be accused of something so petty as self-preservation.
The IMF also admits that it “underestimated” the effect austerity would have on Greece. Obviously, the rest of the Troika takes no issue with that. Even those who substitute “kick up the arse to all the lazy scroungers” whenever they encounter the word “austerity”, have cottoned on to the fact that the word can only be intoned with facial features locked into a suitably tragic mask.
Yet, mealy-mouthed and hotly contested as this minor mea culpa is, it’s still a sign that financial institutions may slowly be coming round to the idea that they are the problem. They know the crash was a debt-bubble that burst. What they don’t seem to acknowledge is that the merry days of reckless lending are never going to return; even if they do, the same thing will happen again, but more quickly and more savagely. The thing is this: the crash was a write-off, not a repair job. The response from the start should have been a wholesale reevaluation of the way in which wealth is created and distributed around the globe, a “structural adjustment”, as the philosopher John Gray has said all along.
The IMF exists to lend money to governments, so it’s comic that it wags its finger at governments that run up debt. And, of course, its loans famously come with strings attached: adopt a free-market economy, or strengthen the one you have, kissing goodbye to the Big State. Yet, the irony is painful. Neoliberal ideology insists that states are too big and cumbersome, too centralised and faceless, to be efficient and responsive. I agree. The problem is that the ruthless sentimentalists of neoliberalism like to tell themselves – and anyone else who will listen – that removing the dead hand of state control frees the individual citizen to be entrepreneurial and productive. Instead, it places the financially powerful beyond any state, in an international elite that makes its own rules, and holds governments to ransom. That’s what the financial crisis was all about. The ransom was paid, and as a result, governments have been obliged to limit their activities yet further – some setting about the task with greater relish than others. Now the task, supposedly, is to get the free market up and running again.
But the basic problem is this: it costs a lot of money to cultivate a market – a group of consumers – and the more sophisticated the market is, the more expensive it is to cultivate them. A developed market needs to be populated with educated, healthy, cultured, law-abiding and financially secure people – people who expect to be well paid themselves, having been brought up believing in material aspiration, as consumers need to be.
So why, exactly, given the huge amount of investment needed to create such a market, should access to it then be “free”? The neoliberal idea is that the cultivation itself should be conducted privately as well. They see “austerity” as a way of forcing that agenda. But how can the privatisation of societal welfare possibly happen when unemployment is already high, working people are turning to food banks to survive and the debt industry, far from being sorry that it brought the global economy to its knees, is snapping up bargains in the form of busted high-street businesses to establish shops with nothing to sell but high-interest debt? Why, you have to ask yourself, is this vast implausibility, this sheer unsustainability, not blindingly obvious to all?
Markets cannot be free. Markets have to be nurtured. They have to be invested in. Markets have to be grown. Google, Amazon and Apple haven’t taught anyone in this country to read. But even though an illiterate market wouldn’t be so great for them, they avoid their taxes, because they can, because they are more powerful than governments.
And further, those who invest in these companies, and insist that taxes should be low to encourage private profit and shareholder value, then lend governments the money they need to create these populations of sophisticated producers and consumers, berating them for their profligacy as they do so. It’s all utterly, completely, crazy.
The other day a health minister, Anna Soubry, suggested that female GPs who worked part-time so that they could bring up families were putting the NHS under strain. The compartmentalised thinking is quite breathtaking. What on earth does she imagine? That it would be better for the economy if they all left school at 16? On the contrary, the more people who are earning good money while working part-time – thus having the leisure to consume – the better. No doubt these female GPs are sustaining both the pharmaceutical industry and the arts and media, both sectors that Britain does well in.
As for their prioritising of family life over career – that’s just another of the myriad ways in which Conservative neoliberalism is entirely without logic. Its prophets and its disciples will happily – ecstatically – tell you that there’s nothing more important than family, unless you’re a family doctor spending some of your time caring for your own. You couldn’t make these characters up. It is certainly true that women with children find it more easy to find part-time employment in the public sector. But that’s a prima facie example of how unresponsive the private sector is to human and societal need, not – as it is so often presented – evidence that the public sector is congenitally disabled.
Much of the healthy economic growth – as opposed to the smoke and mirrors of many aspects of financial services – that Britain enjoyed during the second half of the 20th century was due to women swelling the educated workforce. Soubry and her ilk, above all else, forget that people have multiple roles, as consumers, as producers, as citizens and as family members. All of those things have to be nurtured and invested in to make a market.
The neoliberalism that the IMF still preaches pays no account to any of this. It insists that the provision of work alone is enough of an invisible hand to sustain a market. Yet even Adam Smith, the economist who came up with that theory, did not agree that economic activity alone was enough to keep humans decent and civilised.
Governments are left with the bill when neoliberals demand access to markets that they refuse to invest in making. Their refusal allows them to rail against the Big State while producing the conditions that make it necessary. And even as the results of their folly become ever more plain to see, they are grudging in their admittance of the slightest blame, bickering with their allies instead of waking up, smelling the coffee and realising that far too much of it is sold through Starbuck
I noted back in January that the IMF had started to do its own “lessons learned” on its European financial crisis response and had begun to admit it had made some fairly terrible mistakes in its assessment of the debt sustainability of a number of nations, including Greece, under its current programs.
Late last week the IMF released another discussion paper (available below) that covers recent developments in sovereign debt restructures and their effect on IMF policy. The paper concludes that:
First, debt restructurings have often been too little and too late, thus failing to re-establish debt sustainability and market access in a durable way. Overcoming these problems likely requires action on several fronts, including
(i) increased rigor and transparency of debt sustainability and market access assessments,
(ii) exploring ways to prevent the use of Fund resources to simply bail out private creditors, and
(iii) measures to alleviate the costs associated with restructurings
Second, while creditor participation has been adequate in recent restructurings, the current contractual, market-based approach to debt restructuring is becoming less potent in overcoming collective action problems, especially in pre-default cases. In response, consideration could be given to making the contractual framework more effective, including through the introduction of more robust aggregation clauses into international sovereign bonds bearing in mind the inter-creditor equity issues that such an approach may raise. The Fund may also consider ways to condition use of its financing more tightly to the resolution of collective action problems;
Third, the growing role and changing composition of official lending call for a clearer framework for official sector involvement, especially with regard to non-Paris Club creditors, for which the modality for securing program financing commitments could be tightened; and
Fourth, although the collaborative, good-faith approach to resolving external private arrears embedded in the lending into arrears (LIA) policy remains the most promising way to regain market access post-default, a review of the effectiveness of the LIA policy is in order in light of recent experience and the increased complexity of the creditor base. Consideration could also be given to extending the LIA policy to official arrears.
In short, the assessments of debt sustainability have been woeful, there aren’t strong enough binding terms (read CACS) in sovereign securities, the official sector, but not the IMF itself, need to play a part in defaults and the IMF should investigate the optimal debt resolution mechanisms available for negotiating between creditors and debtors.
The paper discusses the implication of the ongoing litigation against Argentina as well as the experience of the fund in the recent case of Greece. Of note is the admission by the fund that it was forced to lower its assessment of the country due to contagion worries from the official sector in Europe:
Accordingly, when a member’s sovereign debt is unsustainable and there are concerns regarding the contagion effects of a restructuring, providing large-scale financing without debt relief would only postpone the need to address the debt problem.
