Austerity measures in crisis countries – updates from the Eurozone periphery

by niamh on January 31, 2013

The current issue of the online journal Intereconomics features stories about the politics of adjustment in Greece, Ireland, Spain, Italy, and Portugal. Aidan Regan and I contributed the article about Ireland. Each paper outlines the measures that have been taken in recent years, and the major challenges each country now faces. All five countries share many common features of course, including the difficulty of keeping on track with deficit reduction targets in the context of no growth and truly awful unemployment figures. But the challenges discussed by authors are quite varied too: in Greece, for example, it’s governance problems that are highlighted; in Portugal and Italy, productive capacity and export performance; in Spain, problems over sustaining the revenue base of the state.

In Ireland’s case, we outline the ongoing problems involved in trying to reduce the large government deficit. We also note that the legacy of the financial crisis complicates Ireland’s recovery strategy. The government has staked a great deal on getting some relief on a portion of the deficit and debt issues that arise from recapitalizing the banks. What the government is looking for at the moment is not a debt restructuring or a default by this or any other name, but a rescheduling of a portion of the costs of unwinding the full liabilities of the now-defunct Anglo Irish Bank. From the Irish point of view, the ECB has given mixed signals on this: positive indications about the design of the ESM in June 2012, but in September, a statement that was construed by UCD Professor of Economics Karl Whelan as ‘Germany to Spain and Ireland: Drop Dead’.

Yet the backroom diplomacy continued, and the government certainly seemed to that that an agreement would be possible before the next critical deadline for Ireland of 31 March. Right now though, things are not looking so good. There are fears that, as in other areas of crisis management, there is a tendency for EU decision-makers to pull back from new commitments unless crisis is staring them straight in the face. ‘They are under-performing again’, a senior EU official said in December. Even as Germany reported a downturn in economic activity earlier this month, José Manuel Barroso said that ‘the existential threat against the euro has essentially been overcome’. Well, that’s alright then.

For all that, the game is not over yet in Ireland’s negotiations with the ECB. The Irish Congress of Trade Unions has taken up the case too. With the call to ‘Lift the Burden: Jobs not Debt‘, it’s calling for protests on 9 February. We’ll wait and see.

{ 44 comments }

1

hix 01.31.13 at 2:48 pm

Still no wilingness whatsoever to stop building the entire economy on tax evasion it seems. The only thing 12,5% tax rates attract are paper profits and some small alibi production facilities to make the tax evasion less obvious. I cant recall Ireland bailing out Depfa plc or any other Irish bank whos business was not concentrated on the local market and even that would not count as “takeing one for the team” but merly as cleaning up a small part of the mess Irish regulation and tax dumping strategies have caused all arround Europe.

2

Ciaran 01.31.13 at 3:24 pm

Still from what we hear the effective rate of corporation tax is in fact lower in France , despite all the French protestations about Ireland.
Also by the sounds of it the Dutch aren’t squeeky clean either ,

http://mobile.bloomberg.com/news/2013-01-23/yahoo-dell-swell-netherlands-13-trillion-tax-haven.html

Or are we to blame for that one too?

3

Shay Begorrah 01.31.13 at 3:30 pm

@1

It might be worth be thinking about how countries in the EU not bordering on Germany are supposed to attract any investment. Ireland has no significant natural resources to exploit, was never heavily industrialized and has very little domestic access to capital. Our choices in the neoliberal EU that were emerged are limited, it was tax competition or end up like a Baltic republic but with more golf courses and call centres. The new EU with its German centre of gravity is a bleak place for smaller and more distant countries.

Also do you really think it is credible that Ireland is a major cause of the European component of the global financial crisis? It was awfully convenient for Germany and the other self styled core Eurozone countries that there were huge flows funds from the periphery into their banks. There might have been some political difficulties had Deutsche Bank had to face up to its poor investment choices.

I sometimes get the feeling that the German bloc would not mind the pastoralization of peripheral Europe.

