Wednesday 16 October 2019

Marc Coleman: Austerity is not to blame, it is overspending that is the culprit

Despite what Michael D Higgins thinks, Euro bonds are not a viable solution to the EU's fiscal difficulties.

Marc Coleman

To those that have shall be given more. From those that have not, shall be taken away. Sometimes the Bible is a cruel book, and last week there was an old testament biblical cruelty to the mortgage market. Since the crisis began, those on variable mortgages have been hit by a succession of discretionary rate rises by crisis-hit Irish institutions. As a result a huge gap between the "have trackers" and "have no trackers" has opened up. With a rate gap as high as 3 per cent in some cases, those with typical €250,000/25-year variable rate mortgages may now – depending on the institution – be paying up to €450 a month more than their tracker cousins.

Last week many variable rate holders suffered a 40 basis points hike. But tracker mortgage holders will, thanks to the European Central Bank's rate cut on Thursday, enjoy a 25 basis (quarter of a per cent) point cut. For the holder of the aforementioned "typical" mortgage, that's €35 less a month or €420 less a year. OK so the Government will gobble most of that up in property tax. But in net terms it still leaves the tracker market about €170m a year better off. It's just a pity that those who need help most get rate hikes while those that need it least get cuts.

It's the kind of injustice that President Michael D Higgins likes to take an interest in. When I interviewed him during the Presidential election, he criticised his predecessor Mary McAleese for not holding a Council of State when the Bank Guarantee Scheme was announced.

It seemed to signal that he would be more vocal on banking matters. But while saying nothing about institutions that are raising interest rates, Michael D Higgins took aim at the very institution that is cutting rates. The ECB, he thinks, should do even more than it already has.

Compared to other EU institutions and member states, it has done Trojan work. At just 0.5 per cent its main refinancing rate has now been lowered to limbo dance levels. With just two quarter-point cuts left, it has nearly exhausted its arsenal of conventional instruments to fight this crisis.

Nor is the eurozone economy short of monetary stimulus. Like the guy who drinks 10 cups of coffee, there is if anything too much caffeine in the system and another espresso is unlikely to stimulate growth in an already over-indebted continent. As excessive government spending and fears of tax rises in the future crippled investors and consumers alike, growth in Europe is stymied by big government and not by lack of government borrowing. What is needed is a radical slimming down of government spending, debt and taxes.

The Left call this 'austerity' and say it has failed. A glance at the facts show this is nonsense: in 2008 spending was 47.1 per cent of eurozone GDP. Far from falling, that has now risen to 49.7 per cent. And this is why growth is elusive. Had that spending been drastically reduced – and had the "six pack" of competitive product service and labour market reforms been implemented – growth would be returning.

But member states lack the will to take the tough measures to do this. So leaders are taking the easy route by blaming non-existent austerity. And by calling on the institution that has done more than most to do even more. Quantitative easing is, so says Manuel Barroso, the solution to our problems.

President Higgins spoke about the need for Euro bonds to boost European growth. The idea behind Euro bonds is that, instead of borrowing separately, eurozone countries would pool a portion of their debt and then, through the ECB, borrow collectively from financial markets. In theory, countries like Greece – now prevented from borrowing due to high interest rates –could avail of lower German- style rates. The ECB could also then expand money supply in the eurozone.

But evidence suggests this is a recipe for failure: in an attempt to create jobs, the US Fed has pumped $3.2trn into the US economy over the past four years. The result? The share of the US population with jobs is exactly the same as when the whole wasted exercise began. Only US debt is now dangerously higher.

The way to stimulate eurozone growth is to look at which member state policies have been most successful. In Germany, policies emphasising low debt – the opposite of

quantitative easing – have, combined with cost competitiveness, research and development and hard work, led to steady and sustainable growth.

Without a radical slimming down of state spending across Europe – and certainly without serious pro-competitive reforms to product, service and labour markets – the effects of any monetary stimulus will be the same as in the US: higher debt, and no meaningful improvement in the employment situation. Worse still, in their anxiety to get over the hurdle of the next election, Euro bonds would be a recipe for member states to put pressure on the ECB to inject short-term borrowing into the economy.

A little knowledge is a dangerous thing. When mixed with enthusiasm it is even more dangerous. As a sociologist, our President has an erudite and articulate vision of what he calls society. But that does not translate into a sound knowledge of economics.

Euro bonds may have a role as a once-off tool to break the link between sovereign and bank debt. But only in targeted member states. And only if preceded by a clear commitment to fiscal consolidation and discipline and by the completion of a new EU banking supervisory regime. The ECB is nearly out of road on the rate-cut front. Eurozone states, by contrast, have much more scope for movement. In the meantime, if our President is looking for something to comment on, the plight of those on variable rate mortgages here might be more relevant and closer to home.

Marc Coleman is Economics Editor of Newstalk 106-108fm; @marcpcoleman

Irish Independent

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