Instead, the appropriate response would be to deal with the contagion effects of restructuring head-on by, for example, requiring that currency union authorities establish adequate safeguards promptly and decisively to cushion the effect of spillovers to other countries (via, e.g., proactive recapitalization of creditor banks, establishment of firewalls, and provision of liquidity support). In the context of the first Greece program, financial assistance was delayed until Greece had lost market access. In response to concerns about possible spillovers from debt restructuring, the Fund lowered the bar for exceptional access (second criterion) by creating an exception to the requirement for achieving debt sustainability with a high probability in the presence of systemic inter national spillover effects. In light of these issues, the modification of the exceptional access policy could usefully be reviewed
In other words, Europe, and its banks, weren’t prepared for a Greek default so the IMF was forced to pretend that the country’s position was better than it actually was. That was obviously a mistake and the country, like many before it, was forced to take a second bailout followed by a re-structure that should have occurred up front. As noted by the paper:
A review of the recent experience suggests that unsustainable debt situations often fester before they are resolved and, when restructurings do occur, they do not always restore sustainability and market access in a durable manner, leading to repeated restructurings. While the costs of delaying a restructuring are well recognized, pressures to delay can still arise due to the authorities’ concerns about financial stability and contagion. Delays were also sometimes facilitated by parallel incentives on the part of official creditors, who accordingly may have an interest in accepting, and pressuring the Fund to accept, sanguine assessments of debt sustainability and market reaccess.
In hindsight, the Fund’s assessments of debt sustainability and market access may sometimes have been too sanguine.
The existing DSA framework does not specify the period over which debt sustainability or market access is supposed to be achieved (although it is generally understood that debt would be sustainable within a five-year horizon) or how maximum sustainable debt ranges should be derived, leaving this mostly to Fund staff judgment. Sustainability was generally assessed on the basis of an eventual decline in the debt-to-GDP ratio—Argentina, Seychelles and St. Kitts and Nevis were the only three cases that provided for a quick and sizable reduction in the debt-to-GDP levels post-restructuring. St. Kitts and Nevis also targeted an explicit debt threshold, i.e., the ECCU debt target of 60 percent of GDP by 2020. Most other cases allowed more than five years for the debt level to fall significantly below safe levels.
For example, in Greece the debt-to-GDP ratio in the most recent program projections is not expected to be reduced substantially below 110 percent before 2022, while in the forthcoming Fund-supported program with Jamaica, debt is still projected to remain close to 120 percent of GDP in five years’ time. In Grenada, the debt ratio at the end of the five-year horizon actually turned out much higher than staff projections at the time of the restructuring. Also, in Greece, Jamaica (2010) and Seychelles, staff medium-term debt projections have been revised upward substantially within only a few years compared to projections made at the time of the restructurings.
Also of note is the emphasis on the broader guidelines of the IMF programs , supporting countries sustainable return to private capital markets in a specific time-frame , and what that means in terms of the types of restructures that should be used and how, and when, the IMF can support them:
There may be a case for exploring additional ways to limit the risk that Fund resources will simply be used to bail out private creditors.
For example, a presumption could be established that some form of a creditor bail-in measure would be implemented as a condition for Fund lending in cases where, although no clear-cut determination has been made that the debt is unsustainable, the member has lost market access and prospects for regaining market access are uncertain.
In such cases, the primary objective of creditor bail-in would be designed to ensure that creditors would not exit during the period while the Fund is providing financial assistance. This would also give more time for the Fund to determine whether the problem is one of liquidity or solvency. Accordingly, the measures would typically involve a rescheduling of debt, rather than the type of debt stock reduction that is normally required in circumstances where the debt is judged to be unsustainable.
Providing the member with a more comfortable debt profile would also have the additional benefit of enhancing market confidence in the feasibility of the member’s adjustment efforts, thereby reducing the risk that the debt will, in fact, become unsustainable. While bail-in measures would be voluntary (ranging from rescheduling of loans to bond exchanges that result in long maturities), creditors would understand that the success of such measures would be a condition for continued Fund support for the adjustment measures. Such a strategy—debt rescheduling instead of debt reduction—would not be appropriate when it is clear that the problem is one of solvency in which case reducing debt upfront to address debt overhang and restore sustainability would be the preferred course of action.
In light of the ongoing litigation against Argentina the paper also appears to be pushing for two things, firstly the introduction of a standard across-the-board mechanism to support collective action clauses, and resolution, within the sovereign debt markets:
Recent experience indicates that the contractual, market-based approach has worked reasonably well in securing creditor participation and avoiding protracted negotiations. But these episodes have also foreshadowed potential collective action problems that could hamper future restructurings. These problems are most acute when a default has not yet occurred, large haircuts are needed to reestablish sustainability, and sovereign bond contracts do not include CACs. The ongoing Argentina litigation has exacerbated the collective action problem, by increasing leverage of holdout creditors. Assuming there continues to be lack of sufficient support within the membership for the type of statutory framework envisaged under the SDRM, avenues could be considered to strengthen the existing contractual framework.
These aspects of the Greek legislation resemble the aggregation features of the SDRM. The key differences between the framework envisaged under the SDRM and the Greek legislation is that the SDRM would be established through a universal treaty (rather than through domestic law),
apply to all debt instruments (and not just to bonds governed by domestic law), and be subject to the jurisdiction of an international forum (rather than the domestic courts of the member whose debt is being restructured). At this stage, there does not appear to be sufficient support within the membership to amend the Articles of Agreement to establish such a universal treaty.
Complementing efforts to revamp CACs, the Fund may consider conditioning the availability of its financing more tightly to the resolution of collective action problems.
For instance, the use of high minimum participation thresholds could be required in debt exchange operations launched under Fund-supported programs to ensure broad creditor participation. Fund policy encourages members to avoid default to the extent possible, even after restructuring. An expectation of eventually being paid out in full may encourage holdouts. The use of high minimum participation thresholds would help reduce such incentives. The Fund could also routinely issue statements alerting creditors that securing a critical participation mass in the debt exchange would be required for the restoration of external stability—the implication being that failure to meet the
established minimum participation threshold would block future program financing, leaving no other option but default and protracted arrears.
Also, in pre-default restructurings, where collective action problems are most acute, the Fund could consider setting a clearer expectation (already allowed under existing policy) that non-negotiated offers by the debtor—following informal consultations with creditors—rather than negotiated deals, would be the norm, as in these cases speed is of the essence to avoid a default. These ideas could be explored in future staff work.
And the second area, that is also “to be explored in future staff work”, is what to do about the risks caused by asymmetry in the treatment of private and official sector creditors, something that was very apparent in the recent Greek restructure:
… arrears to private and official creditors are currently treated asymmetrically under Fund policy.
Private external arrears are tolerated but arrears to official bilateral lenders are not. This subjects the Fund to the risk that it could not assist a member in need due to one or more holdout official bilateral creditors who seek favorable treatment of their claims. Consideration could be given to extend the LIA policy to official bilateral arrears and in that context clarify the modality through which assurances of debt relief are provided by (non-Paris Club) official lenders. Another possibility would be for the Paris Club to extend its membership to all major lenders, so as to allow the Fund to rely on the Paris Club conventions with respect to financing assurances and arrears.
However, it is uncertain whether the Club could achieve such an expansion.
All up it’s an interesting paper and well worth the read if you are interested in this type of thing. The paper also has some discussion on the European crisis-resolution mechanism ( discussed in more detail here ) , although given recent back-steps from Europe on the banking union this looks to still be something of a distant dream at this point.