4

William Timberman 01.31.13 at 3:57 pm

Shay Begorrah @ 3

There might have been some political difficulties had Deutsche Bank had to face up to its poor investment choices.

This is always the money quote. Germans, who despite Paul Krugman’s advice do see economics as a morality play, with themselves inevitably in the role of personified virtue, are never pleased to hear it, and the financial class of all countries dismisses it with a wave of the hand, and a glib Well, what are we supposed to invest in then, if not villas on the Costa Brava, or CDO’s hatched in the magical Las Vegas Immobilienmarkt? If we invest in industry, then we’re stuck managing some boring factory forever, and the returns for all of that suck, as any savvy banker these days ought to know.

I don’t know whether to laugh or cry, especially when told by some corporate shill — and there’s never a shortage of them these days, is there? — that tax policy should support entrepreneurs and risk-takers. What does the financialization of 1st-world economies and the regulatory capture that accompanies it mean, if not the ability of a global plutocracy to avoid precisely those risks which make the commons a viable proposition. These folks don’t exactly have to love fraternité, but it would help if they weren’t so effing short-sighted.

5

christian_h 01.31.13 at 4:33 pm

Being but one German, and one living in the US to boot, I have of course no idea what “Germans” think – neither, I imagine does William.
I do however have an opinion on the shortcomings of the Krugmanite position, which is right not to see economics as a morality play, but very wrong to see economics as a mechanism to produce aggregate outputs. Viewed this way, austerity politics become indeed inexplicable – a function either of fundamental stupidity or – pace Duncan Black – an irrational desire to punish poor people.

If one sees, however, economy as the social sphere, and therefore locus of struggle that it is, then austerity politics may appear in a different light – far from being a barely explicable bumbled response based on a failure to understand which economic models are correct, these politics are part of a ruling class maneuver in the class struggle. Whether it is an offensive seizing of an opportunity to depress the social wage and assault what remains of labour’s social and political power, or a perceived defensive necessity aimed at avoiding a strengthening of working class position in the state and economy, or both (or something else entirely); austerity politics now appears as a rational (if, of course, still possibly faulty) response to the historical situation of modern capitalism.

6

ponce 01.31.13 at 4:36 pm

Does Ireland really have a massive trade surplus that accounts for nearly one quarter of its $200+ billion economy?

If so, how bad can things be there?

7

William Timberman 01.31.13 at 5:00 pm

christian_h, of course I don’t know what all Germans think — we do, after all have Wolfgang Münchau, not to mention Sahra Wagenknecht — but I do read what Angela Merkel, Wolfgang Schäuble and Jens Weidmann have to say, and I also read the comments sections in the major German papers whenever someone mentions Eurobonds or (God forbid) transfer union favorably in an article.

I’d gladly exclude German Marxists from my value judgments, but somehow I find it hard to believe that they’re representative of public opinion in Germany as a whole.

8

christian_h 01.31.13 at 5:15 pm

ponce (6.), my guess is this is related to why GDP is a bad measure of Irish economic output – much of this “trade surplus” likely comes from accounting practices designed to take advantage of that corporate tax rate. (I cannot believe btw this rate is actually being defended here – given that it does not actually lead to productive investment in Ireland. That’s what happens when everything becomes reduced to some nationalist competition – “Germans” [who apparently mostly think like Merkel and/or newspapers comments page denizens] hate that tax rate, so “Irish” have to defend it.)

William (7.): it’s not very productive to get into a debate over what “Germans” think. My main point was that it is not correct that “viewing economic as a morality play” is what is ultimately driving the policies implemented. That is just typically liberal psychologizing of politics at work.

9

christian_h 01.31.13 at 5:24 pm

To add: I may live in the US, but I do know quite a lot of Germans actually. Most are not Marxists. Some even agree with Merkel’s policies. Not a single one does so by making some kind of moralizing argument about economic or social virtue. Now of course my social circle is not exactly representative, but even taking the whole public debate into account I find Krugman’s description to miss the point entirely. What does show up in the public debate, viz. newspapers comments sections, isn’t “economics as a morality play” – it’s plain old racism (cf., US newspaper comments sections – for some reason they all attract racists).

