July 2012        

A new IMF working paper is brutally stark

A new paper published by the International Monetary Fund states that the banking crises in Iceland and Ireland are among the ten costliest in regard to the increase in public debt, increased in both countries by more than 70 per cent of GDP within four years.
     With regard to loss of output, the continuing crises in Ireland and Latvia are among the ten costliest banking crises since the 1970s, with losses exceeding 100 per cent in both cases. “Ireland’s crisis, which started in 2008, is still the costliest since the Great Depression in terms of the economic havoc it wreaked on the country.”
     This state is now in a double-dip recession, our GDP having collapsed by 10 per cent, with a debt-GDP ratio next year of 121 per cent, with a deficit of nearly 9 per cent, with unemployment at a record 15 per cent, in the middle of an IMF bail-out programme, and whose banking collapse is costing 40 per cent of GDP.
     Our GDP in 2011 was €156 billion, our more representative GNP was €124 billion.
     The Irish Bank Resolution Corporation—the bank formed after the merger of Seán Fitzpatrick’s Anglo-Irish and Michael Fingleton’s Irish Nationwide Building Society—has received €34 billion of a bail-out, representing more than 20 per cent of our GDP.
     But don’t worry, Enda and the boys and girls at the recent summit in Brussels (29 June) agreed to allow bail-out funds to recapitalise banks directly, and to buy bonds for “well-behaving” countries—states that are pursuing reforms but suffering from market pressure—and the Euro Group “will examine the situation of the Irish financial sector with a view to further improving the sustainability of the well-performing adjustment programme.”
     The Irish Times dutifully reported that Kenny has said that “a European Union agreement reached in Brussels in the early hours of this morning to bring down borrowing costs for indebted countries will reduce the debt burden on Ireland’s taxpayers.”
     The announcement came too late to stop one particular piece of lunacy. On the Tuesday, Wednesday and Thursday of the very week of the Brussels summit the state paid private banking debts to the tune of approximately €1,141,716,762—debts not covered by the 2008 banking guarantee and not secured on bank assets.
     The minister for finance, Michael Noonan, acknowledged last year that these payments are likely to be to “speculative investors.” Confirming some time ago that the payments would be made, the minister expressed helplessness and ignorance. In answer to a question in the Dáil, he gave this weak justification:
     “The Government is committed to delivering a return to a successful, vibrant economy. In this context I have indicated that there is no private-sector involvement for senior bank paper or Irish sovereign debt without the agreement of our external partners. This commitment has been agreed with our external partners and is now the basis on which Ireland’s future financing strategy is built. This strategy is working well, as evidenced by the reduction in pricing of Irish sovereign debt in the secondary markets and the recent successful bond exchange offer by the NTMA.”
     So this act of criminal folly would be an example of an action by the sort of “well-behaving” country praised by the president of the EU Council, Herman van Rompuy, after the meeting.
     And the next steps?

A banking union “should evolve as soon as possible”

It is reported that EU officials have drawn up a far-reaching plan that would eventually turn the euro zone into an outright fiscal union. The document suggests that ultimately the single-currency area will need a treasury office and a central budget.
     Among the short-term changes required is the de facto handing over of budget power and economic policies to the EU level. “Upper limits on the annual budget and on government debt levels . . . could be agreed in common,” says the paper. Budgets that breach fiscal rules would have to be altered. The supervision of all banks would be at the European level, and the EU authority would have “pre-emptive intervention powers.”
     The paper—drawn up by the presidents of the European Commission, European Council, Euro Group, and European Central Bank—moots giving the European Central Bank the ultimate authority. In the medium term, so long as there is a “robust framework for budgetary discipline and competitiveness,” some form of debt mutualisation “could be explored.”
     Meanwhile, labour policies and tax polices—until now a no-go area for the European Commission—will no longer be exempt. An integrated economic euro zone would need “co-ordination and convergence in different domains of policy,” says the paper, explicitly mentioning “labour mobility” and “tax co-ordination.”
     “Let me tell you here,” said the president of the EU Commission, José Manuel Barroso, at the European Policy Centre in Brussels on 26 June, “that fiscal union is about much more than just euro bonds. It also means more co-ordination in taxation policy and a much stronger European approach to budgetary matters.”
     And Kenny? According to his devoted fans in the Irish Times, his “focus is on the prospect of a banking union being created over the next twelve months rather than a fiscal or political union over the medium to longer term and he is emphatic that another referendum is not going to happen in the near future. From our point of view the banking union is the big one here.”
     In effect, an EU banking union would deprive states of the ability to make banking and credit creation serve national developmental goals. It would make it impossible for the state to insist that Irish banks should subscribe to its state debt. Having given up the power to issue money by joining the euro zone, advocates of a banking union would pass control of credit in Ireland to banks outside the country completely.
     Kenny insists that there will be no referendum on such a development. He should have a look at article 45.2 of the Constitution of Ireland, which states that “in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole.”

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