It will be interesting to see if this paper has any effect on future programs, but it does appear, if only very slowly, that the IMF is learning from past mistakes and attempting to shift policy in a direction to address that issue. It would appear, at least from this paper, that the IMF will be demanding a more realistic assessment of the debt sustainability of target nations and a greater use of up-front restructuring as a per-requisite for program engagement. We’ll have to watch the next steps in Europe to determine if this is simply a talking point or something the IMF board will action.
Financial Empire may have reduced us all to debt prisoners, but we can still become the social protagonists of history’s greatest-ever prison break.
Let there be no doubt about it: we live in the era of Financial Empire. Unlike the military conquests that drove the territorial expansions of the empires of old, contemporary Financial Empire consists not in the highly visible exercise of a Big Stick ideology (although military imperialism undoubtedly continues today), but rather takes the shape of an Invisible Hand. Where in the late 19th and early 20th centuries the logic of domination was driven by the instrumental power of imperial states, the Empire of the 21st century no longer needs any sticks to enforce the submission of sovereign states: through the global enforcement mechanisms of market discipline and IMF conditionality, the structural power of finance capital now ensures that all shall bow before the money markets.
In The Accumulation of Capital (1913), Rosa Luxemburg noted that, “though foreign loans are indispensable for the emancipation of rising capitalist states, they are yet the surest ties by which the old capitalist states maintain their influence, exercise financial control and exert pressure on the customs, foreign and commercial policy of the young capitalist states.” So great was this financial control that in the First Wave of Globalization, which ran from 1870 until the onset of WWI in 1914, defaulting countries faced a 40 percent chance of being invaded, subjected to gunboat diplomacy, or having foreign control imposed on their domestic finances under threat of a naval blockade. In a telling and ironic sign of the times, even the Hague Peace Conference of 1906 recognized the legitimacy of the use of force in settling sovereign debt disputes.
Enforcing Debtor Discipline: the Era of Gunboat Diplomacy
The late 19th and early 20th century logic of imperialism thus took a military form that ultimately relied upon the instrumental power of the imperial states themselves. In 1882, for instance, following the Urabi revolt in Egypt, which had just deposed the French and British administrators who had taken control of Egypt’s finances in the wake of the 1870s debt crisis, Britain summarily invaded the country and incorporated it into the British Empire as a protectorate. Fast-forward some 130 years, and we have the foreign administrators of the IMF moving in on the heels of yet another popular uprising to make sure that Egypt does not default on its debts to Western banks. Today’s creditors no longer need to resort to the military force of their own governments to enforce their loan contracts: as a global disciplinarian, the IMF will do it for them.
The Ottoman Empire similarly defaulted in the 1870s, and although it was still powerful enough to withstand an outright European invasion, the Turkish government had to submit itself to a humiliating agreement with its foreign creditors: a Council of Foreign Bondholders, made up of representatives of the largest European banks, took control over its tax and customs offices. According to one member of the Council, Edgar Vincent, “There is no instance in which powers so extended have been granted to a foreign organization in a Sovereign state.” Fast-forward 130 years once more, and Turkey yet again finds itself in dire straits financially. The IMF is called upon in 1998 and thoroughly restructures the economy, marginalizing millions of poor Turks and leaving the Bretton Woods Project to conclude that, “over its long decade with the IMF, Turkey managed to replace public deficits with a democracy deficit.”
In 1898, Greece also fell under foreign financial control after defaulting on the debts it accrued during its war with Turkey. Mitchener and Weidenmier recount that, “As terms of the peace treaty, European powers were given authority to assume the administration of revenues on behalf of existing creditors and to effectuate payment of the war indemnity.” The historical parallels between the Greek debt crisis of 1898 and the one of today are striking. Since Germany had been the “major player in arranging the protection of foreign bondholders’ interests” in 1898, “it was given authority by the other European countries to come to terms with Greece about the operation and control over Greek finance as well as the terms of the debt settlement.” These terms were laid out in a new law; but, as Mitchener and Weidenmier stress, the approval of this law — just like today’s austerity memorandum — “was a sovereign act in appearance only.”
A few years later, in 1902, President Cipriano Castro of Venezuela refused to compensate European investors for the losses they made during the revolutionary upheaval that had brought him to power. The creditor response was swift and decisive: for four months, German, British and Italian gunboats shelled Venezuela’s coastal defenses and blockaded its main ports in order to force Castro to repay the debt in full. Two years later, largely in response to this blatant display of European imperialism in the Western hemisphere, President Theodore Roosevelt announced his infamous Roosevelt corollary to the Monroe Doctrine, which held that — rather than having the European powers messing around in its backyard — the US would now enforce the legitimate debt contracts of European financiers in Latin America and the Caribbean itself. Announcing his new foreign policy doctrine, Roosevelt issued a thinly veiled threat to his neighbors: “If a nation shows that it knows how to act with reasonable efficiency and decency in social and political matters, if it keeps order and pays its obligations, it need fear no interference from the United States.”
A year later, in 1905, US Marines invaded the Dominican Republic after it tried to default on its debts, taking over the country’s customs revenues to ensure full repayment to private bondholders. Nicaragua befell a similar fate in 1911-’12. Fast-forward another couple of decades, to 1982, and the United States is once again mingling in the sovereign affairs of its Latin American neighbors, sending in the IMF and World Bank on behalf of powerful private creditors. In Venezuela, seven years of IMF-sanctioned austerity measures eventually reach a dramatic apotheosis in the massive Caracazo protests of February 27, 1989, in which hundreds of thousands demonstrate against cuts in fuel and food subsidies that are part of the government’s agreement with the IMF. This time around, instead of having to fall back onto the gunboats of the US government, Wall Street bankers can rely fully on the internalized debtor discipline of the Venezuelan government: security forces open fire on the protesters and kill over 3,000 people. The debt, of course, is largely repaid.
Enforcing Debtor Discipline in the Era of Financial Empire
Today, the imperial era of gunboat diplomacy may have come to an ignominious end, but the era of Financial Empire is still in full swing. What the ongoing European debt crisis confirms once more is that financial capitalism, once fully developed and globalized, has no need for debtors’ prisons, gunboat diplomacy or US marines to enforce debtor discipline. The iron bars of the debtors’ prison are replaced with the global flows of finance capital; the gunboats have long since made way for what Warren Buffet called the financial weapons of mass destruction; and the foreign administrators of tax and customs offices no longer wear military suits but carry IMF suitcases. Through its control over capital flows and its ability to withhold much-needed credit, the global bankers’ alliance (made up of the big banks and institutional investors, along with international financial institutions and the financial and monetary authorities of the dominant capitalist states) has obtained a form of structural power that allows it to discipline the behavior of indebted countries without having to resort to military coercion. It is this discipline enforced by global capital markets and financial institutions that forms the backbone of Financial Empire.