The types of policies Merkel and Cie. push also aren’t based in some irrational morality (“debts as moral obligation”), but rather bald-faced attempts to force a restructuring of economies along lines advantageous to German (and local allied) capital. If we aim to resist those policies – as we should – it is a dangerous misunderstanding to think they are at their core irrational or inspired by fundamental theoretical misunderstandings.

10

William Timberman 01.31.13 at 5:35 pm

Believe it or not, christian_h, I’m actually on your side. I absolutely think that Germans calling Greeks wastrels, and Greeks calling Germans Nazis (the lowest-common denominator of nationalist arguments about political and economic choices) is counter-productive. Still, that’s exactly what you can expect when the true nature of these conflicts is obscured, especially when demagogues get into the act. In my opinion, the austerians are at best self-serving as a class, and at worst simply out of their minds, and that goes for Cameron and the Tories in the UK, and a majority of both parties in the U.S., not just the CDU and FDP and representatives of the Deutsche Bank in Germany.

I also think, if I’ve understood you correctly, that you’re right about the Keynesians, in the sense that their technocratic analysis leaves a lot of things out that shouldn’t be left out if, indeed, we actually mean to solve our long-term economic problems. Unfortunately, there aren’t many public figures with any measurable following who can recognize, let alone articulate what’s been left out of the argument. There are the Marxists, of course, who gesture in the right direction, but in most cases seem disappear into their own analyses as soon as they do. We need more help….

11

rf 01.31.13 at 5:39 pm

“Still no wilingness whatsoever to stop building the entire economy on tax evasion….”

If you’re actually interested, and not just playing the ‘tax haven’ game, Aidan Regan’s paper, (which luckily enough happens to be footnote 6 on ‘the politics of austerity in Ireland’ article), goes into a lot of pretty interesting detail on this very topic

12

In the sky 01.31.13 at 6:54 pm

Still no wilingness whatsoever to stop building the entire economy on tax evasion it seems. The only thing 12,5% tax rates attract are paper profits and some small alibi production facilities to make the tax evasion less obvious.

You should probably not conflate avoidance and evasion. Moving to a low-tax country is not illegal.

Also, it’s particularly hard to argue that “paper profits” encourage the sort of employment growth Ireland experienced (from 1.1 million workers in 1988 to 2.1 million workers in 2007), especially when the 12.5% uniform rate was only introduced well after the Celtic Tiger first appeared.

The profits of US corporations in Ireland amount to about 7.5% of its GDP. Let’s be generous and say that half of it is declared under dubious circumstances, call it 4% of GDP, so ~€7bn. I’d be interested how you square this 4% of GDP with “building the entire economy on tax evasion.” I’d also be interested to hear your thoughts about the scale of the €7bn when you consider that Britain spends more than twenty times that every year on the NHS.

I’ll also point you to Hines (Do Tax Havens Flourish?, 2005): “Whether the economic prosperity of tax haven countries comes at the expense of higher tax countries is unclear. Recent research suggests that tax haven activity stimulates investment in nearby high-tax countries.” and ask if Ireland’s corporate tax rate still concerns you.

Finally I’d be interested in your comments of the inclusion of “rogue” nations Canada and the United Kingdom on some “tax havens” lists, and if this changes your views on what constitutes a tax haven.

13

christian_h 01.31.13 at 7:36 pm

Might that employment increase in Ireland have been related to the real estate bubble? Just a thought, based on the cleverly chosen time period, ending in… 2007.

14

rf 01.31.13 at 7:55 pm

Afaik that’s not correct. Ireland had better growth rates before the bubble and unemploment (as seen here)

http://research.stlouisfed.org/fred2/data/IRLURHARMQDSMEI_Max_630_378.png

was also dropping substantially in late 90s early 00s

15

In the sky 01.31.13 at 8:38 pm

Might that employment increase in Ireland have been related to the real estate bubble? Just a thought, based on the cleverly chosen time period, ending in… 2007.

