Have you ever heard the expression a “Potemkin Village”? It is a Russian expression and derives from a large and extremely successful scam played by Marshall Potemkin — one of Catherine the Great’s many lovers.
In the late 18th century, the Russian elite was keen to pretend to the world that it was more powerful and more muscular than it actually was. As result, the court in St Petersburg decided to take foreign dignitaries and ambassadors down the River Dnieper to witness just how thankful the peasants of the newly occupied Ukraine were to their new, benign Russian overlords.
Knowing that the Westerners — the dignitaries were British, French and Prussian — wouldn’t expect a hoax, Potemkin constructed mobile villages, which he assembled at the turns of the river just before the royal barges carrying the foreigners came into view. What the foreigners would see on the riverbanks were excited, grateful peasants cheering on the royal Russian barges and showering Catherine the Great with compliments. When the barge went out of view, Potemkin would uproot the “village” and transport it, by night, further down the river to assemble it again ahead of the same royal barges when the barges continued down the river having docked overnight.
The foreigners went home marvelling at the strength and wisdom of the Russians, evidenced by the fact that even those whom the Russians conquered were fawning in their praise of their new masters such was the decency of the Russian occupation.
But the key to understanding the gullibility and the success of the Potemkin villages is that the foreigners wanted to believe, because they needed a success in Russia. It was 1787 after all. Monarchist America had become a republic and imperial France was teetering. Old certainties were crumbling for the old order. There was a feeling that a powerful monarchist Russia was needed in order to stop the “domino effect” of the Enlightenment, American Republicanism and war in Europe. In the event, George Washington and Maxim Robespierre put paid to their false hopes — the dominoes did topple.
Given the fear of revolutionary contagion, it’s easy to see why the dignitaries were predisposed to gullibility — because they didn’t want to face up to the consequences of what was actually happening on the ground. They wanted to see the world as they wanted it to be, not as it actually was. And if that meant believing in mobile villages, then so be it!
Now, fast-forward to Merrion Street today. The so-called Troika — complete with its peculiarly Russian-sounding name — is in town. And it will leave saying everything is hunky dory. We show it export figures and GDP figures — today’s Potemkin Villages — and it will go away happy, having taken into consideration nothing of the unemployment, emigration, negative equity or the fact that retail spending has collapsed. It will see what it wants to see.
The Troika doesn’t look at the real, nasty things because it, like the historic dignitaries in Russia, doesn’t want to. It wants to believe its own propaganda because it can’t face the prospect of failure. Remember, for the Troika, Ireland’s austerity programme must prevail because the prospect of the domino effect is too horrible for it to contemplate.
But the game is up. Let me tell you a dirty little secret: the Troika is redundant. Yes, redundant. The Irish IMF/EU deal is history. No matter what we do, events are overtaking us. The IMF/EU deal for Ireland will be torn up in the next three weeks and replaced with something quite, quite different.
The Troika has failed because the main aim of the Troika was not to fix Ireland but to ring-fence Ireland. We were/are a pawn in a much bigger game and that game is saving the euro. To save the euro, the Troika had to do two things. The first was to indicate that Ireland (and Greece and Portugal) was uniquely delinquent and could therefore be treated in isolation. However, this isolationist policy is designed as a type of financial quarantine to prevent contagion. If the Troika’s mission was to work, its putting Ireland into quarantine would have to strengthen the defences of European banks because, after all, we are being lent money to pay our creditors in order to ensure that the banks that are exposed to Ireland and Ireland’s banks don’t lose on their investments. So the aim of the EU/IMF was not to save Ireland but to make sure no one asked too many questions about what was lying deep inside the balance sheets of Europe’s banks.
But it hasn’t worked.
People are asking questions and they don’t like what they are hearing. The balance sheets of Europe’s banks are full of bad investments. This is making everyone scared. So banks have stopped lending to other banks because they don’t trust each other. After all, when everyone has been lying, I suppose that’s not too surprising. This is called a liquidity crunch. But the other problem is that when there is no liquidity and no one is prepared to lend, it poses huge problems for governments like Spain and Italy because they have to roll over enormous quantities of their national debt, retiring old stuff and replacing it with new stuff.
This is no problem when everyone is willing to lend to you — you just replace the maturity of the debt and reissue it. But when investors want cash and not promises, the game changes.
This sovereign debt crisis reinforces the sense of panic and it means that the only buyer of sovereign debt will be the European Central Bank. But this contravenes the ECB’s own rules and makes the Germans jittery because the Germans worry that their central bank will become a financial skip for Europe’s financial waste.
This is what contagion looks like. This is exactly what the Troika in Ireland was supposed to prevent and this is why the Troika has failed.
The “country quarantine” approach has failed. Contagion now abounds and infection is rampant. Any future bailout of the whole financial system could involve trillions of euro. This will not come without the political price of accelerated political integration. But now the irresistible force of increased political integration smashes into the immovable object of the citizens of Europe who do not want federalism. Expect referenda and then real fireworks will start.
Remember what happened to the country that constructed the Potemkin Villages? It was invaded by post-revolutionary, Napoleonic France which was precisely the type of political Armageddon that the little lie of the ‘villages’ was designed to prevent.