Taking time to reflect, Irial Ó Ceallaigh looks at the scenarios Ireland may face in the coming years in light of the applying for funding from the IMF and European Union.
The tumultuous events of the last week have seen more paranoia, depression and anxiety from fear mongering than, as Pat Rabbit put it,’ the Civil War’. What upset our national psyche more than any other point recently was the idea of a loss of sovereignty. But what are the facts, and if faced with a worst-case scenario, to what degree can the EU and the IMF erode national sovereignty by dictating domestic fiscal policy?
The Bonds –The state issues state bonds, basically an IOU when it needs money, to sell to investors in the market. The markets decide ratings based on the state’s perceived ability to pay the loan back. We had an AAA rating until recently, meaning we paid around three percent interest on the IOUs. Recently, the interest rate reached nine percent. If this uncertainty in our ability to pay back IOUs continued until next year, when we need to issue bonds again in order to raise money, then the interest rate would weigh down our economy and our ability to grow out of recession.
The ECB – We should never forget that the low interest rates imposed by major European states on the ECB in an effort to boost their economies earlier in the decade helped the credit bubble expand in Ireland. When Ireland should have increased interest rates in an effort slow down borrowing and deflate a property bubble during the years leading up to 2007 it could do nothing.
The ECB kept control of our interest rates and naturally favoured the German economy over ours. Similarly, because of the Euro being under the control the ECB, Ireland cannot lower the value of currency in an effort to ease loan repayment and make exports more competitive. To completely blame the government for the bubble and the failing banks would be wrong.
The IMF – An institution formed to offer the low interest rate loans and the technical expertise to drag an economy out of recession and any threat of a state defaulting on its debts. In Greece the IMF offered the loan the state needed to keep running at a rate the bond markets would never have offered. However, in return for the money the IMF gives out every quarter, it attaches detailed clauses ranging from tax reform and cutting benefits and to cutting health care and tearing up trade union agreements like our Croke Park Agreement.
It does not have to answer to the people in democratic elections and governments are forced to implement proposals. The IMF would however offer more experienced technical assistance to officials in the Department of Finance who have already showed enough ineptness.
The EU – The figure of €80,000,000,000 is mindboggling and still does not cover the amount of debt we must already pay interest on. For a population of four million it represents about €18,000 of debt for each person living in Ireland and this does not include interest. For the EU this number is just a drop in the trillions of euro floating around the European financial systems. What worries the EU most, and has led to the recent pressure on Ireland being forced into this loan, is that the threat of an Irish default, coupled with an inability to raise money to finance ourselves, could have led to a domino effect with Portugal, Spain and Italy following our lead.
EU finance ministers are terrified of the markets forcing up interest rates in other member-states who, similarly to Ireland, have implemented austerity measures, offered bank guarantees and did all they were told to do and still the markets have punished.
Loan scenarios – So what’s happening with this loan of €80 billion? Best case scenario is it would only act as buffer in the state coffers which would ease markets into offering us lower interest rates on our bonds when we go to them next year. If rates still have not come down to levels around the four percent interest rate then we would probably dip into the €80 billion fund. However, in principle this loan may be given back by mid-2011 if we can sell bonds at a decent rate. This is the best case scenario however this depends entirely on
1) Our ability to implement austerity measures to bring state spending in line with the tax-take
2) For a stable government with a large majority to take power when elections take place next year
3) For the world economy to recovery with a firm plan in place to increase exports in innovative technologies relative to where global demand will grow. For example, an economic plan focusing on a growing green economy.
Protests would only harm the government’s ability to implement cuts which would be a lot better than what the IMF would offer. Let me make one point clear, no matter how bad you may feel this government has been, the IMF and EU will not offer an easier or faster road to recovery. People are angry with the government but the Irish-made budget has to pass before an IMF-made budget is forced. Elections will be called sometime after the New Year because to be honest who wants a politician on your doorstep at Christmas. The best way to show anger is to vote then, not to protest now.