It certainly was… in part. You could attribute perhaps 100,000 jobs in construction, or about 10% of the increase, to the housing bubble.

As for the other 900,000? Extremely favourable demographic shifts, a doubling the number of women working over the period, etc. All largely unrelated to a boom in construction and/or “paper profits”.

16

Stephen 01.31.13 at 9:23 pm

Based on unreliable contemporary memory [fn1]: I think I remember the Irish Government guaranteeing all exposure to Irish banks, including the Anglo-Irish Bank that had many, er, interesting (and very much Irish and not at all Anglo) people exposed: and critics saying, hold on, the Irish Government doesn’t have anything like the money needed to back up all those guarantees: and the response especially from those with money exposed being, ah sure, it’ll be all right, the worst will never happen.

Am I misremembering things?

17

Stephen 01.31.13 at 9:24 pm

Dammit, forgot footnote.

Russian saying: he lies like an eyewitness.

18

Stephen 01.31.13 at 9:24 pm

Dammit, forgot footnote.

Russian saying: he lies like an eyewitness.

19

christian_h 01.31.13 at 9:27 pm

Sorry In the sky, in this case I simply don’t get your point (and rf, thanks for the correction). Your original post seemed to be in response to my contention that the low corporate tax rates have not actually encouraged valuable investment in Ireland. In response I am now being told that Irish employment and economy vastly improved over a period of time… before this tax rate was introduced. How does this contradict what I said?

20

In the sky 01.31.13 at 9:38 pm

Based on unreliable contemporary memory [fn1]: I think I remember the Irish Government guaranteeing all exposure to Irish banks […] Am I misremembering things?

You’re overlooking the initial pressure from Europe to not let the banks fail; the letter from the ECB effectively forcing the government into a bailout program; and the desirability of a default to the Irish that has not occurred to prevent contagion throughout Europe.

Your original post seemed to be in response to my contention that the low corporate tax rates have not actually encouraged valuable investment in Ireland … How does this contradict what I said?

Crossed wires, my friend! My original post was in response to hix, not you. The low corporate tax did encourage good investment, which caused growth and employment. At around the same time — and I think this was where we got mixed up — there was also a housing bubble that created (albeit temporary) employment.

21

Bruce Wilder 01.31.13 at 10:02 pm

Dr Vassilis Monastiriotis
Senior Lecturer in the Political Economy of South Eastern Europe
writing in Intereconomics, Review of European Economic Policy
emphasis added

structural problems persisted in the Greek economy, politics and society: problems of clientelism and corruption, problems of policy making and governance, and problems of competitiveness (a weak industrial base, strong product market rigidities and a mounting current account deficit). Largely owing to these, as is well known by now, Greece closed the 2009 financial year with a budget deficit of 15.8% (which, at the time, was estimated at 12.7%). As borrowing rates started climbing towards 10%, the country asked its eurozone and IMF partners for an emergency loan – a bailout package – and in May 2010 it was granted a loan worth a staggering €110bn, in a move that seemed to violate all EMU principles and of a size that surpassed that of the loans granted to Europe under the Marshall Plan. With this loan (and subsequent ones) came a strict and pervasive conditionality for the implementation of a broad range of reforms and fiscal consolidation actions. It is widely recognised that Greece has been slow to implement the agreed measures, showing both problems of implementation/capacity and a general lack of commitment. Still, for three years now Greece has been implementing perhaps the most extensive fiscal consolidation programme seen in Europe – and in doing so it has gotten itself into a deep and prolonged recession and, for many, a vicious circle of austerity-induced recession and recession-induced fiscal derailment.

Maybe it doesn’t sound like it to some, but that narrative is definitely economics as morality play. The cause-and-effect is ontological sin (e.g. “problems of clientelism and corruption” “a weak industrial base”) resulting in . . . a large budget deficit. It is an absurd pseudo-analysis, more theological in its character than anything recognizable as academic social science (or even that other widely favored narrative framework for financial and economic reporting: sports journalism).

