Austerity on steroids
The economic unraveling of Ireland highlights the severity of the financial crisis--and the increasingly severe government cutbacks that will be used to pay for it.
FIRST, THE government devotes enormous sums to bailing out the banks. That causes budget deficits to balloon. Then the government imposes austerity by cutting wages, raising regressive taxes and slashing social spending.
This is the essence of what happened in Ireland to lead to the approximately $114 billion "rescue" of the economy by the European Union (EU). The same happened to Greece before Ireland, and the dynamics have been similar in the U.S. and other countries.
It's an international drive to impose austerity--from European bureaucrats twisting arms in Dublin and Athens, to the bipartisan gang in the U.S. that wants to carve up Social Security and Medicare. The same people who spared no expense when the banks were in trouble now want working people to pay for it all.
The EU's deal for Ireland, reached November 21, could fall apart if the Irish parliament, the Dail, fails to approve a proposed austerity budget in a vote set for December 7. But if it does fail, the "troika" of the EU, the European Central Bank and the International Monetary Fund (IMF) will keep up the pressure.
The terms of the Irish deal were complicated by political considerations in both Ireland and across Western Europe. But its goal was not in question. Irish workers, who had supposedly escaped a long history of colonialism and poverty thanks to the roaring "Celtic Tiger" economy of the 1990s are now being told that they must give back the gains of those years--and then some.
The IMF's proposal? Cut the minimum wage and reduce unemployment benefits--for starters. The government is complying with a proposed budget that includes a 12 percent reduction in the minimum wage, cuts in welfare spending of between 5 and 10 percent and a 5 percent cut in weekly unemployment benefits. Groups that get government funds to work with people with disabilities were told to expect cuts of 20 percent, and an unstated number of public-sector jobs will be cut.
THE IRISH economy has been a ticking time bomb since October 2008, when the government stepped forward to guarantee the transactions of the Irish banks, which had become huge in proportion to the economy of a country with a population of only about 4.5 million people.
Ireland's low corporate tax rate of 15 percent had made the country an attractive destination for foreign direct investment by big U.S. and European companies. At the same time, Ireland used its membership in the EU to attract financial capital, while offering tax breaks similar to the notorious offshore banking centers of the Caribbean.
To try to preserve all that, the Irish state gave its unconditional backing to the banks after the crash on Wall Street and other world financial centers. The British, German, French and U.S. governments--as well as those of smaller countries like Greece--were compelled to do essentially the same thing.
The problem for Ireland was that its political leaders had bitten off far more than the small country could chew. Before the EU rescue deal, the Irish government had predicted that it would spend a total of $60 billion to bail out the banks--a huge amount for an economy with an annual gross domestic product (GDP) of $228 billion. In fact, the assets of Ireland's private banks are five times bigger than the country's GDP.
As was the case in Greece earlier this year, speculators concluded that Ireland would eventually be unable to fully repay its debts. As Alen Mattich wrote on his blog at the Wall Street Journal Web site, "When Ireland's banks were threatened by depositor runs during the early days of the credit crunch, the government stepped in to guarantee the sector's liabilities. A huge burden of private-sector Irish debt suddenly became public."
As a consequence, interest rates on Irish government bonds eventually spiked upward, which threatened to cripple state finances. Still, Irish political leaders resisted a rescue. That's because Germany and France were demanding that, as a condition for receiving the money, Ireland must raise its corporate tax rate to increase revenue to repay its debt--which would just so happen to take away Ireland's competitive advantage with...Germany and France. Britain went along.
At the same time, the biggest EU countries are desperate to prevent Ireland's banks from triggering a domino effect across the continent. According to the Bank for International Settlements, British banks hold about $131.6 billion in Irish debt, and their German counterparts are on the hook for $138.6 billion. French banks have $43.6 billion, and for U.S. banks, the figure is $57 billion.
In the end, Irish Prime Minister Brian Cowen of the Fianna Fail party claimed that Ireland had retained its corporate tax rate in negotiations over the terms of the bailout. How long that will last is another question. Ireland has effectively lost control of its finances to European bureaucrats and the IMF.
What's left for the Irish government is to draw up plans to further downsize social spending and cut the consumption of working people. Emigration from Ireland, which had stopped during the go-go years of the 1990s, is already on the rise, thanks to a 13 percent unemployment rate--an estimated 100,000 people are expected to leave the country by 2014.
