Wednesday, 7 December 2011

A Necessary Divorce

Economic conditions laid down by the troika are stalling the recovery and hurting the Irish people, but it is still not too late to take drastic action, argues Ray Kinsella

THE measures included in Budget 2012 have been well trialled. They take place against the backdrop of yet more meetings between France and Germany in the lead up to Friday’s make-or-break euro summit.

The subtitle of this summit could be "this time it’s personal". Finally, Germany and France are pushing with brutal self-interest their version of full fiscal and political union as the only way forward. In a eurozone where "subsidiary" was once a core principle, the views of Ireland and other countries count for nothing. Power and hegemony are what it is about.

But it would be very short-sighted to ignore the timing of Budget 2012 and of the euro summit. They both take place in the lead-up to Christmas. Christianity is about hope and transformational change, yet hope is what is conspicuously absent from our budgetary process. The issue of transformational change doesn’t even arise — all economic and financial indicators continue to point south.

We need the context of Christmas, not just to cope with the effects of self-destructive policies that have been imposed on Ireland: We also need this context to understand how corporate capitalism seduced a generation into a wilderness of austerity and a debt burden that cannot be repaid. We need the image of a family, on the outside, looking in at a political elite that does not understand just how separated it is from the lives of the people. In Spain, to take one example, over 40% of young people are unemployed.

Budget 2012 will devastate Irish business and the economy. In terms of domestic demand, investment has collapsed. The retail sector’s frail state is reflected in the unprecedented "sales" which have all the hallmarks of desperation. Raising VAT damages an employment-intensive sector which is already under huge pressure. But that is only one example. The budget will further push up costs for businesses and for families in desperate straits.

The budget is the latest in a series dictated by the troika. Our European partners, whose financial systems we are helping safeguard, bought control over our future for the knockdown price of just over e30 billion. An economy, with a capacity for innovation stretching back 5,000 years to Newgrange, is held hostage to a eurozone budgetary strategy that is demonstrably failing.

Look at the most recent EU forecasts for 2011. In Ireland, CSO data on growth and numbers on the Live Register confirm the state of an economy traumatised by the three previous budgets based on "troikanomics". Why are we inflicting more of the same on an economy blessed with resources and with spare capacity that would make one weep?

Budget 2012 is a highly regressive and divisive exercise in short-termism. The focus is on squeezing the life out of what remains of the economy. A great detail of spin is being used to justify this approach. It has no substance. Budget 2012 shows, as never before, how the policy mindset of a country can be captured.

This is a hard thing to say: Budget 2012 has been drawn up and will be enforced in the eurozone by individuals with one thing in common — they all have jobs. Only those who have talents they cannot put to use and commitments (especially at Christmas) they cannot meet can understand the pernicious nonsense being talked about the virtues of belt-tightening as a substitute for national development as the key to restoring solvency.

Over the past three years, I have argued that the adjustment strategy adopted post-2008 was wholly imbalanced; that the only sustainable approach was to adjust over a sensible timeframe (2020); that the emphasis needed to be on growing our way back to national solvency.

In September 2010, I argued that IMF intervention would be inevitable unless we changed course. Alongside others, I argued against the terms of the bailout. Last year I argued we were "stumbling toward default". This spring, with so many windows of opportunity having closed, I made the case for a managed exit from the eurozone as the only viable option to prevent the economy being swallowed by a vicious circle of contracting demand, a massive credit squeeze and policy-induced recession.

There is another point.

Developments in the eurozone in the past year — the flat-lining of growth, sovereign credit downgrades, the fact that Sweden, which voted against eurozone entry in 2003, can now borrow more cheaply than Germany — demonstrate to anyone with an open mind that the terms of the bailout is impelling Ireland into a cul de sac.

TDs across the political spectrum know this to be true. Many simply do not believe what they’re being asked to approve in the budget. Faced with this, appeals are being made to "loyalty", a word prone to stalking Dáil Éireann.

It is not acceptable to argue "we have no choice". We have always had choices — even though the cost of exercising those choices becomes greater with each opportunity we let slip through our hands. The truth is we bottled it.

Nor is it respectful of a Dáil to whom our Constitution, forged of vision and heroic sacrifices, has been entrusted, to shrug its shoulders and acquiesce in the emasculation of democracy. This is why our unreconstructed political system commands little respect in the country. What do we have left to fall back on if, as both markets and respected analysts expect, the eurozone implodes and political instability becomes a very real threat? If the Bank of England and the British Financial Services Authority counsel their institutions to prepare for this eventuality, why do we persist, with bowed heads, with a discredited bailout?

A disorderly collapse of the eurozone is likely to occur sooner rather then later. Recent summits have produced nothing except the continued erosion of ECB independence and proposals for a European Stability Fund Mechanism (ESFS) — a bailout fund for large eurozone countries in trouble — whose design and funding arrangements have all but collapsed. In the wake of this, there has been an air of barely concealed, quiet desperation. Spreads remain stubbornly high, even in the wake of Italy’s change of government. Both the ESFS and even Germany are encountering market resistance to funding requests.

All of the choreography set out in recent speeches by German chancellor Angela Merkel and French president Nicolas Sarkozy is of a pre-emptive move to full political union. It is entirely proper to conceive of a role for the ECB that is different to the one set out in the treaty by which it was established.

However, that is not what exists now. What is there now is an institution the mandate, function and independence of which are being subverted by a model of monetary union that was structurally and politically flawed from the outset. It is wrong and has done terminal damage to manipulate the ECB mandate into compensating for these flaws. France, with its intolerance of Ireland’s corporate tax rate, effectively wants the ECB to resort to the printing presses to bail it out when the markets come knocking on its door.

For Ireland, fiscal union — of which the bailout was a precursor — is a precursor to full political union. This means Germany and France would draft monitor and enforce Ireland’s fiscal policies, including its corporation tax rate. When I argued during the Lisbon 1 campaign that this was on the line, it was largely dismissed. We know better now and we know how much store can be put in "binding commitments" from our "partners". What is even worse is that Budget 2012 imposes cuts on our third-level sector as our corporate tax regime has been put on notice by Mr Sarkozy, as part of the fabric of fiscal and political union. It was not supposed to be like this.