I’m largely with christian and timberman, both, in regarding Krugman’s Keynesian aggregates as a wholly inadequate analysis, but, say what you will, he does explain quantities with the quantitative, not the qualitative. When you start doing the latter — when you start using qualities to explain events of varying quantities, you’ve entered into a world of magic, of alcemy and astrology. “strong product market rigidities” as an explanator is right up there with “mercury in retrograde”.

The narrative handwaving, which I have bolded in the quotation, is telling, but not the subject of my rant.

I rant, as someone, who thinks economics largely is, or should be regarded, in important part, as a morality play, at least in the sense that it cannot be treated as a purely valueless technical discipline. Political economy, generally, as Plato had it in the Republic, is, at bottom, about justice. Most of us, as citizens interested in democratic governance, are not going to be all that interested in the geekier technical aspects, but we are going to be interested in the justice, as well as material effectiveness, of our collectively chosen, institutional arrangements.

What’s wrong, here, imho, is that this neoliberal narrative (and it is a neoliberal narrative, and, yes, Paul Krugman, bless his name, is, unfortunately for us, a card-carrying neoliberal, too) gets it all wrong. It gets the technical quantitative economics wrong, and it gets the normative or prescriptive morality wrong as well. It gets everything wrong. Everything. Wrong. It makes me want to scream in frustrated rage at the manufacture of a conventional wisdom so blandly evil in its intent and effects.

And, the counter-narrative is no where in sight. I really wish, “the historical situation of modern capitalism”, did it for me, but it sounds like empty futility to my ears. I disagree with christian on this point: “. . . it is a dangerous misunderstanding to think they are at their core irrational or inspired by fundamental theoretical misunderstandings”. I don’t know what their “core” might be, but I think we ought to recognize that “fundamental theoretical misunderstandings” and irrationality are real and effective political means; this is stupid with a menacing purpose. There’s no possibility of democratic governance, here, in part, because there’s no possibility of a debate, or competitive coalitional politics, on commensurate terms. An antithesis to the neoliberal thesis has a really hard time getting a toehold, and that’s, I hypothesize, by design. We’re meant to be championed by Krugman, who is always three days late and two dollars short. We’re trapped in that Cretan Maze so brilliantly described in dsquared’s post on 500 ways (not) to leave the euro.

22

Bruce Wilder 01.31.13 at 10:11 pm

On the “morality play” front, the Italian MPS bank scandal gives me some faint hope. It may be hoping that the time is coming, when we can dust off the guillotines, and I count that as a somewhat perverse faint hope, but if our ruling class insists in acting like the Court at Versailles, maybe we should serve them in the appropriate fashion. As it is, given the complete absence of a Left, it is the Right, which is likely to benefit, in the immediate politics. A corruption scandal that benefits Berlusconi — can the world stand any more irony?

23

christian_h 01.31.13 at 10:58 pm

Bruce, certainly you make a good point that irrationality works as a political weapon (cf. “the state, like a household, has to live within its means”). I meant to say that the austerity policies are not irrational from the point of view of the ruling classes implementing them.

24

christian_h 01.31.13 at 11:00 pm

In the sky, sorry about misunderstanding then. Yet it seems to me frm what both you and rf posted that most of the increase in emloyment happened before the corporate tax reduction. Is this wrong?

25

dsquared 01.31.13 at 11:09 pm

You’re overlooking the initial pressure from Europe to not let the banks fail

Timeline wrong here. The Irish government guaranteed the banks very early on, when they were claiming to everyone that the Irish banks were sound and that this was all a silly panic caused by Northern Rock. The later pressure came from Europe to not renege on this guarantee.

The Irish government strategy of fib-bluster-walkaway in the guarantee debacle has been repeated a few times in the promissory note saga too, the last iteration being a proposal to basically tear up the liability and let the ECB monetise it. It’s having roughly the effect on their diplomatic credibility that you’d expect.

