IN the late 1980s, while studying at the College of Europe in Bruges, I was struck by just how pragmatic the European project appeared to be.
Many of the lecturers and professors were deep EU “insiders” — distinguished academics from all over Europe who had excelled in their own fields. They seemed to be the pinnacle of cosmopolitan sophistication, enlightened and aware of the various strands that had to be pulled together carefully to make the EU work.
Back then, any moves towards more European power were characterised by patience and prescience — a little move here, a pull back there, never overplaying the hand and, above all, the entire process seemed to be non-ideological.
Over the past 10 years, this has changed. European wisdom has been replaced by EU dogma; lateral thinking exchanged for tunnel vision. The ECB is to blame.
Those who, during the boom, pointed out that there was a central problem at the heart of the euro were dismissed as cranks. Now there appears to be a realisation that, from Ireland’s point of view, the entire euro project might not have been the smartest thing to do. And from an economic perspective, it is becoming apparent that we can’t get out of this mess quickly in a single currency with low inflation.
Historically, when a country has been hit by the bursting of a property bubble, a bank crisis and the destruction of the national balance sheet, this has been followed by a massive devaluation of the currency.
This allows three things to happen. First, the country becomes internationally competitive quickly and the exporting sector — not only the multinational sector but also the domestic exporting sector – gets an immediate boost. Second, the subsequent inflation allows a drop in public sector salaries and the wage bill without huge pay cuts — which is politically easier to achieve. And third, the same inflation begins the process of inflating away the huge debts built up in the boom, reducing the need for debt forgiveness and reducing the likelihood of default.
That’s the way the economy works. It is what happened in the Asian Tigers in the late 1990s and Finland and Sweden in the early 1990s. It is not that complicated really.
However, in a currency union, this process can’t happen. What happens instead of the currency falling is that people’s wages are supposed to fall. It is important to remember that we are flying blind here. We are in a trial and error process because there has never been a currency union without political union, so we don’t know for sure where this will end. But what looks likely is that the dogma of the ECB will cause successive Irish governments to try to grind down wages and prices in order to be competitive. This will take years and much strife.
What does this “drawn out” grinding process do to an economy? In an economy that is facing a balance sheet meltdown — where the middle classes’ balance sheet is bust — such an approach will result in more financial insecurity, causing people to spend less, not more and result in higher unemployment. Higher unemployment results in a higher social welfare bill, which combined with less taxes causes the budget deficit to explode. This increases the default risk. This is exactly what the financial markets are saying to us. The rate of interest on Irish bonds is over 10pc because the market thinks that the “ECB” approach will make default more, not less, likely.
Unfortunately, our deep establishment — the political, the academic and the media — has adopted a position which sees any questioning of the euro project as being “unpatriotic” and “dangerous”. Therefore, debate on the currency and the likely trajectory for the Irish economy and people is being actively quashed because to question the wisdom of European central bankers is being seen as unpatriotic. When did questioning a German or French banker’s motives and intelligence become anti-Irish?
But this is what has happened. The ECB — which is only a central bank after all — has a veto on Irish economic policy. Isn’t it time for all of us to question just who are these people, who has mandated them and who are they to dictate anything to anybody?
These guys are there to represent the banking industry, not the people. If the banks’ interests and the people’s interests move in tandem, then the ECB’s world view might reflect our world. But when that changes, as is the case now, we should change and they should listen. But will that happen? Not likely.
Anyone who actually cared to think about it and had any experience with European central bankers would have known that giving a faceless bunch of central bankers the veto over economic policy might have resulted in problems. In the boom, the legates of the ECB in Ireland — top brass of the Irish Central Bank and the Regulator — failed miserably and the ECB did nothing. In fact, the ECB presided over a financial crack house with banks in the core lending recklessly to banks on the periphery.
Now the ECB is behind the policy of paying bank bondholders every cent, while the real people of countries like Ireland have to endure deep reductions in their living standards. The logic is that all this austerity will somehow lead to economic growth.
But we know that the Irish economy is shrinking, bank lending falling, insolvencies rising and unemployment rising. This is not growth; it is the opposite of growth. The problem with the ECB is that it seems to believe that there is no economic problem that cannot be answered by austerity.
So, for example, when the economy is growing and in danger of overheating, the solution is cuts in public expenditure and increases in taxes. But when the economy is moribund and in danger of depression, the answer is again, more cuts and increased taxation.
