By Yanis Varoufakis, a professor of economics at the University of Athens. Cross posted from
A conversation with Phil Pilkington on Europe’s disgraceful triumphalism regarding Ireland’s ‘exit’ from its ‘bailout.’
Contrary to conventional wisdom, Ireland was never bailed out and, moreover, it is nowhere near escaping the debt prison to which it was confined by its, supposed, ‘bailout’.
After the burst of the property market bubble, following the post-2008 credit crunch, Europe’s Central Bank demanded that the government shift the losses of five Irish banks, worth €60 billion, onto the shoulders of the taxpayers. Of citizens that had neither a legal nor a moral duty to burden this load. Why? So as to shield the fragile German banking system from the repercussions of taking large losses. The Irish took their wrath out on their government and elected another one which, nonetheless, saw as its priority the full implementation of the savage austerity program that came attached to the huge loans that the government accepted in order to repay the banks’ losses. The result was a catastrophic downward spiral for Ireland’s social economy and its people.
But now the newspapers and the electronic media are full of the ‘good news’ that this ‘fiscal consolidation’ program has ‘succeeded’. That Ireland has returned to the markets. That we have the first, tangible proof that the bailout worked. That Ireland is about to regain its sovereignty and the Irish can, once more, look at the Germans, the French, the Dutch proudly in the eye, restored to the land of the free and the creditworthy.
Alas, a far as I can see, all that has happened is that, after five years of a continuous comedy of errors, Europe’s leadership has now decided to declare victory, with Ireland as Exhibit A that the combination of bailout loans and severe austerity work. And if this required being economical with the truth, so be it.
For those who do not wish to be economical with the truth, let’s look at some numbers:
• Number of people employed: Reduced by 12.8% since January 2008
• Unemployed persons: Up from 107,000 in January 2008 to 296,300 today
• Annualised domestic growth rate: -1.2%
• Net emigration: 33 thousand annually
• Government deficit as a proportion of GDP: 7.3%
• Public Debt: 121% of GDP in 2013, up from 91.1% in 2010 and 105% in 2011
• Household debt: 200% of GDP
• Value of assets underpinning household debt: -56% since the crisis began
• Mortgages in arrears for more than six months: 17% of all mortgages
How can anyone claim that this economy constitutes a ‘success story’ and a cause to celebrate the end of the debt-deflationary spiral? Two are the arguments on which EU triumphalism is built. First, Ireland’s spectacular export performance (annual exports exceeding the nation’s GDP!) and, secondly, the collapse of its 10 year government bond yields to levels that make it possible for Dublin’s return to the money markets, rather than a return to the ESM for more bailout loans.
Let’s unpick these two great success stories, beginning with exports.
Ireland is the largest, floating tax haven on the planet. Companies like Google and Apple famously launder their revenues via Dublin in a manner that reduces massively their tax payments while bolstering to ridiculously fictitious levels Ireland’s GDP. Anyone who disputes this must offer an alternative explanation of the fact that each of Ireland’s Google employees produces €4.8 million of revenues annually! All this means that the wonderful export statistics translate neither in corporate taxes nor in a significant number of jobs from the which the government can claim income and indirect taxes so as to service its debts.
Turning to the government bond yields, an interesting question arises: Why are they so low when the data above reveals that Ireland, in view of the sluggish domestic economy, remains perfectly incapable of refinancing its gargantuan public debt? Why are bond dealers no longer dumping Irish government bonds (like they were doing in 2011 and until June of 2012)? The answer is simple: Because they gathered that the ECB and Berlin will never let Dublin default given Europe’s desperate need to proclaim Ireland as ‘proof’ that their policies are working. Bond dealers, put simply, trust that the ECB, via Mr Draghi’s OMT or otherwise, will find ways of allowing Dublin to redeem its bonds even if the Irish people and their government remain firmly lodged in debt prison.
With these thoughts in mind, I turned to Phil Pilgington for his views on the matter. Have I missed something crucial here? Here is his answer to me question: “Phil, what is your reaction to ‘news’ that Ireland has exited successfully from its troika program?”
Phil Pilkington’s perspective:
Ah, Ireland’s return to the land of the markets… Let’s divide your question into two parts: economics and politics:
First of all, 10 year government bond yields. They were around 5% in Ireland until early 2010 in the lead up to the 2010 bailout. They then spiked around the beginning of 2011 due to the bailout and the uncertainty surrounding that action. But they quickly came down as investors realised that the country wasn’t going to go bust due to its access to said bailout funds. By 2012 the interest rates were close to 6%. And with the announcement of the OMT in that year they crawled down to under 4% in the beginning of 2013.
What does this mean? My reading of it is this: Investors are convinced that (i) the Troika/ECB would back the country so long as they adhered to the rules and (ii) Ireland would indeed adhere to those rules. If we assume that these two hypotheses are true, which they probably are, then investors are looking at a 4% yield for almost no risk in an environment where yield is completely dead.
Let me stress: this has NOTHING to do with recovery in Ireland, as the government is falsely proclaiming. Quite the opposite, in fact. The recent growth figures, for what they are, are totally skewed by foreign profits being washed through the country. I show this clearly here:
In summary: The claim of a successful Irish Program is complete rubbish. The Irish government has gotten its interest rate down through a mix of Troika/ECB backing and confidence in the government’s ability to follow the rules, but all the underlying economic problems are still there and will not go away. The Irish debt-to-GDP will continue to rise in the foreseeable future.
Will the inevitable rising stock of debt prove problematic politically in the EU? No one can predict the political repercussions at the moment the Irish and German electorates realise the truth of the matter.
Now, onto the politics…
The problem here has become ever more clear to me as time moves forward. But in order to understand it I think you need to understand the Irish political style.
Since the 1980s Ireland has tried basically to run its economic policy by appealing to the rest of the world. That is, by “sucking up”. Whatever everyone else is saying, Ireland will do with gusto. Mix this with a little bit of clever behind-the-scenes diplomacy and you have Irish economic policy.
After the crisis, the new government basically followed the formula that (supposedly) worked so well in the 1990s and 2000s. So, when the IMF/Troika/ECB said gGet your bond yields down through compliance…” the Irish government did exactly that.
There is a widespread belief in Ireland that this will automatically lead to economic growth. This belief is, of course, entirely irrational, but that matters little. The politicians have convinced themselves that, as long as they achieve this target, all else will be well. This is the typical delusion of politicians who are given an arbitrary target of some form.
So, what will happen in Irish politics now that this target has been reached and nothing changes? That is an interesting question and difficult to answer, but I shall have a go.
I think that leftwing parties like Sinn Fein and former right-wing parties like Fianna Fáil, who have re-branded themselves as center-left, are going to gain massively. I think that people will come to ask questions now that the government’s target, which has been pursued ruthlessly for nearly five years, has been reached. They will ask: Why has it made no difference to the real economy? They are bound to become agitated. As a result they will switch parties and throw those in government out. What will happen then? I have no idea. But the seeds have been sown.
So, it seems that Phil’s view from Dublin is not that different to mine. The Emerald Isle remains in the same prison of the original debt-deflationary cycle. And what seems to be a bright light shining through the cell’s cracks is just the neon light of Europe’s propaganda.