THE IRISH meltdown came despite the creation earlier this year of the $589 billion European Financial Stability Facility (EFSF). The EFSF was part of a $950 billion pool of money rounded up by European governments in May to try to stop the Greek financial crash from spreading to other heavily indebted countries--not only Ireland, but also Portugal, Spain and Italy.
By creating this emergency fund, European leaders were trying to make an implicit guarantee of those countries' debts without having to actually fork over the money. The idea was that the very existence of the fund would stabilize the situation.
Of course, it hasn't worked out that way. Greece, despite a savage series of cutbacks, still won't be able to meet its debt obligations and is stumbling towards an almost certain partial default on its debts sometime in the next few months. Ireland, although it had cash on hand to cover its obligations for the near future, was increasingly seen by investors as a similar risk. The wealthier European governments--in particular, Germany--will therefore have to pay up.
In return for its money, Germany is demanding that the entire economies of Greece and Ireland must be subordinated to repay those debts. France and Britain are going along, too, since, like Germany, they fear that even a partial default on Greek and Irish debt could bring down banks that are still vulnerable from the crash of 2008. Nevertheless, though German Chancellor Angela Merkel is using the IMF and politicians from other European countries as debt collectors so as to avoid allegations of German aggression, Germany is calling the shots.
The problem for Greece and Ireland is that they are chained to Germany through a common currency, the euro. Normally, heavily indebted countries going through recession will try to devalue their currencies in order to make their exports less expensive on the world market and reduce their debt in real terms.
In fact, that's exactly what Federal Reserve Chair Ben Bernanke is attempting to do with the U.S. dollar.
But as long as Greece and Ireland remain in the euro, they will be forced to carry out what economists call an "internal devaluation"--a severe cut in wages and social spending to try to lower labor costs.
The problem in Greece is that austerity is causing the economy to shrink even further, making it virtually impossible for the government to pay off its debts, which now stand at 126.8 percent of GDP--much worse than 115.1 percent that the government anticipated in April.
Sooner or later, Greece will be forced to ask its creditors to accept less than full payment on its debt--a prospect that instilled fear into European financial markets in October and led to the panic over Ireland. When German politicians argued that private bondholders would ultimately have to take some losses on European government debt, the panic intensified. It was only then that the big European governments closed ranks and made Ireland an offer it couldn't refuse.
But the Irish bailout won't solve the underlying problems. No matter how deep the cuts, Ireland has little more chance of making good on its debts than does Greece. And still looming on the horizon are similar problems in Portugal--and far more serious ones in Spain and Italy.
In this context, a move by any country to partially default on its debts could trigger a financial crisis as banks are forced to write down the value of their loans. On the other hand, the failure to make bondholders absorb at least some losses will only mean more government funds flowing into the black holes of loss-ridden banks. As an editorial in the Financial Times put it, "If public money is again used just to buy time, the problem will soon return, more contagious than ever."
But just because austerity measures can't solve this crisis doesn't mean the politicians won't impose them anyway. As European and U.S. capitalists fumble for a long-term solution, they'll continue to increase the pressure on workers and push the costs of the crisis onto them.
In the U.S., austerity is already being carried out piecemeal at the state and local level--tens of thousands of teachers and other public-sector employees have lost their jobs due to budget cuts. These cutbacks were an unstated policy of the Obama administration, which failed to include sufficient aid to state governments in the stimulus package passed in early 2009.
Now, with Republicans taking control of the House of Representatives, austerity will be front and center in U.S. politics for the foreseeable future. The heads of the bipartisan commission on deficit reduction have already published their hit list of programs to cut--coinciding with an ideological blitz in the media about how we've all been living beyond our means, and it's time for shared sacrifice.
The reality is that in the U.S., as in Ireland, there's always enough money to prop up the bankers. But when the needs of working people are at stake--needs that have been dramatically increased by the impact of the recession--we're told to make do with less.
This international squeeze on workers will continue until labor and social movements are strong enough to pose a challenge. The mass strikes in Greece and France in recent months have shown the potential to resist, and protests in Ireland are now gearing up, too. The crisis continues--and so must the struggle.