At present, Denmark, Sweden, or Britain can adjust their exchange rate to gain competitiveness and thereby ease pressure on their labour markets.

Not so Ireland. We are a member of a "one-size-fits-all" monetary union that lacks a fiscal transfer system but instead has a malign adjustment process which exacerbates the underlying structural problems stifling growth.

We should be clear about what surrendering what remains of our budgetary autonomy means. It means that the opening up of the economy in the 1960s would not have happened. It would mean that the Irish Financial Services Centre would not have happened; it means that, as matters stand, our capitol corporate tax rate is living on borrowed time.

In return for all of this, the Merkel/Sarkozy drive for political union offers "direct elections for a President of Europe". Are the suffering people of Europe really expected to see this as something of substance? In our country, we have seen, up close and personal, how little respect there is for the wishes of the electorate.

The Dáil should vote against this budget. It should negotiate a managed exit from the eurozone, both in our own national interest and for a catalyst for the eurozone to face up to its internal inconsistencies and rebuild itself. We have now reached a stage where the threat of default hangs over a growing number of eurozone countries, including Ireland.

We need a government of national unity, because the disunity, factionalism, begrudgery and bitterness that are increasingly evident in our national life are the greatest obstacles to Ireland’s self-belief; and to understand that change from within is infinitely better than adjustments being imposed from outside by those who know little of Ireland’s potential and, quite frankly, care even less.

Christmas seems a good time to take our courage in our hands and leave a blighted eurozone and reclaim a future for our children.

The greatest short-term threat confronting the eurozone is of a self-inflicted economic ice age. Economic growth has slowed to the brink of recession, largely because of policy-induced austerity measures. Eurozone banks are now conflicted by the regulatory requirement to dispose of assets in order to meet higher capital requirements. This means even less lending available for businesses, especially in the present high-risk economic and financial environment.

Meanwhile, non-euro banks are deliberately reducing their lending to eurozone countries. But, most telling of all, inter-bank lending is freezing up — just as it did in 2008. There is, once again, a meltdown in trust, reflected in the unwillingness of banks to lend to their peer banks within the eurozone. In this environment there is only so much that the ECB can do. Printing money, against diminishing quality collateral, is not sustainable in the medium-term and also carries a serious threat of inflation.

These developments will put even more pressure on the public finances of eurozone members, as well as on the already weak balance-sheets of banks. The possibility of a bank run, necessitating ECB intervention, is real. This is the eurozone’s negative vortex within which it — and Ireland because of its adherence to the — bailout is trapped. The EU summit must find a way through on Friday.

*Economist  Ray Kinsella  is professor of banking and finance at the UCD Michael Smurfit Graduate School of Business

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Friday, 26 August 2011

Investment in Education Should Not Be Held Hostage by ‘Bailout’

                                                                        (First published in 'The Irish Examiner' 23-08-2011)

The importance of Education to a country that aspires to be inclusive, democratic, and innovative could hardly be over-emphasised. Ireland has good reason to know this from our history: once we depended on ‘Hedge Schools’ to transmit a commitment to learning. In the face of massive economic uncertainty within the Eurozone, and across the global economy, investment in education is a key policy priority for promoting an economic recovery in Ireland
Ireland’s economic recovery rests primarily on its people and our natural resources. The two are interrelated; to develop the technologies that can harvest our natural resources we need a creative and innovative workforce. In turn, developing these resources in the interest of Irish people will provide the funding for investing in education. We are a million miles from igniting this virtuous circle.
This makes little sense for a country which has almost 36% of its population aged 25 or under. It makes even less sense when account is taken of the contraction in the employment, the rise in unemployment and involuntary emigration that has occurred over the last four years.
The reality is that the future of primary school children is being shaped, even now, by the decisions that are being made on education.
The starting point for such decisions should be that we are currently under-investing in education, comparing with the OECD average. Ireland is a small, open and vulnerable economy, but one with a ‘golden demographic’, and with economic pressures bearing down on it, the like of which have not been experienced in our modern history.
In these circumstances ‘OECD average’ doesn’t begin to cut it – we need to be investing way above the OECD average, because it is these same OECD countries – and the ‘emerging economies’- with whom this generation, and the next, will have to compete if we are to make our way in the world.

In fact, investment in education is being reduced in absolute terms. Under current policies, dictated by the EU/ECB/IMF Bailout, it is going to be reduced even further. The government and, in fairness, the Minister for Education and Skills, know this to be the case. It has been made clear by the Troika, that even the cost of the ‘Jobs Package’ would have to be found from within the existing ‘Bailout’ limits.
Nonetheless, we are allowing our education policies, at this most critical time, to be held hostage to a mind-set that is contrary to educational research and common sense. Think about it: Ireland ‘borrowed’ some €33 billion from Eurozone institutions; Facebook, to take just one example of a knowledge company, has a current market valuation around €90 billion. We sold ourselves, and the freedom to decide what is in our vital national interests, short.

This enforced short-termism in cutting back on investment in Third level is wrong for three reasons.
Firstly, Ireland is first and foremost a ‘knowledge-based’ economy. In a book ‘Ireland and the knowledge Economy’ which I co-authored with the distinguished TCD physicist Prof. Vincent McBrierty  almost 15 years ago, we demonstrated the importance of investing in knowledge and creativity to a, then, sceptical policy audience.

Time has vindicated the proposition we advanced in relation to investing in a new ‘Techno-academic Paradigm’ and, more generally, the importance of investing in R&D and innovation within our Third Level. Ireland doesn’t have too many large companies investing in R&D: our Third level sector and our University Teaching Hospitals are of critical importance to the sustainability of our economy, and to the development, to the full, of our people and of our natural resources. The new paradigm which we wrote of is the ‘bridge’ from where we are, to where we are capable of being.
We have a robust and imaginative policy infrastructure in the HEA and in Science Foundation Ireland (SFI ). We have benefited enormously from pioneering policy makers like John Travers and from generations of researchers and entrepreneurs in our University’s and Institutes of Technology. A brief glance at SFI’s website will confirm just what our researchers are capable of achieving across whole swath of technologies and sciences. This is our real National Pension Reserve Fund.

