A Lifeboat Called Austerity

The European, June 2, 2012

In Ireland’s referendum, fear has won out over anger. The “yes” vote in favor of the European fiscal treaty is not an endorsement of Merkel’s austerity politics, but a concession to the harsh reality of the Eurozone crisis: Only those who play along can expect help from Berlin and Brussels. 

In the end, fear won out over anger. The Irish people have voted in favor of the Fiscal Treaty, opting for stability over protest. Yet it would be a mistake to interpret this as a ringing endorsement of Chancellor Angela Merkel’s austerity prescription for Europe’s ills.

The “Yes” campaign argued – in the end convincingly – that Ireland needed the insurance of access to funding once the bailout it received in 2010 runs out next year. The fact that Europe’s new firewall, the European Stability Mechanism, can only be availed of by countries that had ratified the Fiscal Treaty became the key issue of the referendum campaign.

For all the declarations by the Irish government of its intentions to go back to the bond markets in 2013, the current stormy waters in the euro zone make it increasingly likely that Dublin will require a second bailout. It was the risk of being cut off from potential funding that swayed many to reluctantly vote yes.

Despite the widespread anger at austerity, and the “No” campaign’s strong arguments that the treaty was a recipe for even harsher austerity, the treaty’s opponents failed to convince on the issue of where the funds were going to come from to keep the state afloat.

 The economic contraction and collapse of the real estate bubble that began with the financial crisis of 2008 lead to a massive hole in public finances. That has been exacerbated by the astronomical costs to the state of bailing out the country’s banks. As a result, bondholders who loaned to Ireland’s reckless banks are being recompensed by the Irish taxpayers for their gamble, much to people’s fury.

Dublin will be hoping that with the Fiscal Treaty referendum behind it, it will be able to negotiate some kind of write down of the albatross of Irish bank debt.

The Irish are in desperate need of some light at the end of the tunnel. While it might be upheld as the poster child of austerity, the expected return to modest growth this year and a strong export sector belies the state of the real economy. Unemployment is 14.6 percent and would be higher if it were not for Ireland’s traditional release of emigration. One in 10 mortgages are in arrears, retail sales are down and businesses are continuing to go bust.

Compounding the economic mess has been the sense of a loss of sovereignty as the troika of lenders, the ECB, EU, and IMF, effectively oversees the government.

The revelation that the Irish budget had been seen by members of the Bundestag before Irish parliamentarians felt like proof that the decisions about the country’s future are being made elsewhere. This is adding to the growing problem of the democratic deficit in the EU. Smaller peripheral countries like Ireland feel increasingly marginalized in euro zone decision making.

Meanwhile, the current policy of cutbacks and belt tightening alone is not going to help these economies get out of the current quagmire. The German approach of recasting the rest of Europe in its own image, through slashing wages and implementing structural reforms, is patently not working.

The people of Greece, Ireland, and Spain desperately need a narrative that holds out the prospect of growth. That may well include the use of structural funds and the EIB. It may also require Germany adjusting its own economy, by boosting domestic demand and accepting some loss of competitiveness in relation to its EU partners and even inflation. The recent wage increases secured by German trade unions are a move in the right direction.



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