26

Shay Begorrah 02.01.13 at 12:15 am

@dsquared

The Irish government guaranteed the banks very early on, when they were claiming to everyone that the Irish banks were sound and that this was all a silly panic caused by Northern Rock. The later pressure came from Europe to not renege on this guarantee.

We should definitely start using “renege” to describe when people attempt to leave abusive spouses.

The initial bank guarantee (which was indeed far too sweeping, but then the bankers were lying, as bankers do) was given in September 2008 for and was set to last only two years. The currently dominant powers and institutions in the EU repeatedly forced Ireland to extend the bank guarantee thereafter – by September 2010 Ireland was deep in negotiations with the ECB/EU/IMF for a bailout to save it from the initial guarantee and the ECB conditions perversely included no bond holder being left behind. The guarantee was now Eurozone policy.

I think the current iteration of wiki page on the Irish bank guarantee puts it well:

After initial official criticism of such a <sweeping bank> guarantee, within a month the ECB were advocating such guarantees as protocol for other member states in similar situations. Whether or not the ECB knew about the guarantee, or even ordered it, it is in any case a matter of record that they have demanded the extension of the guarantee each time it was due to end its term

You are a well informed man Mr Davies, you know all this.

27

In the sky 02.01.13 at 12:56 am

Timeline wrong here. The Irish government guaranteed the banks very early on …. The later pressure came from Europe to not renege on this guarantee.

Not so fast!

There were phone calls between Trichet and Brian Lenihan 24 hours prior to the guarantee. Skip to 4 minutes 40 seconds for Lenihan’s rather damning recollection of the official advice given by the head of the ECB – http://www.youtube.com/watch?v=WDN7NiEdNJ0

28

In the sky 02.01.13 at 1:09 am

In the sky, sorry about misunderstanding then. Yet it seems to me frm what both you and rf posted that most of the increase in emloyment happened before the corporate tax reduction. Is this wrong?

IIRC the 12.5% rate was announced in 1997. You can see from rf’s graph that the boom was well under way at that stage.

Whether “most” of the increase happened before that, I’m not entirely sure: it could have been 40% of the way there, for example.

29

rf 02.01.13 at 2:11 am

“Yet it seems to me frm what both you and rf posted that most of the increase in emloyment happened before the corporate tax reduction.”

It was more just to clarify that strong growth and increased employment preceded the bubble, rather than the corporate tax rate. I was under the impression that Ireland has had a relatively low corporate tax rate (or whatever the precursor was) since the mid-1950s, (?) but that could be wrong. Either way it seems to have been one of a number of initiatives that drove growth for the last two decades, probably given too much credit by its boosters and attracted too much hostility from its detractors. Contrary to hix at 1 there is *some* debate now over whether it’s run its course in terms of usefulness, but it doesn’t seem to be hugely relevant anymore except as a useful narrative for the pay your debts’ cartel to rally around as they push their ludicrous positions (along with an unusual obsession with Irish crony capitalists, our culture of blaming ‘all of our problems on outsiders’, and a make believe general hostility towards Germans).
(Btw, I’m not necessarily theoretically in favour of it, but we’re a small country on the periphery of Europe so what can you do?)

“..the last iteration being a proposal to basically tear up the liability and let the ECB monetise it. It’s having roughly the effect on their diplomatic credibility that you’d expect.”

Well sure, they’re beginning to realise that if they want to remain in power they have to risk looking like idiots in a room full of idiots. Good! The perception of Irish political ‘credibility’ in European institutions or the banking sector isn’t actually something any half reasonable person should give a s**t about.

30

rf 02.01.13 at 3:00 am

“Ireland has had a relatively low corporate tax rate (or whatever the precursor was) since the mid-1950s….”

Or to clarify, it has its roots in the 50’s. I don’t know, but if you’re really interested (and lets be serious, who isn’t?!), google ‘Foreign Investment and the Politics of Export Profits Tax Relief 1956’ and it should bring up a 2011 paper by Frank Barry, (although this really isn’t much help with your initial question, so sorry!)

