Despite repeated assurances that Ireland is ‘on track’ and is a model pupil of the Troika, the fiscal tightening in the pipeline is proportionately actually harsher than anywhere else in the Euro Area.
Mainstream political leaders across Europe continue to misunderstand the causes of the Eurozone crisis. As a result, member state governments and EU institutions continue to implement the wrong solutions.
The cause of the Eurozone instability was not fiscal irresponsibility or profligate spending in peripheral economies such as Greece, Portugal and Ireland. Rather, the difficulties in the periphery were a consequence of structural weaknesses in the design and operation of the Euro currency itself.
There is an inherent instability built into the heart of the Euro currency project that advantages strong economies while disadvantaging weak economies. This can best be seen in the cases of Germany and Greece. The single currency made German exports more competitive, boosting their exports and growth levels.
In turn, this led to trade surpluses while also encouraging savings surpluses. In addition to exporting manufacturing goods, Germany also became a major exporter of capital in the form of loans by German banks. Weaker Eurozone economies such as Greece were able to borrow money at cheaper levels with lower levels of risk. This led to an increase in government and private debt, as Greece built up trade deficits and rising levels of personal debt.
The design of the Euro provided an incentive to many strong economies to produce ever-bigger surpluses, and to weak economies to produce ever-bigger levels of private and public debt. Domestic policy choices in weaker and stronger economies also played a key role, and though measures could have been taken to counterbalance this tendency, in most cases they were not.
However, the architecture of the Euro and the policies of the ECB were decisive in deepening the existing imbalances between stronger and weaker economies. The central problem was that there was no mechanism for recycling the surpluses generated by the stronger economies in a way that would assist economic development in the weaker economies.
The ‘one size fits all’ monetary policy, set mainly according to the needs of the stronger national economies such as Germany and France, exacerbated this problem – by providing an incentive for aggressive lending by major European banks and their counterparts in the periphery, and for reckless borrowing by governments and in some cases, individuals.
Eventually, the levels of aggressive borrowing and lending became too great; banks became risk-averse and lending into the real economy stopped during the credit crunch in 2007and 2008. While this was a global problem, it had a particular impact on the stability of the Eurozone. The ensuing recession led to rising unemployment, falling tax revenues and spiralling deficits across the national economies of the Eurozone.
This was made much worse by the policy of the European Central Bank, supported by member state governments, to bail out banks irrespective of the cost. The markets now believed that as a result of bank debts being heaped upon taxpayers’ shoulders, that countries debts were now unsustainable and would not be honoured. This drove up interest rates and led to peripheral economies being frozen out of the markets.
In response, EU leaders fanned the flames of the growing crisis by further contracting economies with austerity and increasing debt levels by insisting on bailing out banks.
The implementation of the Austerity Treaty will continue to contract the Eurozone economies. The failure of the European Council to develop any credible jobs stimulus programme will mean there is little to counter the negative effects of austerity. The EU/IMF austerity programmes are failing. Greece is expected to need a third bailout and Portugal a second bailout. In Ireland there has been tentative steps back into the bond markets but the yields are still on average 3% higher than Germany’s. While the prospect of retrospective recapitalisations by the ESM has pushed bond yields downwards since 29 June 2012, the current uncertainty on the issue of legacy debt risks pushing yields upwards again. This makes any exit from the Troika programme and return to the markets by 2014 very uncertain.
The policies of austerity are strangling growth, not only in Ireland but across the Eurozone. EU unemployment is at an all-time high. The Troika programmes are not working because they are ignoring the real causes of the currency crisis. There is an urgent need for a change of direction away from austerity and towards policies focused on stimulating growth.
Any solution to the Eurozone crisis must follow a series of interrelated steps. There is a need to correct the design flaws inherent in the project itself. We need to invest in economic growth, primarily in the form of jobs. The European banking system must be cleansed of its toxic debts. There is also a need to reduce debt levels across the Eurozone through debt restructuring.
Thus, rather than continuing with the policies of fiscal integration, crippling austerity and bank bailouts favoured by Fine Gael, Labour, Fianna Fáil and their European counterparts, Sinn Féin is advocating a strategy of investment, debt write downs, and market return.
Sinn Féin proposes: