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Dublin: 11 °C Tuesday 19 June, 2018

Column: ‘The treaty is risky and dangerously experimental’

On a ‘No’ vote: Economist Terrence McDonough says evoking fear in people over the recession is not an appropriate move by government.

Terrence McDonough

THE MOST COMMON misconception about Ireland’s current crisis is that it is basically a financial crisis. While finance is important and it played a large role in triggering the crisis, its roots lay in the institutional changes that were consolidated in the early 1980s. What we are facing is a crisis in the institutions of global neoliberalism.

The main origins of the crisis are in recent capitalist policy including an attack on labour, globalisation, a range of free market policies, including light touch regulation and small government, as well as in a bank-centred economy sometimes referred to as financialisation.

It can be very difficult to stay on top of all of the new developments and day to day manifestations of the crisis. It is easy for professional economists and politicians to get lost in the ever-emerging details. For the ordinary citizen this has been a serious challenge.

‘Establishment’s emotional appeals are inappropriate’

This challenge is especially important in the next few weeks as we will all be expected to vote yes or no in the referendum on the so-called Fiscal Stability Treaty. It perhaps doesn’t help that establishment commentary to date has been based on emotional appeals. This is not limited to the fear of the consequences being denied a second bailout. In fact, there are two appeals being made and both are emotional appeals. The first emotional appeal is one of calm reassurance, contending the treaty is simple common sense and the safe and risk-free alternative. And when this is inadequate, the fear of economic disaster is invoked. Neither of these appeals are appropriate.

The treaty demands that the government pursue further austerity even after we meet the current targets in 2015. The government may be required to remove money from the economy for a further twenty years and beyond. Many of our immediate neighbours and trading partners will be in a similar programme. To impose this kind of policy on an economy in the depths of depression as Ireland is in today is an unprecedented and dangerous experiment.

The government and other advocates of a yes vote ask how we would finance our deficit if we are not included in the European Stability Mechanism. If we believe government projections our deficit will be reduced by the current programme of cuts and tax increases. Compared to the cost of the economic crisis to date, this will be a relatively small amount. Ireland will have a number of options.

‘Ireland has the option of borrowing from the IMF’

First, Ireland is small but scary. A disorderly Irish default would threaten the stability of the European banking system. A European Central Bank intervention to restabilise the system would be considerably more expensive than a second bailout of a comparatively small country. It is highly unlikely that Europe would ignore its self-interest in order to spite the Irish electorate. Secondly, Ireland also has the option of borrowing from the IMF rather than the European institutions. Experience to date indicates that the IMF would be less demanding than Europe in its conditions.

A third possibility is to set about closing the budget deficit. Irish tax take as a percentage of GDP is well below the OECD average. Taxes on wealth and high incomes are considerably underexploited.

A fourth possibility is the restructuring of debt. The Anglo-Irish promissory note payments alone constitute €3 billion in any given year. A fifth under-discussed possibility is the issuance of innovative debt instruments. It would be possible to make Irish bonds acceptable in payment of taxes in the event of any default. This should eliminate the risk premium which makes it difficult for Ireland to re-enter the markets at this time.

Any one of these options alone has the potential to substantially address the budget gap in the event of a second bailout and a failure to access ESM funding. A judicious combination of these strategies would easily finance the resulting deficit with little disruption.

‘There will be no disaster in the event of the need for a second bailout’

The “common sense” retailed by the government and established commentary on the Fiscal Stability Treaty is at directly right angles to reality. There will be no disaster in the event of the need for a second bailout. It is the adoption of the budget provisions of the treaty which is risky and dangerously experimental.

In addition to a more sceptical approach to this Fiscal Treaty, the government needs to be much more aggressive in renegotiating Irish sovereign debt. This is something that needs to be moved up on the agenda. This debt is unsustainable in the medium term. There simply needs to be a Greek style write down – it is unavoidable. When it comes to debt write-downs, it is better to do it early and not often. Hanging on and conceding ground bit by bit is the opposite of what should be done. A bold and decisive action will be better for the economy in the long run.

Dr Terrence McDonough lectures in the Economics Department of NUI Galway and at the Centre for Innovation and Structural Change.

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About the author:

Terrence McDonough

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