What it boils down to is this; in order to attract, and retain, Foreign Direct Investment and, also, to continue to keep the ‘lights on’ in our increasingly IT-driven domestic economy, we need to invest in education, especially Third Level, since the outcomes feed directly into the productivity and innovation and competitiveness of the economy.
It is hardly tenable to argue that the EU/ECB/IMF ‘Bailout’ programme ‘does not allow’ us to invest in education. Indeed, the very fact that the Bailout is focused on short-term fiscal bookkeeping instead of medium-term strategic thinking, shows just how impoverished and counter-productive is the thinking on which the Bailout is based.
 It is precisely by investing in education that the growth necessary for recovery and for closer convergence across the Eurozone can best be assured. The irony, of course, is that EU Programmes in education and student/staff mobility – programmes like Erasmus – have been an unqualified success, providing a unique opportunity to generations of students to understand the richness of European culture, learning and research. The same can be said for the EU’s Seventh Framework Programme on Science and Technology. The EU Commission, as part of the ‘Troika’ should be aware of the wholly contradictory nature of its policy imposition on Ireland. Investment in education can rebuild the credibility that the Euro zone policies now so signally lack.
An overseas broadcaster covering Ireland’s economic plight recently put to me the question “why on earth’ is Ireland cutting back on investment in education at this time? How can one possibly explain to someone outside this country why, in three short years, we have managed to find ­€70 billion (including €25 billion allocated by the ‘Troika’ earlier this year) to recapitalize banks, which were close to the epicentre of Ireland’s debacle, and somehow, cannot find the €5 billion necessary to invest in higher education between now and 2020.
The second reason it is wrong has to do with social solidarity and, also, political stability. Investment in education is absolutely central to building an inclusive society. Many thousands are marginalised through lack of access to education, including Third Level. This has been a greatly exacerbated by the rise of Long-term and Youth unemployment.
A generation which we have deprived of employment opportunities are now facing even higher financial barriers to participation in higher education. This is destructive of the human Person and also of what is quaintly called ‘human capital’. The failure to invest in education is also sowing the seeds for a divided and fragmented society, one which is vulnerable to political instability.
The third reason has to do with what is actually being achieved within the Third level sector. No doubt, much more could be done, under the usual mantras of Value for Money and efficiency.
But the reality is that the third level sector has measurably delivered on both quality and commitment and outcomes. It needs investment. We cannot continue to ‘cannibalise’ the legacy that has been built up over the years by our teaching professionals, and by our researchers.
There is also a real danger that we are beginning to believe our own PR. Twelve months ago, an authoritative leader in a major multi-national, one who is seriously supportive of Irelands graduates, quietly pointed out after a seminar that he could see that for the first time standards ‘were slipping’ and that we were in real danger of being bypassed by countries who are more passionate about, and investing more in, education.
Ireland’s third level sector is now under severe stress. It’s not simply a matter of accommodating more numbers with fewer resources, it’s about building on – rather than reversing – participation rates in education; it’s about encouraging lifelong learning and, also, re-skilling in a traumatised economic environment. It is about sustaining – rather than eroding – critical mass in Post Graduate training, and research. We are long on vision and aspiration – and maybe that’s no harm. The vision set out in the Hunt Report does provide something at which to aim. But we are seriously short in delivering the kind of financial support and empowerment that our Third level needs.
The world of education, defined by successive Reports and Strategies and Task Forces, is becoming semi-detached from the real world of kids, and young adults facing increasing Third level costs when they cannot even get a part-time job; and from the hopes of parents for their children when confronted by everything from increased Third level fees to the pressures of getting kids back to school.
There is a real danger of becoming bogged-down in refined argument about student contributions and funding models. These are, of course, reasonable points, but they miss the ‘big picture’. That is, in terms of our natural resource endowments, we are a rich country that should be thinking primarily in terms of the right of all of our children, to the best education that we can offer so that they, in turn, can contribute to their community and their country, and to the raising of their families.
Ireland faces a budget, which is set to extract a minimum of €3.5 billion, from an emaciated economy. A country that can point to Newgrange, the Book of Kells, to Scholars who reanimated European learning in the early middle ages-- and to a level of scholarship in modern Ireland  out of all proportion to Ireland’s size,  is not in need of instruction about investment in Education from a ‘Troika’ driven by a  short-term Technocratic mindset.
 No Government or Minister for Education can take on this challenge by themselves. A consensus is necessary that, when it comes to our core social capital in Education and Health, a malign ‘Bailout’ must not be allowed to subvert our future –and common sense.

Monday, 15 August 2011

-Coming To The End.....On The Brink Of Political Union........

  published in ' The Irish Examiner' Tuesday 16-08-2011

Today’s meeting of German Chancellor Merkel and French President Sarkozy may prove a defining moment in the evolution of the Eurozone, and the wider EU.  One way or another, this meeting has the capacity to change the trajectory not alone of the economy but of modern Irish history.

The leaders may talk of many things but the real agenda for the meeting is simple.  It has to do with two questions.  Firstly, is there anything left – anything at all – that can halt the implosion of the Euro zone. Secondly, is Political Union the only ‘solution’ left on the table.

‘Bailouts’ have not succeeded; their punitive terms, as the ‘Eurozone Authorities’ are now finding out alas too late, have made the underlying problems even more acute. The provision of unprecedented liquidity by the ECB has not worked.  Instead, it has undermined the whole architecture of monetary union; it has undermined the Treaty of the Functioning of the European Union.  It is directly contrary to Article 125 of the Treaty. It has subverted the independence of the ECB and left it hostage to developments in those same markets that can see that the ECB is no longer a ‘Bundesbank’ type institution.  New institutional structures and Stabilisation Mechanisations have not worked; they have not been thought- through and their resources are already inadequate in the face of what is threatening Italy – and perhaps even France.  The participation of the IMF in ‘adjustment’ and ‘financing’ within the Eurozone has not worked.  Neither, it need hardly be added, have the ringing declarations of supports by European political leaders.
The economic forecasts that drove these now redundant ‘policies’ are obsolete, as economic growth has faltered not alone in the peripheral economies but also in the ‘core countries’.  Markets are operating in spasms, driven by the usual daily flow of information but, also, by highly sophisticated strategies to make a buck out of the collapse of the system.  Don’t blame the markets – that’s what they do. It’s what lie beneath that are the issue.  Equities, including financial stocks, are subject to highly volatile collapses – and by ‘recoveries’ based more on brute arithmetic than on market fundamentals.  Bond markets are all over the place – and the data suggests defacto default. 
Gold, the lightening rod of investor uncertainty, has risen to extraordinary heights and authoratative analysis suggests it may rise much further.
These developments have been ongoing, more or less, for some time now and have been analysed in these pages. Markets are defined by volatility. What’s new are:
  • The ‘anomalies’ that are now showing up in the system: there are chronic shortages of liquidity in parts of the system and equally chronic shortages in other parts of the same system. 
  • Reactive bans on ‘short selling’ of stock by some central banks, that can simply cannot work but which reinforce the markets lack of confidence in the ‘authorities’ 
  • Currency interventions on the part of the Eurozone. 
  • The erosion of the reserve currency status of the dollar, following the recent downgrading of its credit rating