When there is inflation, the answer is austerity and when there is deflation the answer is austerity and when there is stagflation the answer is — yes, you guessed it, austerity!
So these guys are stuck in an intellectual cul de sac. They have only one policy solution for every economic problem.
For Ireland, the end of the cul de sac is a sovereign default. In addition, by reducing people’s wages we involve ourselves in a race to the bottom. If every peripheral euro country cuts wages as the way to growth, we will cannibalise each other. This would truly be a one-way ticket back to poverty on the periphery of Europe — which was precisely what the EU regional funds and years of regional policy were supposed to arrest.
The EU is waltzing up a financial, economic and ultimately political cul de sac. It is now threatened, not by the likes of Ireland and Greece, but by its own central bank. Students of the 1920s and 1930s, when overly powerful and ultimately stupid central bankers helped destroy the world economy, might not be too surprised by this.
But what was that they said about history: “Those who don’t learn from it are destined to repeat it”.
Whats the alternative to austerity? spending more, accumulating more debt? I think David is only looking at this from an Irish perspective. Most of Europe ( well the top half ) are having wage increases e.g. the Germans at 3.5% and inflation has reappeared hence the rate rise. We must tighten our belts our spending is 50 billion and our income is 30 billion thats a huge gap, in fact the budget deficit was 9.9 billion for the first 4 months. Its hard to believe that the rest of Europe excluding the PIGS are back in business and doing ok.… Read more »
Brilliant David, I concur. The ECB has NO mandate from the people. What I truly don’t understand is why we are not shouting from the top of our voices, The ECB king has NO Clothes! Or maybe that’s the problem, that the ECB believes it is King?!?
Power corrupts, absolute power corrupts absolutely!
This discussion parallels the excellent “Fight of the Century” video (between Keynes and Hayek) http://econstories.tv/2011/04/28/fight-of-the-century-music-video/, but there may be a synthesis that would pull the best parts of both views together – http://thedepression.org.au/?p=6005
David, I agree with you that European dogma has replaced Europeam pragmatism in the last decade or so. Having worked as an intern within the European Commission a few years back, I also believe that the EU Dogma syndrome is also quite prevalent throughout the Commission, and must therefore, also be partly to blame. It is almost like as if a large self-sustaining bubble exists within Brussels & Frankfurt and those who are followers of this “Euro-bubble”. This Euro-bubble has taken on a life of its own and is now fundamentally disconnected with the people(s) it is supposed to serve.… Read more »
Good article. Could it be true to say that ‘austerity’ is a financial tool to transfer more of the real resources away from the ordinary workers
just to be handed to the dirty selfish oligarachs & elites.
Another way to look at is ” what we learn from history” is that “we learn nothing from history”. Get as much social welfare and dole assistance as you can as this is the only way to break even, more or less.This is the “new dole” peoples attitude. Can you blame them? Then when we do get back to growth, they can start earning enough without assistance. This is the mantra on the Irish street and I dont blame those “new dole” people one little bit.Do you? However, some of these will never work again and we are creaing a… Read more »
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This excerpt from Karl Polanyi about the tensions leading up to Word War I provide a foreboding about the current global system: “For another seven years peace dragged on but it was only a question of time before the dissolution of nineteenth century economic organization would bring the Hundred Years’ Peace to a close…….The true nature of the international system under which we were living was not realized until it failed. Hardly anyone understood the political function of the international monetary system; the awful suddenness of the transformation thus took the world completely by surprise…..The dissolution of the system of… Read more »
How ready are we to revert to punt if we have to? I’m sure our German neighbours have Deutch Mark II at the ready. Angela knows which button to press on meltdown day, but does Enda have such a button?
CENTRAL BANKS AROUND THE WORLD…. Folks, This is so important for everyone to understand, and I pledge to David to go the extra mile and write a dedicated article from his point of view on the entire Issue of central banks, and not to scratch only on the surface. YOU, as in the people, have to do some homework and educate yourself further on the structure, history and even more so recent changes in central banks around the world. You own this to yourself to look behind the smoke screens, and it is no rocket science either. David’s article scratches… Read more »
SHOULD IRELAND REMAIN PART OF THE EURO PROJECT? FACT! Ireland voted “NO” to Lisbon! FACT! Ireland voting “YES” when unduly pressured! Is Europe a Democracy for Banks or a Human Collective Society? The Treaty establishing a Constitution for Europe is preceded by a Preamble which recalls, among other things, Europe’s cultural, religious and humanist inheritance, and invokes the desire of the peoples of Europe to transcend their ancient divisions in order to forge a common destiny, while remaining proud of their national identities and history! FACT! Article 27 Irish Constitution States! CONSTITUTION OF IRELAND — BUNREACHT NA hÉIREANN Reference of… Read more »
All treaties between great Nations cease to be binding when they come in conflict with the struggle for existence.