When talking about Empire, Hardt and Negri remind us, we should not be fooled into thinking that we are referring to a metaphor. It is not that the abolition of Greek monetary and fiscal sovereignty is somehow reminiscent of the Nazi invasion, as both left-wing and right-wing protesters in Greece seem to claim; unfortunately, the reality is both more complex and more subversive than that. Rather than falling into the trap of making simple historical allegories between the territorial empires of old and the Financial Empire of today, we should conceive of Empire as a concept; a concept which, in Hardt and Negri’s words, “is characterized fundamentally by a lack of boundaries.” In this sense, the rule of Financial Empire — unlike that of the Third Reich or the British Empire — has no limits. Unlike Nazi troops or British navy vessels, finance capital cannot simply be expelled from Greece’s sovereign territory. Rather than posing a territorial threat to national sovereignty as an occupying force, Financial Empire dissolves the notion of national sovereignty altogether by subverting the power base and popular legitimacy upon which the modern state ultimately depends: its ability to direct the flow of capital through monetary and fiscal policy.
To an extent, capital always-already operated beyond the boundaries of the modern nation state. As Marx and Engels observed in the Communist Manifesto, “The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country.” But with the resurgence of global finance from 1973 onward, the state’s structural dependence on globally-mobile capital has been greatly increased. The state, which continues to exist in its territorial realm, is gradually stripped of its ability to control the de-territorialized flows of investment upon which it relies for its continued existence. As a result, Subcomandante Marcos, who in 1994 led the Zapatista uprising against the Mexican state — which had by that point become fully incorporated into Financial Empire – poetically remarked that, “in the cabaret of globalization, the state appears as a table dancer that strips off everything until it is left with only the minimum indispensable garments: the repressive force.” Thus the creditors’ need to exercise physical repression is greatly reduced: by stripping down the state and exposing its naked essence of institutionalized violence, the process of globalization serves to internalize debtor discipline into the state apparatus, rendering state managers structurally subservient to the logic of global capital.
In 1982, with the structural power of capital firmly on the rise following the collapse of the Bretton Woods regime, the American political scientist Charles Lindblom wrote a controversial article in the Journal of Politics in which he compared the market to a prison. By allowing private investors to withhold much-needed capital from the state and the economy, Lindblom observed, the market effectively functions as a disciplinary mechanism for state managers: you want to raise environmental standards? You’ll have to take into account the impact on business investment — and thus on jobs and your approval rating as a politician. Want to regulate the financial sector? You’ll have to worry about big banks simply moving their assets to another country. Want to raise taxes on the wealthy? You’ll have to consider the fact that your famous movie stars might move to Russia. Whatever you want to do as a politician, as soon as you’re in power, the first thing you have to contend with are business interests, and the punishments businessmen can bring to bear by withholding investment if they don’t like your policies. Most remarkably, Lindblom noted, “this punishment is not dependent on conspiracy or intention to punish … Simply minding one’s own business is the formula for an extraordinary system for repressing change.”
Lindblom’s notion of the market as prison can easily be extended to the global capital markets of today. As Robert Kuttner recently put it in his review of David Graeber’s Debt: The First 5,000 Years, “entire economies abroad, indentured to past debts, find themselves in a metaphoric debtors’ prison where they can neither repay creditors nor resume productive livelihoods.” Similarly, financial lawyer Ross Buckley has written that “we still have something very like debtors’ prisons for highly indebted nations.” As we saw in Greece and Italy in 2011, the automatic disciplinary mechanism of global capital markets ultimately serves to undermine democratic procedures, replacing them with technocratic administration. In the process, politicians are reduced to the role of temporary managers of the state apparatus in the name of financial capital; an arrangement that is ultimately much more convenient and much less costly to the global bankers’ alliance than sending in gunboats or physically occupying a country. In this sense, today’s Financial Empire is really not just a metaphor: it is the culmination of capitalist development into the perfected form of imperialism — one that hardly requires any bloodshed on the part of capital while still ensuring a massive upwards wealth redistribution from the poor to the rich.
We Are All Debt Prisoners Now
But for some, even the overwhelming structural power of finance capital does not appear to be good enough. Even though default has already been ruled out a priori as a “legitimate” policy option in the management of international debt crises, there are still voices going up for further intervention into the sovereign affairs of indebted countries. In the wake of Argentina’s 2001 default, for instance, MIT economists Ricardo Caballero and Rudi Dornbusch argued that “Argentina cannot be trusted” and “Somebody has to run the country with a tight grip.” Stopping short of promoting an outright CIA-assisted military coup — the preferred solution of US-based capital throughout the Cold War era — the authors suggested that “Argentina now must give up much of its monetary, fiscal, regulatory and asset management sovereignty for an extended period, say five years,” and allow foreign commissioners to take over financial management of the country. “Specifically,” they stressed, “a board of experienced foreign central bankers should take control of Argentina’s monetary policy.”
Similarly, Mitchener and Weidenmier, two economists who went to great lengths to emphasize the efficacy of military coercion in deterring sovereign debt default between 1870 and 1913, suggest that today “some type of fiscal or monetary control by an external financial committee may impose needed discipline on recalcitrant debtors.” One prominent conservative commentator on the Latin American debt crisis of the 1980s, whose book was notably praised by IMF Managing Director Jacques De Larosière, Federal Reserve Chairman Paul Volcker, and leading banker Charles Dallara, even went so far as to propose the somewhat frightening notion that “gunboats are the borrowers’ best friend.” Not surprisingly, similar calls for the abolition of fiscal sovereignty are being echoed in European policy-making circles today. In 2011, for instance, one leading member of Angela Merkel’s conservative party argued that “Greece must give up something, like some of its national sovereignty — at least temporarily,” to allow private creditors to be fully repaid.
During the negotiations between Greece and its private creditors last year, Larry Elliot, the economics editor of The Guardian, rightly observed that, even though “the warships have been replaced by spreadsheets … the Troika’s gunboats will [still] get their way.” The real pressure, he observed, now “comes from banks, hedge funds and the team of officials of the International Monetary Fund, the European Central Bank and the EU.” Perhaps, then, we are not as far from the imperial era as we would like to think — and while the use of military force may be considered off bounds today, its real absence is not just the result of some enlightened liberal morality but rather a product of the high costs of military intervention compared to the much more effective methods of financial interventionism that replaced it. Even though one-third of US states still allow citizens to be imprisoned for failure to repay their debts, the general tendency in Financial Empire has been to move away from the direct exercise of punishment towards more structural forms of domination. In this sense, debtors’ prison is no longer just a physical place where “recalcitrant debtors” are locked away from the rest of society; it has become a de-territorialized disciplinary mechanism that encompasses the globe as a whole. We are all debt prisoners now.
Luckily, the structural power of finance capital can never be complete. In fact, those who are willing to take a closer look can already see the cracks in the prison walls – some of them made by the countless escape attempts of the prisoners themselves, as they desperately try to break their way out; others caused simply by the inability of the global financial architecture to support the unbearable weight of the debt load that states, firms and households have accrued over the years. As Lindblom himself importantly stressed, wherever there are prisons, there will also be prison breaks, and the crumbling system of market discipline that sustains Financial Empire is clearly far from escape-proof. The Argentine experience of 2001 is a case in point. While there is no need to romanticize Argentina’s widely-discussed default — rather than a revolutionary act of defiance, it was simply a desperate (and successful) populist attempt by the established Peronist elite to cling on to power in the face of massive social unrest — the most important lesson to emerge from Argentina is that, in the face of a spontaneous and sustained popular uprising, even the strongest walls will eventually cave in.
Indeed, Financial Empire may have reduced us all to modern-day debt prisoners, but we can still become the social protagonists of history’s greatest-ever prison break — as long as we draw the right lessons from the long history of imperial domination that led us to this defining point in human history.
