Saturday, 23 April 2011

Beware Long Weekends In An Economic ‘Waste- land’

There is a ‘sense’ in the market data of an impending systemic shock. Beware long weekends; it’s when Chancelleries/Finance Ministries work over-time to push elephants out of rooms before financial markets re-open.
Ireland should exit from the Eurozone, devalue against the Deutstche-Euro before the markets do to it what they did to the UK in the September 1992: force the prevailing political mind-set to adjust to market realities. The temptation to do nothing – fear of the unknown – is overwhelming. But the risks of staying where we are – in an economic ‘waste land’ and dependent upon our EU ‘Partners’ – are far greater; our ‘core’ Eurozone  ‘Partners’ have their own agenda
The extent of the ‘Credibility Gap’ within the Eurozone is reflected in the yields on bonds of peripheral countries which are at historically high levels; the Eurozone has seen nothing like this before. This is not speculation: it is a prognosis that is terminal; Credit Ratings Agencies provide the ‘case notes’ in their successive downgrades.

There is no way back for the Eurozone from yields such as we are seeing. All of the cards have been played: the May 2010 €750 billion ‘Rescue package’ that simply didn’t work; the participation of the IMF in ‘Bail-outs’; unprecedented budgetary cuts (but no economic growth). The ‘Authorities’ – the ECB and Germany in particular – have retreated into ‘denial’ mode, characterised by, for example, plans for a revised Financial Stability Mechanism by 2013 – which is a little late for preventing a Eurozone crisis, let alone preventing Greece, Ireland and Portugal imploding. At the same time, Political Union is pursued by stealth aka ‘European Economic Governance’.

What is happening within the Eurozone reflects global instability. A key indicator is the rise in the price of gold to levels not seen since the collapse of the international monetary system in the early 1970’s. In the wake of the collapse, the real economy of jobs and businesses were buffeted by a decade of volatility.

The recent downgrade of U.S. sovereign debt by Moody’s is another significant indicator. So, too, are the recent warnings about its deficit by the IMF. Denials by the U.S. Treasury Department that a downgrading was warranted, or indeed would happen, up to the moment it actually happened, are precisely what one would expect. Last year, in an interview with Bloomberg,  Professor Laurence Kotikoff pointed out that the U.S was insolvent; that it’s Public Finances – its actual and contingent liabilities stretching out into the medium-term – had long past the point of being sustainable. It’s got a whole lot worse since then
If the U.S. was a member of the Eurozone, Markets would be speculating about the imminence of a bail-out and an IMF Team would be packing their cases. The problem is: no one can bail-out the U.S. The implications for systemic stability, and for global political stability, are far- reaching indeed.

The backdrop against which this is happening is a massive Geo-Political shift in innovation, productivity and growth towards China and, also, other emerging countries. Governments and Sovereign Wealth Funds may be reluctant to contemplate the ‘appalling vista’ that these developments open up and just how easily another crisis in the Eurozone could ignite a global catharsis. This doesn’t mean it’s not going to happen.

What was a banking, and then an economic crisis, has now morphed into a crisis of political credibility. The markets know this.  Therefore, the question arises whether, as a general proposition, governments in these circumstances can be trusted. There are, of course, highly ethical, high-minded and decent individuals who serve in Governments and in administrations. That’s not the issue. The issue is ‘Politics’ and ‘Power’. Students of politics will be familiar with ‘The Politics of Lying’ by Cliff, Ramsay, Bartlett (Ed., 2000). It’s an insightful critique, with plenty of case studies, of the pathology of Politics and Power and how Administrations decide for themselves just how to define ‘Truth’: as well as  all of the subtle and persuasive reasons why ‘we’ cannot trust the people or truly democratic institutions.

The financial markets have long tumbled to this reality. In addition, new technology is opening-up the dark corners of politics, where lies and expediencies fester and spawn and emerge full-blown in the guise of ‘Public Interest’. Sometimes, as in the case of Ireland’s treatment by Germany and the ECB regarding interest relief on the EU ‘Bailout’, it’s simply about self-interest.
What all of this suggests is that it is not prudent to seek ‘Truth’ or objective ‘Reality’ within the Communiqués or Statements of governments.

