19 November 2010

One Crisis - Two Narratives

One of the most fascinating things about the terrible situation in Ireland nowadays is how there are very different narratives inside and outside Ireland to explain what's happened. To the largely europhobic British media, the story is simple: being in the Eurozone gave Ireland access to too much cheap credit, all offered at inappropriately low interest rates, which caused a credit bubble that has exploded. In short, it's all the fault of the Euro. Or, if you like, we told you so, and Maggie was right all along. Even the less characteristically europhobic elements of the British media seem to have bought into this story.

The Irish media, on the other hand, realises the Euro really isn't the problem, and the British crowing about it is far more reflective of Britain's issues than Ireland's. As Jason O'Mahony says in this superbly cutting post:

The Euro is not the source of our problems. Our exports continue to perform strongly. Please stop trying to project your Euro neurosis onto us. The Euro has flaws, but it is still where we need to be. We need to be competitive by cutting our costs, which we are doing, not by some Harold Wilson style three card trick.

It's true, after all, that our trade surplus is widening as our exports keep growing, and Goldman Sachs reckons that the situation is rather better than people seem to fear.

But if our estimates suggest anything, it is that the ultimate losses, and the ultimate burden on the Irish government, will be quite a bit lower than estimated by NAMA, which is likely to make money on its investments. Correspondingly, the government will significantly have over-capitalised the banks, perhaps by tens of billions of Euros.

Certainly, the situation is far more complex than us simply being trapped in the wrong currency. GS's analysis is summed up by saying that the fiscal crisis is a consequence rather than a cause of our collapse in output. This should make sense to anyone who's not been wearing ideological blinkers when watching how Ireland's economy has performed over the last twelve years or so; the fact that George Osborne was singing its praises at a time when the country was obviously an inflated bubble speaks volumes about his understanding of such matters, or at least it did four years ago; perhaps he's learned.

This isn't a matter of the wisdom that comes with hindsight; for years Garret Fitzgerald has been grumbling about how our national expenditure was too high while we simply weren't producing things and were dependent on construction to keep the wheels turning, Fintan O'Toole was pointing to the state's infatuation with a neo-liberal ideology that was pouring money into people's pockets and building nothing for when the good times ended, and David McWilliams memorably pointing out four years ago what the Ghost Estates around the country were destined to mean. I had huge arguments with friends before the 2002 and 2007 elections, with them happily voting for the status quo despite the writing being on the wall, or at least in the mainstream media, if they could be bothered to look.

Yes, it's true that easy access to cheap credit from German banks has played an enormous part in this whole farce, but this is hardly a matter of us being in the Eurozone. We have a young population that grew up with nothing and wanted to have everything; of course German banks, overloaded with pensioners' savings, wanted to lend to us. They'd lend to anyone! Look at Britain, with its national debt of more than £950 billion and its total personal debt of almost £1,500 billion! There's also the fact that not all of our debt has come from Eurozone countries -- our single largest creditor, to whom we owe a fifth of our debt, is the UK, with our third- and sixth-largest creditors being the United States and Japan. No, this problem wasn't caused by our using the same currency as our neighbours.

Inflation has been a huge problem in Ireland since the mid-1990s. I visited Berlin in 1996 and was struck by how expensive it was, and again five years later, before the physical adoption of the Euro as a real currency, and was amazed by how cheap it was. It hadn't changed; Ireland had. Inflation was rife, and property prices were rising, and rent was rising, and rather than bring in rent controls or otherwise try to cool the property market, the government instead decided to allow incomes to rise too, keeping taxes low and in 2002 raising all public servants' pay in accordance with a national benchmarking agreement.

More money was poured into the economy, driving labour costs up in the private sector and raising inflation in general, making us less competitive than we had been, all at a time when the hi-tech sector was feeling the aftershocks of the Dot.com Bubble bursting, and tourism was trying to cope with the double-whammy of the restrictions imposed by the Foot and Mouth Crisis and the of the collapse in American tourism following 9/11. Output declined, and the only thing keeping the economy going was the frenzy of construction, all funded by cheap credit, gambled on the new buildings being sold for a huge profit.

The buyers weren't there, though, as the credit began to dry up, and when the global banking system went into a tizz, the Irish banks, lightly regulated for far too long, turned out to be hugely overstretched. The government -- perhaps pressured by our partners in Britain and the Mainland who feared their own banks mightn't get their money back -- guaranteed to cover the banks, no matter what. This calmed things down, and we won plaudits internationally as teeth were gritted, belts were tightened, and costs were cut. It didn't work though, not least because it turned out that the banks had massively played down just how reckless they'd been and how overstretched they were.

This made it look increasingly likely that the bank guarantee would sink us, that it would, in hindsight, turn out to be an enormous mistake, though until a couple of months ago it was a mistake that could have been solved, in a sense, by the government changing the terms of the guarantee, pointing out that it had been misled about the scale of the banks' problems. The opportunity wasn't taken, though, and the government stuck to its guns, determined for whatever reason to keep to the letter of its word, thereby ensuring that people and institutions who had gambled with risky loans to Irish banks would get all their money back. And we all know what that's brought us to over the last fortnight.

It's difficult to tell, of course, whether the government is bluffing in saying it doesn't need a bail-out; there is a serious argument that it's more in the interests of the likes of Britain, Germany, and France than it is for us to accept their money -- and on their terms -- and that this is about preserving their banking systems and the European economic system as a whole. Of course, if that were destroyed, we'd be lost anyway...

So, are we doomed? The government and Goldman Sachs don't think so, and if it's just a matter of regaining confidence and keeping to our current austere path then we might be okay. Have we lost our sovereignty? I don't know. Did the UK lose its sovereignty when it called in the IMF back in 1976? If it did, did it get it back? Mightn't we do likewise?

Whatever way we look at it, those buffoons who babble about Ireland rejoining Sterling or even the United Kingdom, no matter how tongue-in-cheek their suggestions are, really need to calm down.

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