THERE are three reasons why a managed exit by Ireland from the eurozone is the most urgent economic priority. But first consider this reality.
He was referring, in particular, to the impact of eurozone polices on peripheral countries. But much closer to the centre, France — whose credit rating was downgraded late last year — is now deeply mired in a second recession, with no obvious way forward. The Economist has called France “the time-bomb at the heart of Europe”.
In the late summer of 2010, I argued in these pages and elsewhere that if Ireland did not change course, matters would be taken out of the government’s hands. They were. The “inconceivable” happened. The “inconceivable” may be happening again.
The austerity doctrine imposed the burden of adjustment to the post-2008 economic collapse on the labour market. It is an indefensible misuse of economics that the eurozone “authorities” should seek stability on the back of tens of millions of unemployed — this month’s eurozone unemployment figures reached yet another record.
It is equally indefensible that, within an economic epoch characterised by intellectual capital and innovation, youth unemployment should now stand at an average of 25% — and more than double this in some of the peripheral countries which are most in need of their intellectual capital and capabilities.
At this stage in the present recessionary cycle, there is no sense in what is being done to the economy — and what is being planned for forthcoming budgets. After five austerity budgets the deficit has been reduced, at a terrible cost, and with much further to go. The country has been brought to the brink just to impose further cuts of €300m — of which half is slated to come from health including disability services that are already bleeding.
“Adjustment” to an economic shock is never painless. Adjustment to the post-2008 crisis required deleveraging the banking system, restructuring the economy and restoring competitiveness. However, the larger point is that the whole Irish political system proved incapable of delivering a consensus around how we could ourselves undertake these “adjustments”. Instead, it ceded responsibility to our “partners” — and it has used the power of strangers to enforce regressive and counterproductive policies. The policies reflect the self-interests of other and larger powers.
The economies of a still growing number of countries are being impoverished while countries at the centre — Italy and France — are caught in the headlights of a still lengthening recession across the eurozone. The only response has been “we need more integration”, or, to put it another way, more and more power and control to the centre. But it is the policies dictated from the centre that are the cause of the problem, and which are now subverting what the wider European project was originally all about.
Ireland is caught up in this nihilism. We have learned the hard way that no one at the centre is much interested in Ireland, except as a nuisance in terms of its corporation tax (which is now under very real threat). Also, as a “poster child” for policies that have failed and whose failure has, as the IMF have repeatedly pointed out, jeopardised global economic stability.
So, to return to the three primary reasons for a managed exit by Ireland from the eurozone.
The first arises from the fact that, facing into an unprecedented economic crisis, the eurozone “authorities” required countries with very different economies and burdens to conform to the stability and growth criteria — a maximum 3% budget deficit and a 60% debt/GDP. These were originally “indicative”. And yet, in the face of a seismic and accelerating economic crisis, these indicative criteria were transformed into articles of faith, to which all had to conform. It made no sense.
Furthermore, the intellectual underpinning of austerity which the eurozone “authorities” adopted was the Roghoff/Reinhart theorem — that is, above a debt/GDP ratio of 90%, countries enter a kind of “black hole” from which they cannot escape. This has been discredited. Nobel Prize-winning economist Paul Krugman and others have argued that the line of causation probably does not run from “high” debt to low growth but rather from low growth to rising debt. Common sense would indicate that this was surely the case in the post-2008 eurozone.
These fundamental errors were reinforced by the destructive time-table initially required for adjustment. In the case of Ireland, being compelled to even attempt to meet the “stability” criteria by 2014 was deeply damaging — it further exacerbated the underlying problems of adjustment. The eurozone authorities were wrong in their myopic fixation on reducing debt and effectively ignoring what is key to the whole ratio, namely, growing GDP, while simultaneously pushing ahead with, and incentivising, structural reforms.
Instead, there has been a succession of crisis summits involving people with big jobs talking about people with no jobs being “more flexible”.
In recent months, the eurozone authorities have started backtracking: Grudgingly accepting the evidence that their short- term austerity doctrine has been enormously damaging to the eurozone and to global stability. It is a bit late for them to be making speeches on “rebalancing austerity”.
It is little comfort to Ireland or its economy to have “good” school reports from a troika comprised of European institutions whose policies were deeply flawed and an IMF that has no business lending its credibility to an ideologically driven agenda.
It defies common sense that an Irish government should still feel obligated to defend such policies and attempt to impose two more years of “fiscal consolidation”.
Talk of “exiting the bailout” is wide of the mark. The burden of ‘troikanomics’, including onerous debt-servicing costs, stretch into a future that is dominated by those who preached the austerity doctrine in the first place.
Ireland’s growth capacity has been compromised; the best and brightest — our engineers and architects, doctors and nurses, teachers, entrepreneurs — have left and the morale of those remaining is being destroyed. This is not “adjustment”; it is tantamount to self-harm.
The second reason for a managed exit by Ireland is that these same policies are doing enormous damage to two of the most fundamental pillars of a stable and functioning democratic economy. Healthcare and education are the foundations for sustainable growth, innovation and social solidarity. The cuts being imposed arising from the doctrine of austerity are not evidence-based. At the micro-level, in schools and local health provision, they are doing damage that will take years to reverse. The only force that is driving these cuts is short-term book-keeping to appease the troika.
The third reason relates to the damage that is being done to the wider EU project. Ireland is, by its history and conviction, empathetic with Europe and with European solidarity. Austerity has, however, reinforced German hegemony within the eurozone and there is little evidence of the solidarity that was once at the heart of the European project. The UK’s disenchantment with Europe has become significantly more marked. Recent survey evidence demonstrates a deep-seated and widening gulf between the peoples of France and Germany. Expectations of recovery are no longer taken seriously by people in the eurozone.
Recovery cannot be built on a lack of confidence or disillusionment. Ireland has become dependent on the powerful and the peddlers of myths. It does not have to be dependent. It can contribute far more to the European ideal and the single market, outside of the eurozone. Denmark is a case in point.
There is no longer any appetite for the argument that only further integration will solve this crisis. This is a self-serving argument and finds no resonance among national populations. There is always a danger to democracy when the elite — the ‘authorities’ — become semi-detached from the beliefs of the people from whom they get their legitimacy. Riot control is a poor and an obdurate response to the reality that the ‘authorities’ have lost the argument.
In a world a little braver, a bit more far-seeing and one which was capable of learning — and moving on — Ireland would host a meeting of the peripheral countries. They would hammer out the basis for a managed exit from the eurozone for all or some. Those who aspire to national leadership would come out from behind the barricades of “There is no alternative” and would take up again the freedoms and responsibilities of which they are trustees.
Rather than solving Europe’s crisis, EU institutions are allowing corporate elites to further enrich themselves through a fire sale of state assets.
The text and infographics below are excerpted from a new working paper, Privatising Europe: Using the Crisis to Entrench Neoliberalism, which was just released by the Transnational Institute in Amsterdam:
The European Union is currently undergoing the biggest economic crisis since its foundation 20 years ago. Economic growth is collapsing: the eurozone economy contracted by 0.6% in the fourth quarter last year and this slump is set to continue. The euro crisis was incorrectly blamed on government spending, and the subsequent imposition of cuts and increased borrowing has resulted in growing national debts and rising unemployment. Government debts in crisis countries have predictably soared: the highest ratios of debt to GDP in the third quarter of 2012 were recorded in Greece (153%), Italy (127%), Portugal (120%) and Ireland (117%).