But the single most significant change in recent weeks is the fact that the ‘leadership’ is now being seriously questioned.  It has been questioned in these columns many times in recent years.  Once upon a time, a few short years ago, Greece did not need (and was not going to get) a bailout: nor Ireland, nor Portugal, nor Spain, nor Italy...  Once upon a time, the credit rating of the US was seemingly impregnable.  The simple fact is that the US – for a whole series of reasons – is at present insolvent but not, so long as the printing presses still function, yet illiquid. But the crisis in the Eurozone is exacerbating the underlying problems of the US fiscal policy and the Eurozone contagion which has now infected Italy, and has metastasized into a transatlantic contagion.

Last weekend, the President of the World Bank, chose to highlight the extent of the global economic crisis and, picking his words carefully, raised the issue of ‘leadership’. 
Today’s meeting of Chancellor Merkel and President Sarkozy is a meeting where ‘leadership’ and,, by extension of the policies of these leaders, are now been openly questioned.
In these circumstances, Political Union is now an issue.  There is very little left that they have not already attempted and which has not already failed.  In the short term perspective, it would mean that the Eurozone could borrow as a single entity, underwritten by the economy and people of Germany.  It would mean a single European Department of Finance.  It would mean that for all countries – even for Italy and France – fiscal policies and ‘national budgets’ would be determined by Germany.  Stripped of all the nonsense, that is what ‘Economic Governance’ is all about: Political Union.
The markets would probably respond positively – at least for the short term. The next few weeks will be significant.  Then the enormity of what was the last throw of the dice (and the original, unspoken, objective of monetary union) would be challenged.  Indeed, the process is already being challenged in the German Constitutional Court.

 It would raise the question of the implications for Germany’s hard-won global credit status; it would raise the issue of the sustainability of an enforced fiscal policy across highly divergent economies.  Smaller countries, including Ireland, who have been wholly by-passed in the sequence of events, would be in a most difficult constitutional position.  Even the most pro-EU advocates would point out that they did not elect Chancellor Merkel or President Sarkozy to take responsibility for the future, not alone of their economy but of their country; they elected a national legislature that convenes in Dail Eireann, one that is ‘in office but not in power’.
In terms of economic policy, it is already apparent  that is it is nonsense to insist that every single twist and turn of Eurozone policies; every policy denial and subsequent reversal, can all simultaneously be sold to the people as being in the ‘national interest’.  Even the ‘legislators’ heading home in the evening, understand that there is , as yet, no democratic mandate for Political Union and that the legitimacy of such a historic step would have to be put to the peoples of the Eurozone, battered and disillusioned from the consequences of the failures of policies from this same orthodoxy.  

What it boils down to is this.  The leadership of Germany and France – a leadership that will pass in a few short years to others – are being impelled down the road for which they have no mandate from the peoples of Europe.
  In the face of the collapse of the ideology of corporate capitalism in the Eurozone and in the US, the question arises as to why we are recreating at such an enormous cost a paradigm that has failed.

 In the face of the disorderly breakup of the Eurozone, the most important priority may well be the preservation of European solidarity, which is the defining political legacy of two world wars.  A disorderly collapse of the Eurozone will bring with it the threat of protectionism and capital controls – and most important of all – the undermining of European solidarity.  History may judge that the greatest contribution of an Irish government at this point – not alone to its own people but to all that has been developed in Europe – may be to leave the Eurozone.

Saturday, 6 August 2011

Failure of leadership in the eurozone means Ireland must exit now

This appeared in the printed version of the Irish Examiner Saturday, August 06, 2011

UNCERTAINTY, and even fear, again stalks global financial markets. All of the key market indices — interest rates, exchange rates, and bond yields — signal a profound level of uncertainty, not alone about where the global economy is headed.
But more importantly, they indicate a lack of confidence in policymakers. Nowhere is this more evident than in the eurozone. Market data signal that we are close to the end of the road.

What we have seen this week has been a massive shift by the markets into cash holdings, which reinforces recessionary pressures and signifies a vote of ‘no confidence’ in current policies and economic leadership. We have seen equities fall sharply, creating a real dilemma for institutional investors, including pension funds. We have seen perversely massive flows into US treasury bills, which does not reflect any intrinsic strength of the US economy but, quite simply, a lack of alternatives for very spooked investors. The VIX index, which measures market volatility, spiked this week at levels which indicate just how spooked the markets are.

The most striking feature of all this is that the global financial crisis has not gone away. In the eurozone, ‘leaders’ have attempted on two occasions to ‘fix’ the instability that is in fact built into the system.

Moreover, the two Financial Stability mechanisms — the more recent one to take effect in 2013 — raise serious issues regarding their constitutionally and compatibility with all of the provisions of the treaties.

There is little left that European ‘leaders’ can now throw at these problems. We need, even at this 11th hour, to be very clear and dispassionate about the events that are unfolding in the markets and their significance, not least for macro-economic management in Ireland.

The eurozone Troika — Germany, France and the ECB — have used up pretty well all of the policy instruments available to them to mitigate the crisis and to prevent it spreading — particularly to the US. They have failed.