– Otto von Bismarck –
Excellent article. Yep the ECB is doling out stasis, stagnation and moribund pills to the periphery to follow its crack from a crack house lending policies. The message needs to be strongly shouted from the roof tops that the greatest threat to the EU, is the ECB itself. ECB is sowing divisions of impoverishment and reckless incompetence across the EU. The true Finns will become a tidal wave against the ECB. They’ve pointed out the bailouts are not working and EU money is being poured down the drain. http://www.ritholtz.com/blog/2011/04/european-pushback-against-bailouts/ As Ken Feinberg says above, “Europeans are slowly figuring out they… Read more »
Hi David,
Superb article. I am currently a student over here in Leuven in Belgium at the moment and it’s blatently obvious that the heads in Brussels are not calling the shots anymore. This is a terrible situation. I believe what we need is intelligence reform. I refer here to Malcom Gladwell’s story ‘connecting the dots’ about why the Israeli failed to predict the Yom Kippur War, very interesting story and strong parallels with the Irish, and European response for that matter, to the crisis. http://www.gladwell.com/2003/2003_03_10_a_dots.html
When the ECB chief Jean-Claude Trichet was a top official in the French treasury in the 1990’s, he signed off on Credit Lyonnais’s accounts which hid the bank’s huge losses. At the end of the subsequent trial in 2003, three men from Credit Lyonnais were found guilty of fraud but Trichet was cleared. Credit Lyonnais had lent extravagently and when it could not recover the bad loans, it had to be bailed out at a cost of tens of billions of Euro by the French government. Does that sound familiar? Now, let’s give Jean-Claude the benefit of the doubt about… Read more »
Sorry I must disagree. We tore the arse out of the economy not the ECB. And then compounded the error with the nod wink and wave of the old school tie. Within a currency union the only way for things to rejig themselves is for the banks to go to the wall. It would be the same as if a Limerick bank went bust, you would let it die. This reduction in wages and social welfare is doing nothing more that frightening the horses. What needs to happen soonest is a mechanism for a homeowner to buyback his mortgage at… Read more »
David. I Agree with the articles main points. The political disenfranchisement of the citizens of the *euro* is a key point. The euro project itself is a pOnzi scam. The euro is a paper money pOnzi scam. The ECB is the hub of its operations. Perhaps back in the day, before the fall of communism, the rise of China, teh rise of the internet, etc the euro seemed like a positive idea. ANd the euro had its positives. But, I reckon its the fact that the euro has been so successful because of a multitude of reasons like some of… Read more »
Jeffery D Sachs the shock doctrine boy genius just penned an article the other day. In it he asserts the west is drowning in corporate fraud.
http://host.madison.com/ct/news/opinion/column/article_39bf29cd-61af-51d8-a8ad-8732115fe73a.html
Great article David, agree with everything you say here.
Another example of the EU gone mad is their long term goal to admit Turkey into the EU, against the wishes of most of the people in the EU. Turkey moans about being on the outside and calls the EU a Christian Club. Well we’re only Christian by the grace of God, after key battles down through the centuries which forced back Muslim armies on 3 different southern European Peninsulas, including the Balkan peninsula invaded by Ottoman Turks.
This is quite a bizarre article. Advocating inflation as an economic solution – without mentioning the well known downsides of inflation – is hardly giving an honest presentation of the possibilities. Inflation has historically proven to be a terrible plague on economies and on people. Presenting it as if inflation would give everyone in Ireland a free pass is (IMHO) deeply disingenuous. Inflation has a habit of causing austerity too. Having lots of paper in your pocket doesn’t help buy imports. Similarly, for the Irish state to try to fund even its own deficit in a new Irish punt would… Read more »
I believe it’s time to look for Mr Triches’ resignation. You should broach subject on a national stage David. This guy is wrong and he doesn’t know it.