Europe’s member states have responded by implementing severe austerity programmes, making harsh cuts to crucial public services and welfare benefits. The measures mirror the controversial structural adjustment policies forced onto developing countries during the 1980s and 1990s, which discredited the International Monetary Fund (IMF) and World Bank. The results, like their antecedents in the South, have punished the poorest the hardest, while the richest Europeans – including the banking elite that caused the financial crisis – have emerged unscathed or even richer than before.
Behind the immoral and adverse effects of unnecessary cuts though lies a much more systematic attempt by the European Commission and Central Bank (backed by the IMF) to deepen deregulation of Europe’s economy and privatise public assets. The dark irony is that an economic crisis that many proclaimed as the ‘death of neoliberalism’ has instead been used to entrench neoliberalism. This has been particularly evident in the EU’s crisis countries such as Greece and Portugal, but is true of all EU countries and is even embedded in the latest measures adopted by the European Commission and European Central Bank.
This working paper gives a broad and still incomplete overview of what can best be described as a great ‘fire sale’ of public services and national assets across Europe. Coupled with deregulation and austerity measures, it is proving a disaster for citizens. Nevertheless, there have been clear winners from these policies. Private companies have been able to scoop up public assets in a crisis at low prices and banks involved in reckless lending have been paid back at citizens’ expense.
Encouragingly though, there have been victories in the battle to protect and improve Europe’s public services which serve as beacons of hope. There is even a counter-trend of remunicipalisation taking place in Europe as people have become aware of the cost and downsides of privatising public services, particularly water. As public awareness grows that the European Commission far from solving the crisis is using it to entrench the same failed neoliberal policies, these counter-movements and growing popular resistance can work together to halt the corporate takeover of Europe.
Was away over Easter in a far flung part of this island. But, was able to get the Sunday Business Post in its print edition and what did I read? Nothing but good news there… no, excuse me, not so good news. For the headline read:
Austerity to end by 2016 but ten years of tight budgets to come.
And reading further it was hard to see how one could differentiate between the pre-2016 and post-2016 era. Actually it’s interesting how it was phrased. Some will recall that the narrative has been shaped by a ‘spending beyond our means’ line and how cuts and austerity were not merely necessary but actually good. But the report notes that 2016 will ‘show the end of huge cuts to public spending and tax increases in 2016’. Which is interesting in that at least the scale of said cuts is unvarnished.
In effect his this will mean that the government finances will remain extremely tight for another decade, during which time they will be overseen by European authorities.
This being the case it does make something of a mockery of all the talk of ‘regaining our sovereignty’ does it not? For if sovereignty meant anything it fundamentally means the capability to make our own decisions and allow for those being both good and bad. Though it’s hard to argue that the actual situation will be good, in the context of said European supervision.
And there’s more.
There will be little or no scope for spending increases beyond the rate of economic growth nor will there be resources for tax cuts.
Let’s put the latter to one side, that being the SBP’s trope of the day, every day, but let’s note that once austerity has done its magic nothing changes. Literally nothing. We will be locked into a permanent 2016, or near enough permanent. It’s hardly worth dragging out the growth and stimulus argument, we’re all well aware of it at this stage, but this has effects beyond the economic.
For a start it suggests a complete shutting down of alternative economic policy options. What is political contest in a state which has in itself decided that there can be no change, and worse again is constrained by the EU and others in this. This provides both challenge and opportunity for those who would argue otherwise, for almost every argument in that context is an oppositional one, and if not revolutionary – after all, let’s not get ahead of ourselves, it is one that provides a direct push back against the orthodoxy and the status quo.
That’s, in a sense, the broader context, but more narrowly this has significant ramifications.
One obvious follow on from this is that this must spell ruin to Labour’s ambitions of a recovery, and not very good news at all for Fine Gael, for despite all their right of centre tilting they are as aware as any Fianna Fáil member of the necessity to disburse something to the citizenry, and how, at the end of the near enough decade of austerity that need will be greater again.
Indeed it suggests that the messages both FG and LP can craft are minimal in terms of their attractiveness for the post-2016 period.
Now granted none of this is new, we’ve known broadly the parameters that the state will operate under for quite some time, but now it is beginning to come into sharper focus. Particularly as a sense that economic growth is quite some way off.
But if one thinks that’s it, what of this last weekend’s news, again from the SBP that:
The fund states that this could happen in a “downside scenario” when slow growth would hit the property market. It believes this would increase bank mortgage loses and hamper Nama’s ability to dispose of its mammoth loan book.
The IMF has also called for more EU help for Ireland, warning that, if economic growth does not recover as expected, the national debt will quickly rise to unsustainable levels. The warning places further pressure on the European Union to ease the terms of the €40 billion it has advanced to Ireland through as part of the bailout.
Thing is we’re living in precisely that ‘downside scenario’. Only this weekend the Central Bank revised growth forecasts downwards yet again.
Now the IMF is an unreliable operation, in so far as it often appears to be speaking out of both sides of its mouth simultaneously. Nor is it’s ‘good cop’ to the ECB/EU ‘bad cop’ routine entirely convincing. Yet there is a consistency now to its refrain that growth must be supported. But contextualise its thoughts with those already outline above and far from things looking as if they’re getting better it would appear that stagnation, is at best, the light at the end of the tunnel.
The Irish government is halfway through its Presidency of the Council of the European Union. The Presidency Programme targets “stability, jobs and growth” and picks a round of “fights”, namely: the fight against poverty, the fight against hunger, the fight against the effects of climate change, and the fight against tax evasion and tax fraud.
The fight against poverty
In the ‘fight against poverty’, the programme makes reference to the Europe 2020 Strategy, which aims to lift 20 million people out of the risk of poverty or social exclusion by 2020. No mention is made of the fact that, last year, the Irish government reduced its target from eliminating consistent poverty by 2016, to reducing it to 4% by 2016. The European Anti-Poverty Network expressed alarm at this reduction. In its key message on the overall target, the organisation said: “Austerity policies are generating poverty and undermining an inclusive recovery.” Far from reducing poverty, European and Irish policy, through austerity, is concentrating wealth and thereby increasing poverty. Ireland, at the helm of the EU, is presiding over poverty.
The EU, which often praises its own role in international development, need not look beyond its own borders to see widespread poverty. 24% of the EU27 population is at risk of poverty or social exclusion (approximately 120 million people) and up from 23% the previous year. At 38%, Ireland has the highest rate of children at risk in Western Europe and the fifth highest of the EU27. The Irish League of Credit Unions ‘What’s Left’ surveys are important indicators in the Irish media and have been ‘noted’ by the Troika. The latest of these, based on December 2012, showed that 61% of people have less than €100 left at the end of the month once essential bills are paid, 36% have less than €50 and 20% have nothing at all. Another survey showed that 56% of Irish homes have been forced into debt to pay household bills.
The CSO’s Survey in Income and Living Conditions demonstrates that almost one quarter of the population, over one million people, experienced two or more types of deprivation in 2011. These types of deprivation include: unable to afford to replace any worn out items of furniture, without heating at some stage in the last year, and unable to afford a roast one a week. This poverty has manifested itself in hunger as 10% of the population or 450,000 people are in food poverty. One cannot deny that there are a significant amount of people that are struggling to get by in modern Ireland.