These policies have been characterised by deep and very public differences, back-biting and by policy reversals. Hopelessly confused, they have exacerbated the underlying institutional deficiencies. They dissipated market confidence like some kind of spend-thrift.

The ECB, for its part, has effectively revoked its own Constitution which prohibits ‘bailouts’. Its balance sheet is stuffed with the sovereign debt collateral of countries on the brink of default. Its ability to conduct monitory policy has been subverted.

The punitive nature of the adjustments forced on countries as the price for assistance from ‘partner countries’ has been thrown into sharp relief by the recent deal on Greece. Interest rates were reduced from levels at which they should never have been set.

These concessions were extended to Ireland — not as a matter of policy, still less as a matter of principle, but as a necessity expediency revealing the paucity of any strategic vision regarding how to deal with this spiralling crisis. For the first time there was mention of growth and jobs. The case for such a rebalancing has been argued in these pages on many occasions. It found no resonance in either Irish economic policy or in the eurozone — until its ‘leaders’, thoroughly spooked by events spiralling outside of their control and by the collateral damage to the balance sheets of core European and also US banks, suddenly backed-off. The European Commission — which had censored the Credit Rating Agencies for the temerity of adding two and two, has found itself making the case for a fundamental revision of policy, and has been censored by Germany.

The eurozone now represents less a single currency areas than some kind of nightmarish ‘Hotel California’. Is it any wonder the markets have so little confidence and that this lack of confidence should now have morphed into a crisis encompassing the US, and, therefore the global financial system.

In the US, the 11th-hour agreements last week on raising the debt ceiling should not be dismissed as political theatre. The time period for adjustment is 10 years. The eurozone ‘authorities’ sought to impose on Ireland an adjustment in half of that time. But even more fundamentally, the stark reality is that, when account is taken of actual and contingent liabilities and the prospective growth rate, the US economy is in worse shape than Greece.

The economic forecasts on which Ireland’s budgetary policies — and the bailout — have been constructed, have now shown to be wholly wrong. So, too, have the policies. They simply aren’t working. All there is to show for all the sacrifices are a sovereign debt rating of junk status, a shrinkage of employment of 15% and ‘Closed’ and ‘For Sale’ notices right across the economy.

This is not leadership — it borders on the willful to adhere to policies that are demonstrably not working and that have mired the eurozone in a crisis, from which it is seemingly incapable of escaping. Ireland needs to leave.

It would, of course, have been far better had we left earlier — not through a lack of solidarity with fellow members of the EU; but simply because structural deficiencies in the eurozone itself are generating profound anti-European sentiment, paving the way for political extremism.

The argument has been made repeatedly in these pages that Ireland needs to pull out of a eurozone that is imploding. Ireland needs certainty and stability — and courage. We can rebuild our economy, and regain access to capital markets, on the basis of credible growth-based policies. 

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Sunday, 24 July 2011

The Cloyne Report: Some Key Issues and Lessons

The protection, and nurturing, of children is fundamental to the integrity of any country. The Cloyne Report has set-out catastrophic deficiencies in upholding this imperative within that Diocese. It has generated an anguished response within, and outside of, the Church. However, the interests of children require an informed and even-handed national debate on the Report. David Quinn, in an article in the Irish Independent, highlights the lack of balance to date– and he is absolutely right. No political Party has a mandate to highjack balanced and even-handed debate on an issue of such sensitivity; one in which the good faith of all, not excluding the Pope, should be the starting point.  

Need for Balance

The need for balance is very clear in reflecting on events in the UK, our nearest neighbour, in the week in which the Cloyne Report was published. The News of the World/News Corp. debacle has generated a crisis that threatened to engulf not alone the media, but the government and even the police. This debacle is all about a lack of responsibility and a collapse of Trust. But it would be wholly wrong to say that there are not politicians or journalists or police of unimpeachable integrity.  Of course there are. Here in Ireland, it is right to require of the most passionate critic of the ‘Cloyne Syndrome’ the same even-handed approach that might be expected in addressing institutional failures in all other fields of Civil Society.

In the case of the Church, such an approach begins and ends with Christ.  His Church was founded on very fallible individuals. One of the twelve betrayed Him; one denied Him. They foolishly contended for power and influence ‘at his right hand’: they presumed to ‘draw down fire’ on those whom they believed to oppose his teaching. They sought to exclude those who were not followers but who spoke well of Jesus; they sought to hold back the children from Him.

In all these things, He instructed them by His words -and even more by example- how to see things differently. He sent the Holy Spirit to confer the doctrinal infallibility that has preserved the Church from error- but not personal or institutional failings.  There must be a reason why He chose such a frail and fallible bunch. Perhaps because every generation since then sees in the Church a mirror image- good and bad- of itself and the need to continually look to Him.

 Still this Church He founded, for all its frailties, has animated Human history over the last 2,000 years. It has lit up Irish history and since the time of St.Columbanus in the sixth century (acknowledged by Robert Schuman as one of the giants who shaped European history)
At its best, it is a Church rooted in the humility which Our Blessed Lady exemplified – ‘Humility with fierce resolve’, in the words of a celebrated Harvard Business Review article on Leadership; the heart of what true Leadership is, whether in the Church , in Business --and also in Politics.

‘Judge Not’...

Christ warned His followers against judging others. In judging the institutional church, with all of its failings, the State leaves itself wide open to being judged in relation to its own duty of care down the years.
The case has been made that the State, too, has failed in its duty of care to children and, indeed, that the Church’s guidelines are even more rigorous than those of the State. Maybe so; but that is no reason for the Church to delay fundamental reforms to rebuild Trust.
 But what this does do is to reinforce the argument that neither Church nor State should claim a monopoly of that most treacherous of all locations – the ‘high moral ground’.
 If, in fact, we really believe that it is the interests of the child that matter most, then both Church and State need to come together, through gritted teeth if necessary, to learn the lessons of their respective failings and, more important, to share their own distinctive values, experiences and insights, in the protection and nurturing of our children. A culture of antagonism or expediency or legalism should have no place in such an important dialogue.

Fundamental Issues

In the wake of the Cloyne debacle, there are a number of fundamental issues which the Church should focus.
  • It should acknowledge its institutional failings as a cross that it must carry and, at the same time,  commit itself to renewal building on all that it has done( much of it unacknowledged); that is what each of us are required to do in our own lives.

