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.

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