31

christian_h 02.01.13 at 3:11 am

Thanks rf, In the sky – always happy to learn.

32

In the sky 02.01.13 at 5:32 am

I was under the impression that Ireland has had a relatively low corporate tax rate (or whatever the precursor was) since the mid-1950s, (?) but that could be wrong.

I can’t tell you about the 1950s, but as of the early 1970s the Irish corporate tax rate was ~35% for most businesses, with a 10% rate for those in manufacturing. Nobody had a problem with this for quite a while.

Things changed in the 90s when the Commission started to get upset about differential rates of taxation. A query was lodged with the Irish government, which is usually a hint that legal action will follow unless things change.

Things did change, but maybe not the way the EU wanted. Rather than raising the 10% corporate tax rate for manufacturing up to the norm of ~32%, it was decided (either by the Rainbow government, or early FF/PD, I’m not sure who) to just drag everything down to 12.5%. After negotiations with the Commission, it was a phased drop over the best part of a decade… a 3% per year kind of thing. It only fully took hold in 2005, long after employment/GDP had surged.

Today we have people screaming blue murder about “12.5%” this and “evasion” that. That the rate was changed to satisfy a legal warning from the Commission, and the fact that the implementation was agreed to by the Commission, is of particular irony.

33

Bruce Wilder 02.01.13 at 7:20 am

Of course, the headline rate is necessary, but not sufficient, in building an economy on tax evasion, as the administrative willingness of the tax audit authorities to accomodate multinational corporations in re-locating geographic accounting incidence of taxable income, without actually moving productive activity around, or actually paying any rate of tax, anywhere, is the important qualifier. It would be interesting to know what the focus of the Commission’s concerns was, and how it changed over time, with regard to tax harmonization or whatever they choose to call it.

34

P O'Neill 02.01.13 at 10:25 pm

@Shay

That clipped quote from the wiki on the Irish bank guarantee is confused to the point of being wrong (unless there are some qualifying quotes around it but the absence of a link precludes checking that).

Specifically, it’s mixing up the notorious blanket guarantee which applied to all bank debt, but only for a period of 2 years, and then the later Eligible Liabilities Guarantee scheme, which applied to newly issued debt only. The latter avoids the madness of guaranteeing legacy debt in insolvent banks, but the genie was already out of the bottle by the time a more sensible guarantee scheme had been designed. And I know of no evidence that the ECB was demanding the first type of guarantee in other Eurozone countries, whereas the second type is much more common (incidentally, the remaining Irish banks now want out of the ELG, because the fees are so “high”). Now there is the separate question of whether, as policy, the ECB has been demanding Ireland maintain its blanket guarantee even when it is no longer in legislation, but that’snot anything with a pre-defined “term” that needs to be extended.

The article which forms the basis of the OP is very good but doesn’t say much about one aspect of the Irish adjustment process — the rural-urban split. The informal sense (perhaps accentuated by visible ghost estates) is that rural areas have done much worse in the adjustment, because they weren’t very diversified before the crash (indeed for them, construction was diversification) and they don’t have the buffer of public sector jobs and large multinationals to provide some protection from the downside.

35

LeftAtTheCross 02.01.13 at 11:38 pm

@3 Shay

” Ireland has no significant natural resources to exploit”

Me hole.

Natural gas in the Corrib basin is estimated at €540bn. Oil field off Cork in the news late last year. Wind energy in the enews this week in a deal to export electricity to GB.

Maybe it depends on your definition of “significant”.

What Ireland doesn’t have is an indigenous sector to exploit the resources for the benfit of the Irish state, and thanks to our comprador elite they have been gifted to the provate profit of the MNCs for feck all in return.

36

Barry 02.02.13 at 4:05 pm

Daniel,

Is there any chance that you could post your critiques of ‘Freaknomics’ outside of the Secret Lair of your blog? I was trying to refer to them the other day, but no matter how much I pounded on the door, nobody answered.