‘One law for the rich, one for the poor’
Despite these levels of poverty, we remain a very wealthy as a society. But this wealth is concentrated in very few hands. According to the CSO and Credit Suisse, the total wealth in Ireland is €468 billion. Half of this is owned by the richest 5%. The top 1% (36,000 adults), where the true extent of the concentration of wealth is seen, own a startling €131.5 billion or 28% of all wealth in Ireland. This is same amount as owned by the poorest 80%, 2.9 million adults! The chart below indicates the distribution of wealth across the population deciles (10%). The concentration of wealth can clearly be seen as the richest 1% towers over the other deciles. The first five deciles, the poorest 50% of the population, between them own €4.8 billion and barely register on the chart.
The application of austerity in the last six budgets, far from closing these gaps or protecting the vulnerable, has seen the rich get richer. According to the CSO, between 2009 and 2010 the disposable household income of each decile fell, except that of the richest 10% – which increased. In the year following two austerity budgets, the poorest 10% of people got 26% poorer while the richest 10% got 8% richer. This scenario was acknowledged by the European Commission last year: “Italy recorded a particularly sharp rise in financial distress followed by Greece, Ireland, Cyprus, Portugal and Spain, with the upper quartile seeing the greatest impact of the rise in all except Cyprus and Ireland where the lower quartiles bore the brunt”.
The proponents of austerity, the Troika, cannot even agree over whether the policy is working, with recent exchanges between the EU and IMF. An IMF working paper in January found that “stronger planned fiscal consolidation has been associated with weaker growth than expected” and that “fiscal multipliers were substantially higher than implicitly assumed by forecasters,” particularly in the short term. Fiscal multipliers, though only one factor to consider for fiscal policy, are an indication of the effect of changes in government spending on economic output (GDP). The IMF has found that fiscal multipliers due to fiscal consolidation (austerity) are far higher than originally assumed and are of the order 0.9 to 1.7. This means that every €1 cut from government spending will reduce economic output by between €0.90 and €1.70. Far from improving the situation, austerity is making things much worse and, in fact, both Ireland and the Eurozone are officially back in recession.Despite the government rhetoric, employment is not rising and emigration is. Nobel Prize-winning economist, Paul Krugman, has described austerity as: “an unethical experimentation on human beings going on across the world right now”.
Austerity may not be working for most of us, but it certainly is for the super-rich. The richest 300 people in Ireland make up the richest 1% of the richest 1% of adults. These 300 people in Ireland own €66bn. That’s more than that of half the population and almost as much as the entire bailout package. The era of austerity has been very good to these people as their take has risen from €50 bn (2010), €57 bn (2011), €62 bn (2012) to €66 bn (2013), according to the Sunday Independent. That’s an increase of one third in just three years!
The ideology of austerity has become EU and Irish law through the Fiscal Compact Treaty, the ‘Six Pack’ and the ‘Two Pack’. Therefore, if one agrees that this austerity law has benefitted the rich while the poor get poorer then we certainly have a case of, as Christy Moore puts it, ‘one law for the rich, one for the poor’.
Debt, investment and demand
It is in this context that at least €64 billion (or 40% GDP) of private banking debt has been taken on by the Irish State. According to economist Michael Taft, Ireland has borne the brunt of European banking debt, 42% of the total cost of the European banking crisis. The recent promissory notes ‘deal’ does not represent any success for the Irish Presidency of the EU. The liquidation of IBRC and conversion of the promissory notes to 25-40 year government bonds completes the transfer of private banking debt to sovereign debt liable to be paid by the Irish public. According to Prof. Terrence McDonough of NUI Galway, the deal represents little to no saving, will not reduce austerity, and is really a “scam”.
The application of austerity in Ireland cannot therefore be separated from the private banking crisis. The socialisation and subsequent repayment of these private banking debts has been an effective transfer of wealth from across Irish society to investors in major international banks (the bondholders), i.e. from the side of labour to the side of capital, from poor to rich. Such a transfer (particularly in the context of austerity) is making the crisis worse as it reduces consumer spending , i.e. aggregate demand. Nobel Prize-winning economist, Joseph Stiglitz, describes this process as follows: “In effect, we have been transferring money from the poor to the rich, from people who would spend the money to people who do not need to spend the money, and the result of that is weaker aggregate demand”.
As austerity continues, and as the property tax and the Croke Park 2 cuts are coming down the line), domestic demand (personal consumption + government expenditure) has fallen each year. The latest Quarterly National Accounts show that personal consumption has fallen by €7bn government expenditure by €5bn since 2007, however the big loser has been gross fixed capital formation (investment) which has fallen by over €20bn and is now the lowest in the EU27 as a percentage of GDP. Economist Michael Burke has outlined the investment strike taking place in Ireland since 2007. Put simply, business is not investing for production, and this is holding back employment and economic growth.
To overcome the private investment strike, the state should invest to kick start the economy through large-scale job-creation schemes and should reverse public sector cuts. However, the austerity doctrine holds that the debt must be repaid and the deficit must be reduced. Overcoming the investment strike by investing billions of Euro, say in social housing construction or food production, is effectively illegal. The true fight against poverty is a fight against austerity. It is a fight for public investment to overcome unemployment and a fight to put the needs of the vast majority in society above those of the super-rich.
Repossession is the order of the day from the IMF.
So what is next on the IMF agenda? Is it to be the total destruction of the Irish Nation… Shortly to be known as “Destitution Incorporated ” administered by the IMF
The International Monetary Fund has delivered a tough assessment of Ireland’s economic situation, highlighting lack of progress by banks and dangers of the country’s debt becoming unsustainable if growth forecasts are missed.
The fund has criticised Irish banks for “inadequate progress” in dealing with non-performing loans.
In its latest review of Ireland’s bailout programme, the fund also raises concerns that banks are losing money even before putting cash aside to cover bad loans.
The IMF states that lenders are “only beginning to tackle non-performing loans”.
It says repossessions are low at 0.3% of total mortgage arrears in 2012, compared to 3.25% in Britain and the United States.
The IMF suggested a need to strengthen the efficiency of the repossession regime.
It also said that the designation of specialist judges could concentrate expertise for handling a “potentially larger volume of repossession cases in an expedited manner”, while maintaining protections for homeowners.
While acknowledging progress to date, the fund expects Ireland’s economy to grow by 1.1% this year, by 2.2% next year and by 2.7% in 2015.
However, it says if growth was to fall short of these targets and to remain a sluggish 0.5% per year, public debt would escalate to one-and-a-half times the size of the economy by 2021.
That would put the economy on what the IMF calls an “unsustainable path”.
It says allowing the European Stability Mechanism bailout fund to directly invest in Irish banks could play “an invaluable role” in improving the country’s prospects for recovery and making the public debt burden more sustainable.
The high unemployment rate is also a focus of IMF attention.
“If involuntary part time workers and workers only marginally attached to the labour force – two groups that registered significant increases – are also accounted for the unemployment and underemployment rate stands at a staggering 23%,” the review says.
I have been watching articles pour forth about Cyprus all weekend. I am almost
as aggravated with the majority of them as I am with what took place. People are
dancing around the edges while the propaganda machines of Europe are
churning out the usual bunk.