This lack of ‘Truth’, as an indispensible political value, is a catastrophic deficiency in itself and, also, because the first casualty of this deficiency is ‘Trust’. There is neither Trust nor Empathy within the Eurozone, as it is being shaped by the ‘Core’ countries with the aim of morphing in to Political Union by 2015.
Political Union as a result of the democratic will of the European people, properly consulted, is one thing; Political Union secured by brute political and economic power is quite another. That is why Ireland should leave the Eurozone now: there is no ‘Trust’ but only voodoo economics, widening the structural divides between ‘Partners’.

Ireland has a formidable process of change ahead, much of it related to the need for a wholly new culture within our governance at every level. ‘Agreements’ are of little use if there is no Trust and no willingness to rebuild such Trust. Recovery will not be built on ‘Agreements’. This has to be recognized as an integral part of leaving the Eurozone and rebuilding our economy, solvency and self-respect. So, too, has the issue of exchange-rate management in the wake of a Eurozone exit: then, again, Ireland maintained a 200 year link with sterling prior to joining the ERM, precursor of EMU. Ireland has options once it exits from a Eurozone that has been hijacked.

However, the next stage of the evolving crisis in the Eurozone will be political instability. It has already begun. When Greece defaults –‘restructures’ – the pressures on Ireland will become irresistible and people will begin to ask ‘what was all of the needless pain for?’.

Where there is political instability, extremism is never far behind. ‘Extremism’ should not be equated with legitimate opposition to Eurozone-dictated policies that howl at common sense. But ‘Extremism’ will exploit such opposition. The supreme irony is that the original Common Market and the impetus towards greater cooperation across Europe were precisely intended to prevent such Extremism.
The lessons of history, of the trajectory of the global financial market ‘contagion’, and even of biological systems, are that it takes only a small shift in a key parameter to generate far-reaching and unpredictable consequences.

In Ireland, we are now not far from this point. There were concerns regarding political instability arising from the counter-productive and regressive budgetary policies being followed back in 2009. The defeat in the General Election of the previous Administration which negotiated the ‘Bail-out’ from our ‘EU partners’ – and the ECB’s self-serving assistance to Ireland, has left the new Government still mired in a ‘Death Loop’. That is, extracting more and more from an emaciated economy in order to safeguard Eurozone banks as well as the wider stability of the Eurozone itself. A banking system is only as strong as the economy it services; the Irish economy has at this stage been run into the ground despite the private sector adjustment that has occurred.  This makes the intransigence of the Eurozone ‘Core’ even more perverse. There is now a focus for public discontent and political instability.

The Irish government has a limited time to leave the Eurozone before markets – or political disillusionment with the Eurozone – take things into their own hands. The catalyst for political instability such as Ireland has, all too tragically, known before may well be the cumulative effects of budgetary cuts, which, to take one example, are putting lives at risk in our health system. It may stem from the nihilistic proposals to sell certain state assets. We are not talking here about very necessary restructuring or increased competition; what is at issue is the sale of Ireland’s natural resources to appease a malign and self-serving orthodoxy being pushed through by Germany, with the acquiescence of France and some smaller countries. Once, in the not too distant past, the imposition on VAT on children’s shoes brought down an Irish government. All it takes...!
What is unfolding in the Eurozone is entirely predictable: a kind of political ‘Contagion’ which I highlighted at an OSCE political conference in 2009.

What leadership now requires is that Ireland leave the Eurozone, having faced-down those ‘Authorities’ that are impelling us into default; the consequences of default will impact not alone on the Irish economy but will resonate across the Eurozone. If the logic of President Obama in putting the IMF into play at the May 2010 EU Finance Council meeting in order to ‘Fire-wall’ the EU peripheral countries, is correct, it may also ignite Global instability

Professor Ray Kinsella is on the Faculty of the Smurfit School of Business UCD.

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