  • The issue of mandatory reporting has been addressed by the Church. Over and above such reporting in the normal course of events, there has also been  talk of legislation which would, in effect, seek to set-aside the absolute seal of sacramental confession in the case of individuals confessing to the abuse of children. Such legislation would simply deter those guilty of a heinous sin, and a crime, from reconciling themselves with God. It would also fatally undermine the integrity of sacrament which is the beating heart of Christ’s redemptive mission. There is also an underlying presumption in the belief that it is alright for us to seek forgiveness for our particular sins, but that Christ’s mercy is not to be extending to every single person who seeks, with real intent and purpose, to transform their lives. Some, foolishly, may seek a kind of confrontation on this issue. Others may be led to believe that legislating for mandatory reporting of such sins and crimes, actually confessed to a Priest in the confessional, will resolve this most difficult of societal problems. It won’t. For Catholics, the Church stands, or falls, by its conviction that, until we draw our last breath, forgiveness and reconciliation is open to us. In our history, many priests have faced execution to uphold this conviction.

  • The Church should seek, so far as possible, to remove itself from a culture of Power. The British philosopher Alistair McIntyre, on a visit to Ireland a few years ago, spoke of how we see more clearly ‘from the margins’. This is because the centre is always contended by those seeking ‘power’. It is enough that members of the Church seek, as best they can, to have Christ at the centre of their lives – and to understand that Christ Himself lived, and healed, and was crucified, ‘at the margins’.
  • There are compelling reasons to simplify the Church’s ecclesiastical structures. Some years ago, Professor Vincent Twomey SVD argued persuasively for the need of an overhaul in the whole diocesan structure in Ireland. Such an overall would make it easier to ensure more effective leadership and oversight, as well as the implementation of ‘best practice’ in those areas of social responsibility that are at the heart of the Church’s ministry of witness.

  • At a yet deeper level, the Church needs to move away from the whole definition of its institutional identity as ‘Hierarchy’. This is one of those words, like ‘Human Resources’, that speak to the values of this world and not of the Gospel. The Church is about ‘Service’ and responsibility, not ‘Hierarchy’- a term which, to be fair, does not do justice to the vocation actually lived out by Bishops, and by religious congregations.
  • The Church in Ireland needs desperately to embrace its own intrinsic goodness. The Christian faith has shaped Ireland’s history and, also, that of Europe. It is that same faith that animates many voluntary Communities and organisation within parishes and across the country and which provide irreplaceable support to the whole of society at a time of national crisis. In addressing its failings, the Church needs more than ever to be conscious of this intrinsic goodness, which transcends such institutional failings.
  • The Church needs to continue to reach out to, and learn from, the very best in other faith traditions. The invitation in 1997 extended by Pope John Paul II to all faith traditions to meet and pray at Assisi was an inflection point.. At one level, the Church could learn from the way that crises and institutional failings are dealt with in other faith traditions.
  • But there is an equally important reason. Over and above justified criticisms of its institutional failings, there is vein of hostility to the Church that reflects secularism wholly intolerant of the transcendent of the human Person.
The Catholic Church happens to loom largest in its sights, but there should be little doubt that this secular fundamentalism would, given the opportunity, set aside the values and all that is best in every faith tradition. There is enormous reassurance for Christians in the Jewish understanding of the faithfulness of the Covenant of G-d with His people. The pervasive importance of prayer within Islam reinforces the importance of a mind-set that is in danger of being lost sight of.

Across the whole Judaic and Islamic tradition, the reverence for life and for family and for the exercise of care for those of our brothers and sisters, call us to a unity whose importance could not be overstated at a time when Ireland faces into headwinds that threaten to diminish us as a people. 

Wednesday, 20 July 2011

Please Sir -May We Have Our Currency Back?

Four Austerity Budgets and a punitive and damaging bail-out have reduced Ireland’s sovereign debt to junk status. How many businesses have to fail? How far do house prices have to fall? How many talented people have to emigrate? How much misery has to be inflicted on families........ before the message gets through?. Our attempts to salvage credibility and stability has been inimical to the cultivation of both. It’s not working; it’s over. Ireland needs a new start.

 We really should have started on a different trajectory 2 years ago, the case was argued in these pages on several occasions. But it’s never too late to do the right thing. The Eurozone is now being held together by collective denial, stubbornness and hubris. The spread of this, though, to other structurally vulnerable countries – most recently Italy – was entirely foreseeable.  The Eurozone has thrown everything at this, especially since Spring 2010. If it was going to work it would be long-evident and reflected in the financial markets.
Instead, the key measures are all pointing toward a major default event – firstly (but not exclusively) the cost of borrowing, which is determined by whether or not the markets believe that what is being proposed by the Eurozone is credible, has risen beyond our capacity to secure it. Secondly, the costs of borrowing when compared with the costs for Germany and thirdly, the costs of securing against prospective default. All of these point to a complete lack credibility – the markets simply do not believe that the Eurozone in its present form is viable nor do they believe that the policies currently being followed in Ireland are sustainable.
The response of the Eurozone finance minsters at their meeting last week was an exercise in denial and futility. The communiqué did not deliver and the post-meeting ‘chatter’ was met with a near unprecedented fall in key market data. What was even worse was the response by the EU council to the downgrading of Portuguese debt and to Moody’s downgrading of Ireland’s sovereign debt to junk status. It was shoot the messenger time. Indeed it showed an extraordinary lack of realism about what is and what has been happening to the Eurozone. The Eurzone finance council commitment to ‘look at’ the interest rate burden being carried by Ireland, and at such a cost, is bewilderingly, almost callously, under-stated.

The new financing facility may be strengthened – and it comes in to effect in 2013! All of this simply highlights the fact that they are out of their depth. The gap between the problems facing the Eurozone and their ability and willingness to surmount those problems is now too large. The Eurozone is fragmenting between a ‘Deutsche Eurozone’ and a peripheral zone made up of countries such as Italy, whose budgetary profile and financial system are highly vulnerable.
In the face of denial, the situation is getting progressively worse – a de facto default has finally been accepted in the case of Greece but it won’t stop there and the negative forces being generated by a complete inability to get to grips with the scale of the problem has exposed a possibly catastrophic cognitive dissonance in the minds of the EU power brokers and respective governments while also revealing enormous vulnerability in the banking systems Europe and the US to a seismic shock within the Eurozone.

