Analysis and Commentary on Irish Banking and Eurozone Stability - An Economist's View.
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.