As Dr. Stiglitz pointed out in 2004 when addressing the UN on the subject of European Integration, one of the main dangers for the Euro and Europe in General was the lack of representation of the ECB of the poeple of Europe. He felt that the represented the interests of the financial industry first and the workers second. He suggested that representitives from workers unions should sit on the executive board as in some Latin American countries. Actually apart from being from a banking or finacial industry background the 6 members of the executive board are exclusively from Germany, France,… Read more »
On the point of workers in Europe. There doesn’t seem to be any pan-european workers representation. I wonder if the trade union leaders in Ireland have made any effort to contact their European counterparts as part of their response to the crisis. Europe really needs strong workers representation now to make sure they are treated fairly by multinationals and company owners. By the way we are in a sinlge labour market. Imagine a EU wide strike against bailing out bankers and the rich? Certainly from reading comments in Spanish and Italian newspapers there are many middleclass europeans who are just… Read more »
I should say that the integration of Europe has been a very positive experience and has helped and is helping many countries to grow and develop. However the idea that Europe is an Optimal Currency Area should be analysed more closely in repsect to the cause and response to the crisis. The fair representation of the ECB of the European people and regions should be made a priority by the EU commision and Parliment.
David, I totally agree with you on the issue of the problem caused by our inability to devalue and I covered alot of what you say on the subject in my post of a couple of weeks ago, http://notmydebt.blog.com/?p=17 . There is also a suggestion there of how we might address this. The issue of the ECB, an unelected, undemocratic organisation, now controlling strategic government policy as illustrated by their forcing the Portuguese government out of strategic state assets, is one not just of lost sovereignty but also one of lost democracy. In order to see what we are allowing… Read more »
Create a couple of new Irish banks (all deposits guaranteed by government). Watch the deposits flow from BOI+AIB etc. to the new banks. This is what happened with Anglo a couple of months ago, in fact AIB now hold the old Anglo deposits. Allow the old banks to collapse without hurting deposit holders and say ‘tough luck’ to the ECB and tell them it’s called capitalism. Who loses? the ECB but they can print more money, is that not how the fractional reserve system works? The bond holders get a double whammy because they are being bailed out by the… Read more »
Breaking news: Entire Nations prepare for the day of the MEGA CRASH OF CURRENCIES Within two months, central Bankers in Mexico oprdeed 93,3 tons of Gold according to FT, this is the equivalent of USD 4,5 billion, approx 7250 Gold bars and round about 4% of the entire reserve fund of Mexico’s central bank. This is not a single event, China, Russia, Iran and India bought massive Gold reserves as well. These events indicate an end to the era of foreign government bond Investments. Silver is still on it’s way down, loosing 22% within a week. The Dollar is finished,… Read more »
http://www.ecb.europa.eu/press/key/date/2011/html/sp110503.en.html Here is a recent speech by a ECB executive board member where she talks about asset bubbles with reference to Ireland at the Uni of Vienna. I doubt these guys are planning many trips to Ireland. They should certainly be invited, perhaps by our Universities to try to explain to Irish people what they are at. It would be great to be able to ask them questions directly. Her solution to future asset bubbles- higher captial reserves and more stress tests for banks basically. Stress tests have not been working very well. Beijing failed to cool their house prices… Read more »
I work in the tech sector and get paid quite well. I contribute a rather large amount every year to the public purse – and as I like a social safety net, a health system, public transport, roads, police, food inspectors and so on, I’m happy to do so. If the government wants to push wages down they are free to try. However I can pretty much work anywhere in the world. I am already underpaid compared to my counterparts in the US, the UK and so forth. Irish public services are also subpar compared to those of the rest… Read more »
An interesting comparison here – Has the Euro run its course? can the EU remain a stable political entity?
http://www.zerohedge.com/article/special-report-eu-ussr-redux
During the boom anyone who spoke honestly or rationally was labelled a crank and excluded from discussion. We now know that regulators, who were supposed to simply implement clearly defined cautionary procedures, were told “look the other way or look for another job”. And this ‘conspiracy’ of silence and omission was global — not local. It was coming down from the very highest echelons in the banking and financial oligarchy. There was no error or mistake in all of this. Only those myopic enough not to be able to see beyond the local scenario can miss such a BIG picture.… Read more »
We now live in a “Debtocracy”.