The Eurozone has run out of options. What is now being pushed is a new system of ‘economic governance’. This is a euphemism for ‘political union’ by the back door. There are attempts to drive this through without a referendum in Ireland and also through the German constitutional courts. It is unlikely to succeed. Great damage has been – and is being – done to solidarity across European countries  through what the Polish finance ministers called the ‘breathtaking short-termism’ of the Eurozone. The impartiality of the IMF, too, has been damaged by being dragooned into an ideologically driven adjustment process.  All of this is happening in the context of the US’s inability to contain its own funding crisis. Debt levels in the US now exceeds 14 trillion, taking existing and prospective liabilities into account, the US is essentially insolvent. It would take at least a decade of budget surpluses to get it back on trajectory.
Meanwhile in Ireland mainstream thinking still clutches to the idea that if we keep the head down, attend enough meetings, support enough Eurozone initiatives and attend enough photo ops with EU power brokers that it will be all right. It won’t.  Look around, see how far we have fallen in the last 5 years and ask where this kind of thinking has taken us.
So, to re-state the argument spelled out in these pages so many times: Ireland needs to leave the Eurozone before it is forced into another reactive debacle and with no place to go. That is what the financial markets data is telling us. It simply makes no sense to base the upcoming 2012 budget on the redundant data, projections and mindset of all recent budgets and the bail out agreement. We need to leave the Eurozone and must have a budget in 2012 that is simple and focused on growing the economy.
If we can change our thinking, if we can achieve solidarity across business and communities, if we focus on our strengths, then we can achieve the kind of credibility and certainty that the financial markets are looking for and provide a surer foundation for growth. We will also have demonstrated that we are capable of courage and a capacity to take our future in our own hands.
The future of Ireland – unless are willing to change – is not just taking place in the boardrooms of the EU Commission, it is being played out in the streets of Athens at present.  We in Ireland know all about the consequences of political instability; it would be the worst of all possible worlds led to us being impelled down that same road. The threat of economic contagion has already manifested itself in the most brutal form, the threat of political and social contagion is all too real as well.

Tuesday, 5 July 2011

Budget 2012 – Are we heading in the Same Direction as Greece?

Ireland is facing into the pre-Budget season. The 2012 Budget will determine, for good or ill, the future of modern Ireland. In this context, the decision by EU Finance Council Ministers to release a further tranche of €12 billion to Greece to avoid the first Eurozone default in coming months, and the circumstances in which that decision was made, raises important questions.

The first is whether a second Bailout will resolve the underlying problems of the Greek economy and put it on a path to solvency and sustainability. The answer to that is in the measures imposed by the Bailout on the Greek economy (See Box).

Look at these measures and ask how any economy, much less one that is broken-backed, could possibly grow its way back to solvency under such a burden. Ireland’s Budget for next year is being drafted within our particular Bailout. All of the data clearly point to the fact that the Irish economy has suffered enormous and needless damage as a result of the terms and conditions and timescale of the Bailout.

The second question relates to the implications for Irish budgetary policy if a Greek default has merely been deferred, not avoided. The answer is, of course, that a default by Greece will take us with it – if we choose to wait until decisions are taken out of our own hands. We have, through fear and some strange impulse to be ‘nice’ to a wilfully obtuse Eurozone orthodoxy, almost run out of road – that is why next year’s Budget will be a defining event. It’s not about being nice it’s about being right.

The third and most important question is whether Ireland can avoid the political instability so graphically reflected in the Athens riots. This is just the start of the process and it begs the question of what will happen when the terms of the second Bailout are actually implemented. The riots are the result of self-created problems; something which we in Ireland know all about. But they are also  the consequences of a policy of denial and deferral, of hesitancy  and deep divisions, on the part of the major Eurozone countries and the ‘Eurozone authorities’ continually  kicking the can down the road in the hope that ‘something will turn up’. The history of the post-2008 crisis suggests that it won’t.

Those rioting on the streets of Athens are not extremist, though their very real fears are all too vulnerable to being exploited by extremists. Instead, the opposition to the Bailout agreements is primarily driven by the alienation from glacial nihilism of the Eurozone and the policies being pursued by the core countries and by the ECB.

It is only prudent to ask whether, in looking at the Athens riots, we are not also  looking at Ireland some little time down the road – and whether persistence with Eurozone membership, and the same Bailout orthodoxy that has brought Greece to the brink of default, will not leave Ireland exposed to the self-same threat of ‘political contagion’.

The Polish Finance Minister, and incoming President of the Finance Council, recently accused the Eurozone of ‘breathtaking short-sightedness’; he is well qualified to make that point. The issue is how Ireland has allowed itself to acquiesce in this policy and political myopia and whether, or not, we have the courage to read the signs of the times and to develop a Plan B. The 2012 Budget now being prepared will provide the answer.

Budgetary starting point

The Program for Government is based on the assumption that the framework for achieving sustainability, set-out in the EU/ECB-IMF Bailout, is conceptually sound, realistic and achievable by 2015. This is not the case. In truth, the Bailout actually stands between what the Government aspires to do- and what it is permitted to do by the Troika

The economic forecasts on which the Bailout is based are increasingly redundant. Growth is lower, unemployment (including concealed unemployment) is higher, and therefore, the capacity of the economy to service its growing debt burden is being continually eroded. Also, the debt burden itself has worsened compared both to official data and are a million miles from converging on the ‘Stability’ and ‘Growth’ targets by 2015.

Interest rates in the Eurozone have increased over the last year and, in the face of inflationary forecasts, can only increase. These developments are impacting on mortgages and homes – particularly those in negative equity – as well as on businesses. These developments in turn, undermine the budgetary forecasts in the Bailout agreements.

The labour market has deteriorated further over the last year. Long-term unemployment, in particular, has emerged as a significant challenge because of the recession-inducing pressures of the Bailout terms and conditions and timescale.