Let’s get some things
straight and look what has happened directly in the face. There was no
tax on the bank accounts in Cyprus. There still is no tax; the Cyprus Parliament
has not passed it and will not vote on it until tomorrow so whatever action
takes place it is retroactive. Next, this was not enacted by Cyprus. The people
from Nicosia did not go to the Summit and ask to have the bank accounts in their
country minimized to help pay the bills. Far from it; the nations of
Europe, Germany, France, the Netherlands and the rest, demanded that this take
place, a “fait accompli,” the President of Cyprus said and Europe
annexes Cyprus. Let’s be quite clear; the European Union has confiscated the
private property of the citizens in Cyprus without debate, legislation or
A bank account is not a bond or a stock
or any sort of investment. This seems to be lost on many people. A bank
account is the private property of a citizen or a corporation and does not
belong to the government or at least that was the supposition up until now in
Next there is deposit insurance in Europe.
Every country has its own version but it is there. It guaranteed the bank
accounts of citizens up to one hundred thousand Euros. So much for the meaning
of any guarantee in Cyprus or any other country in Europe. Null and Void! If the
European Union can dismantle deposit insurance in Cyprus they can damn well do
it in whatever country they please and at any time.
Here’s the description of the Cypriot government deposit insurance plan:
“Participation in the DPS is compulsory for all banks authorized by the Central Bank of Cyprus, i.e. banks incorporated in the Republic of Cyprus, including their branches in other countries, and the Cyprus branches of foreign banks, incorporated outside the Republic of Cyprus or the Member-States of the European Union. The DPS does not cover deposits of branches of banks established in European Union Member States. These deposits are covered by the corresponding deposit protection scheme established in the country of incorporation.
The DPS is activated in the event a decision is reached that a member bank is unable to repay its deposits, or as a result of a Court’s order for the winding-up of a member bank. Where a bank is unable to pay its deposits, the relevant decision is adopted by the Central Bank of Cyprus or, where a member bank is incorporated in a country outside the Republic of Cyprus, by the competent supervisory authority of the country of incorporation.
The maximum level of compensation, per depositor, per bank, is €100.000.”
Please note that until yesterday all depositors in Cypriot banks were insured up to the value of €100,000 with any one bank. Today that solemn governmental promise has been shown for what it is; a lie. Worse and actually far worse and quite scary in fact is that the European Union and the European Central Bank and the IMF has not just allowed violation of the deposit insurance but demanded it. One thing is certain here; if they can void deposit insurance in Cyprus then they can void it in any country in Europe. Further; if they can void deposit insurance then they can void bond covenants with the scratch of a pen on paper. Nothing now; Nothing is safe!
Pay attention please. The European Union and the European Central Bank and the IMF have just advocated the confiscation of private property for their own indulgence. Bank accounts are not bonds or stocks or some other form of investments. It is private property like your house or your car. Germany, France et al came in and said, “We want it and we are taking it and it is necessary for our government.” These countries did not demand it, yet, from their own citizens though they might soon but they demanded it from the citizens of Cyprus in exchange for funds. This is not a European Union this is a European Fourth Reich!
“The moment the idea is admitted into society that property is not as sacred as the law of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.”
Eurozone nations have to fundamentally reorganize themselves and shift sovereignty away from national parliaments to new layers of centralized, transnational, beyond-control bureaucracies that can decide at will when to extract untold wealth from taxpayers. That’s what the Eurozone has to do, according to the “first ever European Union-wide assessment of the soundness and stability of the financial sector,” released Friday by the institution that the world couldn’t do without, the IMF.
“Financial stability has not been assured,” the report stated flatly about the fiasco in the Eurozone, despite ceaseless hope-mongering by Eurocrats and politicians, and banks remain “vulnerable to shocks.” The report, which never mentioned banks or countries by name, discussed a number of “risks” that could topple these banks, with some of these “risks” already having transitioned to reality:
“Declining growth.” Banks with “excessive leverage, risky business models, and an adverse feedback loop with sovereigns and the real economy” are particularly vulnerable. Hence, most banks. A number of European countries have been in a deep recession, some of them for years. So “declining growth” is a reality, and these “shocks” are happening now, said the IMF in its more or less subtle ways.
“Further drop in asset prices.” Real estate prices are now dropping in some countries that didn’t see a collapse during the first wave, including France and the Netherlands—where it already took down SNS Reaal, the country’s fourth largest bank [A Taxpayer Revolt Against Bank Bailouts In the Eurozone]. So hurry up and do something, the IMF said.
The report points at other risks for banks. Pressures in wholesale funding markets could dry up liquidity and tighten refinancing conditions. And the market could lose confidence in the sovereign debt that banks hold. For example, an Italian bank, loaded with Italian government debt, would topple if that debt lost value—but of course, the report refuses to name names.
And in “several countries,” the heavy concentration of megabanks “creates too-big-to-fail problems that could amplify the country’s vulnerability.” So Germany, France, and the UK. Alas, in Europe too-big-to-fail doesn’t necessarily mean big. In tiny Cyprus, fifth country to get a bailout, the banks, though minuscule by megabank standards, are getting bailed out anyway. It’s psychological. A fear. If even a small bank were allowed to go bankrupt, the confidence in all banks across the Eurozone would collapse. That’s how fragile Eurocrats and politicians fear their banks have become—despite their reassurances to the contrary.
And so “policymakers and banks need to intensify their efforts across a wide range of areas” to save these banks, the IMF exhorts these Eurocrats and politicians.
Big priorities: “bank balance sheet repair”; banks should build larger capital buffers to be able to absorb shocks. And “credibility” repair of these balance sheets. In an admission that bank balance sheets still aren’t worth the paper they’re printed on, the IMF calls for stiffening the disclosure requirements, “especially of impaired assets” that are decomposing in hidden-from view basements.
The new Single Supervisory Mechanism (SSM), the EU-wide banking regulator under the ECB, to be operational by early 2014, would have to have real teeth, along with expertise, the IMF pointed out. It should regulate all banks in the Eurozone “to sustain the currency union” and in the entire EU to sustain “the single market for financial services.” In other words, without the SSM, the currency union won’t make it.
But the IMF’s killer app is the Banking Union, a “single framework for crisis management, deposit insurance, supervision, and resolution, with a common backstop for the banking system.” Under this system, taxpayers in all Eurozone countries would automatically be responsible for bailing out banks, their investors, bondholders, counterparties, and account holders in any Eurozone country.
For the most hopeless cases, the Single Resolution Mechanism would step in to dissolve banks “without disrupting financial stability”—hence bail out investors, disrupting financial stability being a term that’s commonly used to justify anything. The medium would be the transnational taxpayer-funded ESM bailout fund; it would bail out banks directly, rather than bail out countries after they bail out their own banks—which is the rule today.
In the process, countries would surrender much of their authority over banks—and how or even whether to bail them out—to this new instrument. Decision makers would be Eurocrats, far removed from any popular vote. Victims would be the people who’d end up paying for it. Investors and speculators would profit. Other beneficiaries would be politicians who’d no longer have to bamboozle voters into bailing out banks because it would be done by a distant power.
The dictum that there is never an alternative to bailouts would be cemented into the system. Democracy, which always gets trampled during bailouts, would be essentially abolished when it comes to transferring money from citizens to bank investors. And that’s of course the ultimate goal of the banking industry.
The stark reality facing millions of Spaniards, Italians, Greeks, and Portuguese is hidden—buried deep under a mountain of economic data, massaged to suit the purposes of the central planners-in-chief.