We are all debt servicing agents, while those who refuse to get in line will get the debt collectors knock on the door before the home is seized.
Practical protest, anyone? March, petition? So much wisdom and logic in here but who’s listening, apart from ourselves? I’m doing something, anything and everything I can think of; the weekly march, the petition, those are the two public efforts, but behind it, the texting, e-mailing, blogging, tweeting, chat-rooms, forums, the whole cursed shebang. Trying to saturate this bloody bog, get it moving – then let them try and control it.
Oscar-Winning ‘Inside Job’ Director Attacks Economists’ Ties to Financial Sector
http://www.pbs.org/newshour/bb/business/jan-june11/insidejob_05-04.html
Watched Prime time tonight. Stephen Kinsella from Economics Department in UL told us that we were half way through the property crash. Much more to go. Gave us the overview, the statistics, based on similar crash experiences…sensible enough, and logical and cold. Angela Keegan represented Myhole dot ie. Blathered on about how Irish people would realise that bricks and mortar are an investment like none other. (she is right, but not in the way she thinks). Talks about value, and then delivers anecdotes about great value in the Gassorks site. It was like listening to a good looking version of… Read more »
Somebody mentioned Property Tax.
Pay Property Tax, and help out NAMA.
The irony of it all should not be lost upon us.
Almost as bad as taxing work to pay for speculation gone wrong.
If it hasn’t been mentioned here I would encourage anyone to see the movie “Inside Job”. Very cohesive and succint analysis of the GFC. You could substitute a few names and make an identical movie about Ireland, without the veneer to investigate and “punish” those responsible. As I’ve said before, I have no background in finance, so this has been a rapid learning curve, thanks to the likes of the few with integrity in the sector, such as David, and a number of posters on this and other sites. There are a number of near comical parts to the Insider… Read more »
One politician at least doing his best- watch Stephen Donnelly’s speach on refernedum for bailout here- http://www.stephendonnelly.ie/index.php?option=com_content&view=category&layout=blog&id=38&Itemid=56 . It’s the video under ” My Call for a Referendum”.
I agree with most of what David says I just wonder why the Irish people have just rolled over and lay down and let all this happen to them. Whats wrong with us?
Have we lost the ability to stand up for ourselves? Are we spending to much time on these web-sites when we should be on the streets.
Change
Time is Change and there is nothing we can do about it except what we need to do.Until then make a living.
Trish
GFC is the Global Financial Crisis. I was in the same boat last year in Australia where everyone I worked with talked to me about the “GFC” and I hadn’t a rashers what they meant for the first few days.
David
Morning,
Just in response to a few posters who have said that my favoured policy is default, that’s not what I am saying. I am saying is that the result of this present policy will ultimately be some sort of default. If that is the case, we should bring the whole thing forward.
David
This may have been mentioned previously, Brian Lenihan’s elder brother Niall works as a lawyer in the ECB.
@doflynn, With respect and unless I’m mistaken I watch you occasionally trying to rouse your fellow posters into some sort of action? It sometimes comes across as though some posters are not as interested as you or maybe their actions do not live up to their words??? Well it’s not like that at all and each has their own way. The very act of being a poster and debating as we do is extremely valuable!!! Fair play to you guys in Ballyhea and genuine thanks because what you do is also extremely valuable! And maybe the only difference between Ballyhea… Read more »
Are Labour still in government?
David, do the French and Germans have economists capable of expressing a view on what’s going on? Are they bought and paid for, or don’t understand, or is it just that we don’t hear about them? My guess is all three of the above.
CLARITY
http://www.irishtimes.com/newspaper/opinion/2011/0506/1224296265727.html
I have been busy moving house and whatever so haven’t followed much of the debate on irisheconomy and elsewhere. I take Hugh Sheehy’s point above about the dangers of inflation (from Colm’s link above to irisheconomy I note that he also finds Gary O’Callaghan’s recent article bizarre) and also Michael Hennigan’s point that blaming outsiders such as the ECB is a convenient way to avoid facing our own problems (he says he wouldn’t apportion more than 20 to 30% of the blame to Europe). But in the latter case I think that is really a separate issue from identifying who… Read more »
Debtocracy – The Film
http://www.dailymotion.com/video/xik4kh_debtocracy-international-version_shortfilms#from=embediframe