Ireland remains locked-out of the capital markets and the data suggests that, on unchanged policies, this is likely to continue through the medium-term.
Ireland is further away than ever from achieving the current deficit and debt targets – the so-called “Stability” and “Growth” targets on which the Bailout and whole Eurozone orthodoxy is based.

What all of this shows is that the post 2008 Budgets enacted in Ireland didn’t work. Irelands economy has become emaciated, its public finances hopelessly compromised. The Bailout further reinforced this negativity. Ireland’s economy, institutions and mind-set need reform. But necessary and painful reforms can best be achieved within the context of an economy that is growing. More borrowings on punitive terms from our ‘Partners’ won’t solve Ireland’s problems.

Meanwhile in Greece...

Two points are notable about the Bailouts in Greece. The first is the assumption that it will work (in a measurably more difficult environment), even though the first Bailout didn’t work. Instead of contributing to sustainability, the probability of a Greek default, in one form or another, is now close to 100%.

Ireland and Greece, each in their own particular way, screwed up. The political system in Greece is coming to terms with this reality. What has brought the population of Greece on to the streets – and it will get worse – is the perception that the Eurozone is imposing a punitive adjustment that has not, and cannot, contribute to recovery and sustainability but, instead, is undermining the capacity of Greece to move onto a sustainable growth path towards national solvency. Look at Box One and it will be clear just why they believe this to be the case.

The second point relates to the frenetic attempts by France and Germany to protect their financial institutions in the face of the overwhelming opposition to the Bailout by the Greek public- and the very real possibility of a default. The ‘voluntary’ rolling over maturing Greek debt by these institutions, albeit in a highly opaque form, was all about protecting banks with exposures to the debt of peripheral countries from default.

The punitive costs of Irelands Bailout mean that we are effectively subsidising the costs of such protection. In other words, the ‘voluntary’ rollover by French and German financial institutions, ostensibly to prevent a Greek default, is really all about protecting the financial institutions of major countries from the consequences of such a default. Yet when the Irish government made a robust case for some similar form of relief earlier this year in the interests of the wider Eurozone, their request was turned-down flat by these same countries.

Ireland cannot change what is unfolding in Greece. Nor, it is now clear, can we influence the policies and mind-set that are taking the Eurozone to the brink. In these circumstances, there is a clear and present danger for Ireland in slip-streaming behind these policies and this mind-set. We know that – but there is an enormous reluctance to acknowledge -and act on – this reality.

The forthcoming Budget can play to the strengths of the economy – but not within the Eurozone. A Budget framed within the Eurozone and benchmarked to the Bailout will impel Ireland down the cul de sac within which Greece is now trapped.

The Bailout arrangements are suffocating growth and recovery in Ireland. This is clear from the data. Developments in Greece confirm the fact that Bailouts do not deliver macroeconomic stabilisation and the kind of recovery that is necessary to move towards a sustainable debt position.

However, unless there is a fundamental change in Government thinking, the forthcoming Budget will be based on the terms and conditions and timescale of a flawed and oppressive Bailout- and on remaining within a Eurozone that is demonstrably fracturing and is likely to finally collapse by 2013.It is based on the delusion that the ‘Stability’ and ‘Growth’ targets can be achieved by 2015. They cannot, and attempting to do so through yet another recession-inducing Budget will only worsen the underlying problems and further delay recovery.

Attempting to push through budgetary measures based on the Bailout template risks evoking a political reaction in Ireland similar to what is unfolding in Greece. Then all the lights will go out and Ireland will find itself impelled to do what it should have done two years ago: namely, leave a Eurozone that is failing and re-build within the wider European Union.

We are not talking only about lives of increasing desperation across the country; we are talking about the preservation of our democratic institutions and of political stability and social solidarity.

Selected Measures of the Second Greek Bailout Program

  • Education spending will be cut by closing or merging 1,976 schools.
  • Defence spending will be cut by €200m in 2012, and by €333m each year from 2013 to 2015.
  • Health spending will be cut by €310m this year and a further €1.81bn in 2012-2015.
  • Public investment will be cut by €850m this year.
  • Subsidies for local government will be reduced.
  • Social security will be cut by €1.09bn this year, €1.28bn in 2012, €1.03bn in 2013, €1.01bn in 2014 and €700m in 2015.
  • There will be more means-testing and some benefits will be cut.
  • The statutory retirement age will be raised to 65, 40 years of work will be needed for a full pension and benefits will be linked more closely to lifetime contributions.
  • Taxes will increase by €2.32bn this year, with additional taxes of €3.38bn in 2012, €152m in 2013 and €699m in 2014.
  • A ‘Solidarity Levy’ of between 1% and 5% of income will be levied on households to raise €1.38bn.
  • The tax-free threshold for income tax will be lowered from €12,000 to €8,000.
  • There will be higher property taxes
  • VAT rates are to rise: the 19% rate will increase to 23%, and the 11% rate to 13%, while the 5.5% rate will increase to 6.5%.
  • The VAT rate for restaurants and bars will rise to 23% from 13%.
  • Excise taxes on fuel, cigarettes and alcohol will rise by one third.
  • Special levies on profitable firms, high-value properties and people with high incomes will be introduced.
  • Nominal public sector wages will be cut by 15%.
  • Wages of employees of state-owned enterprises will be cut by 30% and there will be a cap on wages and bonuses.
  • All temporary contracts for public sector workers will be terminated.
  • Only one in 10 civil servants retiring this year will be replaced and only one in 5 in coming years.
  • The public sector wage bill will be cut by €770m in 2011, €600m in 2012, €448m in 2013, €300m in 2014 and €71m in 2015.

  • The government is required to raise €50bn from privatisations by 2015, including:
  • Selling stakes this year in the lender Hellenic Postbank, port operators Piraeus Port and Thessaloniki Port as well as Thessaloniki Water. One has already been sold to Chinese investors.
  • The Government is required to sell 10% of Hellenic Telecom to Deutsche Telekom for about €400m.
  • Next year, the government is required to sell stakes in Athens Water, refiner Hellenic Petroleum, electricity utility PPC, lender ATE bank as well as ports, airports, motorway concessions, state land and mining rights.
  • The Government is required to undertake  further sales to raise €7bn in 2013, €13bn in 2014 and €15bn in 2015.