Ambrose Evans-Pritchard: Brave Ireland is poster-child of EMU cruelty and folly
Published 04/03/2013 | 11:22
IT has endured a fiscal squeeze of 16pc of GDP. It has stabilised the colossal debts left from taking on the gambling losses of Anglo Irish Bank at EU behest, that is to say from shielding German, British, Dutch and Belgian lenders from systemic contagion at a critical moment.
It has clawed its way back to market credibility, issuing bonds at respectable rates. “Our last issue of routine 3-month treasury bills was at 0.26pc, not quite what Germany gets but very low,” said finance minister Michael Noonan.
It was spared serious contagion from last week’s anti-austerity revolt in Italy, evidence of sorts that the Celtic Tiger is off the sick list. Deo volente, it will be the first of the EMU victim states to regain its sovereignty by early next year and escape control of the EU-IMF Troika, though it will answer to inspectors for another 20 years and the yet unborn will be paying off the €67bn of Troika indenture until 2042.
“If measured in terms of what the Troika expects, we have been very successful,” said Mr Noonan.
Other measures are less cheerful. The EU’s latest survey on “poverty and social exclusion” shows that the number of children at risk in Ireland has reached 37.6pc, worse than Italy (32pc), Greece (31pc), Spain (30pc) or Portugal (29pc).
There is a fascinating twist to the data, a glimpse of what 1930s deflation can do to the social structure of an indebted society. Just 12.9pc of Ireland’s elderly are at risk of poverty, lower than in Germany, Austria, Belgium or Britain.
Budget-busting pensions granted in the good times have risen in real terms. So have savings. But young families that took out 100pc mortgages at the peak of the bubble face debt servitude after a 58pc fall in Dublin property prices, if they can keep their jobs. “What we need here in Ireland is a good dose of inflation,” confided one official.
European Commission chief Jose Manuel Barroso was in Dublin last week to celebrate Ireland’s heroic fortitude. Brussels needs a poster-child for its theory of “expansionary fiscal contraction” and discerns one in the Gaelic mists.
“The Irish economy is turning the corner. It shows that the bailout programmes can work”, he said, citing fresh figures that show a dead-cat bounce in jobs last Autumn before Europe crashed back into recession.
Whether or not Ireland’s economy is in fact turning the corner is a subject of hot debate, but what is crystal clear is that none of the Club Med countries trapped in depression can easily replicate the Celtic come-back.
Ireland will export as much as India this year, and more than Brazil, fruit of an industrial policy dating back to the early 1990s that has made the country a hub for global pharma, software, medical equipment, and financial services. It will rack up a very German current account surplus above 4pc of GDP.
Exports make up 106pc of GDP, compared to 35pc for Portugal, 30pc for Spain 30pc, 29pc for Italy, and 21pc for Greece. Ireland has a much higher trade gearing than Club Med peers, and that is what has kept the country afloat despite a 26pc collapse in domestic demand. Growth was 1.5pc in 2011 and 0.9pc in 2012, better than the EU average.
The export story is by now well-known. The global drug giants almost all have plants in Ireland, employing 44,000 people and producing half the country’s merchandise exports, though this may be losing its edge. The country is facing a “Patent Cliff” as a clutch of drugs - such as Pfizer’s statin pill Lipitor - come off patent in the US. It is the reason why Irish exports slipped 15pc in December.
Microsoft, Google, Facebook, Twitter, and a host of household names have regional headquarters in Dublin, whether drawn by a corporation tax of 12.5pc or by the critical mass of a high-tech skills. How much value is added to the Irish economy is an open question. Google rotates some 45pc of its global revenues through Ireland under transfer pricing schemes.
Even so, Ireland is clearly a different animal from the Greco-Latins. It never had a seriously misaligned currency within EMU. It had a misaligned monetary policy that set off a credit bubble. Real interests set in Frankfurt averaged minus 1pc from 1998 to 2007 (compared to plus 7pc in the early 1990s). As Irish eurosceptics foretold, the effects were ruinous.