Thanks!

37

dsquared 02.02.13 at 4:31 pm

We should definitely start using “renege” to describe when people attempt to leave abusive spouses.

if you’ve ever wondered why I don’t always respond to you, it’s mainly because you use silly and unpleasant analogies like that.

38

Shay Begorrah 02.02.13 at 9:55 pm

@P O’Neil

And I know of no evidence that the ECB was demanding the first type of <blanket bank liabilities> guarantee in other Eurozone countries, whereas the second type is much more common. Now there is the separate question of whether, as policy, the ECB has been demanding Ireland maintain its blanket guarantee even when it is no longer in legislation, but that’s not anything with a pre-defined “term” that needs to be extended.

Do you not feel a little uncomfortable arguing that the ECB compelling Ireland to continue to effectively implement the policies of the first blanket guarantee after it had elapsed is different in any significant way from the ECB compelling Ireland to extend the initial guarantee?

As for whether the ECB would have demanded similar blanket guarantee from any other states we know that in this one case, where it had the power to do so, it did.

The initial banking guarantee was a terrible mistake by the Irish government but the policies were and are consistent with the policy preferences of the major EU institutions and Eurozone powers.

39

rf 02.02.13 at 11:20 pm

In fairness there is some ambiguity over what actually happened vis a vis the bank guarantee etc Mary O Rourke said recently that Lenihan told her what happened before he died, and it’s a lot more interesting than ‘the joyless economists would have you believe.’ (Or words to that effect)

40

hix 02.03.13 at 2:05 am

I have no problem to call the Irish strategy immoral first, as opposed to inefficient. When Microsoft pays 12% on 8 billion thin air profits, that is quite good for Ireland, less for everyone else. And yes, not paying back debt is immoral too under most circumstances. The Irish circumstances look very much like most.
The huge GDP/GNI difference and that little box “statistics without IFSC” at the CSO are a pretty definite sign that Ireland is a particular bad offender. I´ll leave the paper reading to people who get paid for it, that is sure not necessary to understand more than i ever wanted to.

There is nothing particular German about that those countries who do have to pay bailouts in the Eurozone are not happy about it. The only thing particular German in the Irish context is that every single German bank that had to be bailed out did do her dirty business in Irish subsidaries. Further, it does not make any sense to first claim position (a) is a somehow ilegitimate morality play (which is a moral judgment in the first place) just to turnaround and claim position (b) is immoral. There is no human right to gdp maximisation through default in filthy rich countries and a gdp maximisation strategy that depends on indefinite transfers will never work anyway.
We are not really talking about a simple default in this context anyway – what is actually meant is a situation where inner Eurozone transfers would replace capital markets as a source of financing for ongoing currenct account deficits.

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Cranky Observer 02.03.13 at 2:42 am

= = = hix @ 2:05 am “And yes, not paying back debt is immoral too under most circumstances. ” = = =

And yet, when major financial trading institutions do it it is called neither “reneging” nor “being immoral” but rather a ‘business decision':


= = = = =
Morgan Stanley fund fails to repay debt on Tokyo property
By Junko Fujita

TOKYO | Fri Apr 15, 2011 1:30pm EDT

(Reuters) – A Morgan Stanley property fund failed to make $3.3 billion in debt payments by a deadline on Friday, handing over the keys to a central Tokyo office building to Blackstone (BX.N) and other investors, the largest repayment failure of its kind in Japan.
= = = = =

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rf 02.06.13 at 11:51 pm

” It’s having roughly the effect on their diplomatic credibility that you’d expect.”

Yeah, just want to agree with this before the thread closes. You were certainly on to something here, my apologies

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Niall McAuley 02.07.13 at 9:14 am

And now, in a crroked timber thread crossover, Ronan O’Gara steps up to try and kick the can 40 years down the road…

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rf 02.07.13 at 7:37 pm

It seems that, despite obvious misgivings about the Blueshirts, this was a good deal? That we won? For all time..

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