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 communiquĂ© 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.

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