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One size doesn't fit all when it comes to European austerity


Austerity across Europe created difficulties.

Austerity across Europe created difficulties.

Austerity across Europe created difficulties.

The annual 'Battle of Ideas' festival has been running in London for the last ten years. With a cast of hundreds, and an audience of thousands, it offers a weekend of vigorous panel and floor discussions and debates on almost every topic imaginable.

I heard many Irish voices at the recent festival and caught a glimpse of John Waters boarding the Tube as I disembarked at the conference venue.

He was a panellist on the very first session, which debated whether it is elitist to believe that some opinions deserve more careful attention than others.

I was invited to speak on the more mundane topic of economic crisis and austerity. The session was entitled 'Piigs Can't Fly: democracy-technocracy-austerity'. The acronym - which refers to the troubled economies of the Eurozone periphery - I find vaguely insulting. I was surprised to learn that the title had been chosen by the panel chairman, a Greek sociologist.

The format was designed to minimise waffle. I was invited to squeeze the views I have expressed at various Irish crisis conferences into a seven-minute presentation. After the allotted time the microphone would cut off automatically. It was like being at the Oscars.

I began with a quote from Paul Krugman (as distinct from Paul Newman), written way back in 1986, long before anyone took the prospects of a future Eurozone seriously. He pointed out that an increasingly integrated Europe would face a fiscal policy problem: policy would be overly restrictive.

Excessive restriction results when every government ignores the impact of its actions on the exports of others. "There is not even temporarily a natural central player whose actions can solve the fiscal co-ordination problem," he wrote. This problem has never been addressed. Simultaneous austerity across Europe over recent years has made it more difficult for austerity to achieve its goals, which are to reduce government deficits and slow or reverse the growth in government debt-to-GDP ratios. More difficult, though not impossible.

Just much more painful.

Without this co-ordination problem ever having been addressed, the potential for exchange-rate realignment was removed with the introduction of the euro. The co-ordination problem is resolved in the USA by the large Federal budget. The euro however, as many US economists warned, was a federalist project without the necessary federalist infrastructure to support it.

Not only was there nothing remotely equivalent to the US federal budget, there were no federal insurance schemes - such as a Eurozone banking union - to cushion the blow to regions suffering particular adversity.

It is difficult to imagine Helmut Kohl, one of the political heavyweights behind the euro, deeming as acceptable the level of paralysis that has prevailed in policy-making circles in Europe over the crisis. But the federalists had departed the stage at the end of Act One.

Irish tax revenues evaporated overnight at the commencement of the crisis. Large budget deficits would have prevailed even had we defaulted on our debt - and whether or not we had loaded ourselves with the extra debt from the disastrous bank guarantee.

Debt default would have necessitated the slashing of all public expenditures - on wages and pensions, on health and education, on social welfare. Could Irish society have withstood such disruption? I think not.

The austerity for Ireland and the other peripheral countries would have been a lot less painful however, had the missing fiscal co-ordination mechanism been in place at European level. Ireland's last period of fiscal retrenchment in the late 1980s was much less painful because the UK, the most significant market for job-intensive Irish exports, was booming. Today there is no equivalent beacon in the external European landscape.

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The European Central Bank made things worse in 2010 when it reportedly threatened to cut off liquidity to the Irish banking system if Ireland refused to pay off remaining unsecured bank bonds.

Economist Colm McCarthy argues convincingly that it far exceeded its mandate in doing this and has called for the matter to be tested before the European Court of Justice. I fully support this call. But, as McCarthy notes, the need for retrenchment would have scarcely diminished.

The Irish experience under austerity has been distinguished by remarkable industrial peace. Paddy Teahon, the chief civil servant behind social partnership, long argued that the process had promoted a shared understanding between unions, employers and government of the key mechanisms and relationships that drive the economy.

In the early days of the current crisis I suggested that "the Teahon view will be seen to have validity if some agreement can be reached to reduce public-sector pay until the current crisis is overcome". Students to whom I pitched the idea at the time thought it implausible. It surprises me that this legacy of partnership is rarely recognised.

As to whether austerity has worked, I suggested that the phrase is often misunderstood. Austerity is not about getting the economy back to work; it is about repositioning the economy for when markets rebound.

The flexibility of the labour market makes it easier for Ireland to bounce back than is the case for many of the other troubled economies. And we seem to be seeing such a bounce, though export markets remain fragile. All we can do about the latter is to advocate, along with others, that the remaining design flaws in the euro project be addressed.

I am not convinced that rigorous adherence to fiscal discipline on everyone's part will be sufficient.

Even the best behaved economies in Asia suffered contagion when crisis swept the region in the late 1990s. European integration, if it is to mean anything, should mean that we are capable of a co-ordinated policy response.

Given that all the other panellists in London expressed hostility to 'the displacement of democracy by technocracy', I want, finally, to offer at least two cheers for the latter. Most of my economist colleagues (and I) considered the deficit reduction policies advocated by the troika to be largely appropriate. Technocracy can be invaluable as a buffer to screen out the voices of powerful entrenched interests as well as the purveyors of snake oil, though technocrats can also of course be susceptible to malign influences.

Democracy, we know, is an imperfect system of checks and balances. But one of the most dispiriting aspects of the Eurozone crisis to my mind has been the sidelining of the European Commission, which was a similarly crucial bulwark in the defence of smaller member states' interests.

Frank Barry is Professor of International Business and Economic Development at Trinity College Dublin.

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