The country has since deflated the froth. The gap in unit labour costs with the EMU-core has been closed again, at least on paper. “We have cut costs right through the economy with an internal devaluation of 15pc or 16pc,” said Mr Noonan.
One can quibble with the claims. Nearly all the gain in labour costs has been in the non-tradeable public sector - nurses, policemen, teachers - where wages have been slashed 14pc, with another 5.5pc to come. Productivity levels have been flattered by the annihilation of the building industry. “Private wages have declined only modestly,” says the IMF in its latest report.
Yet the point remains that Spain has not begun to see this level of deflationary shock. Were it to try with such a closed economy, it would tip into free-fall, push the jobless rate above 30pc, and cause the debt trajectory to spin out of control. As for Italy, its unit labour costs rose as fast as Germany’s last year. Its deflation lies ahead.
Club Med can take no comfort from Ireland’s success, but is even Ireland itself out of the woods? The budget deficit is still 8pc of GDP five years into the ordeal, and public debt is already nearing the limits of viability at 121pc of GDP this year.
Dublin has pencilled in a 3pc deficit by 2015, but dissidents say 6pc is more likely. The IMF warns that a “stagnation” scenario of 0.5pc growth a year into the middle of the decade would cause the debt ratio to spiral up to 146pc by 2021.
That is a serious risk as Europe persists in botching macro-economic policy, and US austerity threatens the fragile world expansion later this year.
Investment has collapsed to 10pc of GDP.
This is the lowest in recorded Irish history and the currently the lowest in the EU. “If this does not recover over the next couple of years, I’ll be worried”, said Rossa White from the National Treasury Management Agency.
Indeed, it is the crux of the matter. Spending has been slashed through the muscle and into the bone. This presumably is what Laszlo Andor, the EU employment commissioner, was talking about last week when he decried a slash-and-burn policy in the name of competitiveness that is tipping the crisis economies into a “downward spiral” and making it even harder to cut control debts. Are his colleagues in the Berlayment listening to him?
A mass exodus of 40,000 to 50,000 each year to the four corners of the Irish Diaspora have kept unemployment down to 14.1pc, but 60pc of those left on the rolls have been out of work for over year -- the highest rate in Europe -- and that is where the “hysteresis” effects of lasting damage bites hardest. It steals from growth from the future by degrading work skills.
Irish trade union chief David Begg was speaking with poetic licence last week when he accused the Troika of doing more damage to Ireland than the British Empire ever did in eight hundred years, snapping that the English had at least left some “beautiful Georgian buildings.” Needless to say, he has not forgotten the Wexford massacre and the potato famine, and nor have we at this newspaper. Yet he made his point.
“When we meet the Troika, we tell them that austerity is not working, and they tell us that it is. It is a dialogue of the deaf,” he said.
Mr Begg said he had come to realise that EMU is constructed in such a way that the “entire burden of cost adjustment” falls on workers if there is macro-shock. He is right. An internal devaluation is achieved by forcing unemployment to such excruciating levels that it breaks the back of labour resistance to pay cuts. It is the polar opposite of a currency devaluation that spreads the pain. Note that Iceland’s unemployment is just 5.4pc today, and Britain’s is 7.7pc.
“Such a callous disregard for distributional justice - which we have witnessed in this country over the last five years - is a fatal flaw,” he said.
“For much of its history, European integration has proceeded on the basis of a ‘Permissive Consensus’. European citizens thought it was a good thing, or at least did no harm. I doubt that view is still current. From what I hear in the circles in which I move, today’s labour movement is disaffected from the European project,” he said.
“What will happen when people eventually realise that they are trapped in a spiral of deflation and debt. We may reach the tipping point,” he said.
Europe’s labour movement is the dog that has not barked in this long crisis. Bark it will.