Should Ireland Leave The Eurozone -Before We're Pushed ?

posted 21 Apr 2011, 19:14 by Ray Kinsella   [ updated 21 Apr 2011, 19:17 ]

The last thing Ireland needed was to be commended by the EU/ECB/IMF ‘Troika’ for ‘making good progress’, following their first Review meeting of the ‘Bailout’: continued economic contraction, 15% unemployment, property prices continuing to fall with tens of thousands in negative equity and in mortgage arrears. 

The losses of banks in 2010 and prospective impairments tell their own story about the state of the economy. The public finances are carrying an unsustainable debt burden.  Our Sovereign Bonds are rated near ‘Junk’. This is ‘good progress?  God help us if we ever really get into difficulties.

The changes secured by the Government from the EU/IMF/ECB ‘Troika’ are commendable. Nevertheless, in terms of the impact that the implementation of the Bailout is having right across the economy, they are very much at the edges. The counterproductive Stability and Growth targets to be achieved by 2015 remain the same. Coming down the line are the negative effects of the rise in ECB rates.
The new Government’s focus on job creation is right. The difficulty is that the Government now has little or no autonomy to invest in putting our people, spare capacity, and our natural renewable energy resources, to work. Or to invest further in the ‘knowledge equity’ embedded within our Third Level institutions, the ‘linkages’ with our multi-national companies (MNC’s) and in individual companies.The Ministers we elected now must effectively have their decisions ‘signed off’ by the ‘Troika’—where does Democracy or Liberty come into all of this?Crucially, there has been no reduction in the bailout servicing costs – even though the IMF in their recent Global Stability Report made the case for such an initiative. In fact, the dangers to the EU of a default, and the ‘spill over’ effects to global markets, are clearly set out in the IMF Staff Report on the ‘Bailout’. There is a clear difference in these areas between the EU orthodoxy and the approach of the IMF, who have been ‘politicised’ by the Euro-zone.

The new Government asked its EU ‘Partners’ for debt relief – not just in the interests of the Irish economy, but of the stability of the wider Eurozone – at the March Eurozone Meetings and Heads of Government Summit. Ireland was left hung-out to dry – but not before an attempt by our European ‘partners’ to exploit Ireland’s seeming weakness by  offering  debt relief only in exchange for abrogating their own ‘solemn and binding’ assurances regarding Ireland’s CT Rate, in the run-up to Lisbon II.

What, exactly, does it take to get across the message that the Bailout has left us more, and not less, vulnerable; that it is stifling the capacity of the economy to recover and emasculating democracy?
We haven’t begun to see the full effects of this ‘Bailout’. There are more EU- imposed cuts to follow which have not even been discussed in Ireland e.g. to accommodate ‘ageing related expenditures’- even as Irelands ‘Demographic Dividend’ is being ‘frozen out’ by the impact of the Bailout on Youth Unemployment. If Ireland were in the grip of the ‘Troika’ in the late 1980’s, the IFSC would never have got off the ground.

A national debate is now required on a post- Default scenario and whether, or not, our prospects for recovery would be greater outside of a Eurozone dominated by the political interests and mind-set of the ‘core’ countries.
The temptation for Governments is to hang in there; history tells us that this is not always possible. The post war Bretton- Woods’s international monetary system collapsed under the weight of impossible political pressures. The UK was forced out of the ERM-precursor of EMU—because of an ill judged attempt to accommodate itself to an impossible economic discipline. Greece is set to ‘restructure’ its debt i.e. a managed default. The markets have clearly priced in the possibility of an Irish default and there are authoritative estimates of the costs of a breakdown of the Eurozone and even of a German withdrawal.

 The costs of an unwanted, but enforced, default would be very significant- the issue is whether they would be less than those being imposed by going on as we are. We were in denial before the debacle of IMF intervention. It happened. Default is now in the balance. We are still in denial. It may cost us dearly. The choice we face is this: a continuation of the economic collapse since 2008, an intensification of the pressures on the economy, and on political stability, as the ‘Bailout’ emaciates the economy further.  Ireland is sleepwalking over a cliff. The question ‘How – and why – did we allow this to happen?’ needs to be asked now.

The alternative is a decision to withdraw from the Euro-zone on our own initiative. Default would be followed by devaluation. No country would choose to start from the position in which Ireland has been placed. But it puts our destiny very much more in our hands, in much the same way as the UK when it was forced out of the ERM in 1992. Britain remains outside the Eurozone. But even with its economic difficulties, the financial markets rate the UK’s probability of default as close to zero. That tells us something.

Ireland needs to be courageous enough to envisage recovery outside of the Eurozone. We can choose to leave- or be forced out, following a Eurozone crisis. The real issue is whether we have the strength, resilience and values to undertake what recovery outside the Eurozone will demand of us—namely, a credible set of initiatives to maximize the use of all of our natural resources. This includes renewable energy resources capable of meeting Ireland’s needs and helping the EU to meet its growing energy deficit. Such resources beat paper currency every time. They provide the capacity to generate enough revenue to work our way to solvency: growth and solvency on the basis of shared values to ensure, first our survival, and then our independence.This will not happen inside a ‘one size fits all’ Eurozone. The recently agreed ‘Pact for the Euro’ is an enforced route map to Political Union. The Financial Stabilization Mechanism comes into effect in 2013! A little late for Greece or Ireland or Portugal or.......

A default is not something that Ireland wants. We attempted in good faith- at the behest of the ECB- to minimise the possibility of a default of its major banks, and a sovereign default, in order to avoid a destructive ‘contagion’ across the Eurozone. In reality,the ECB did us no favours; it has its own (legitimate) agenda. It will exact the last farthing.

The real problem is the Bailout itself and the ‘core’ Eurozone orthodoxy. This orthodoxy is not going to change. Ireland is now regarded as an ‘irritant’ in a much larger scheme of things: a ‘moral hazard’ that, unless it is kept firmly in line, may stand in the way of this orthodoxy being imposed across the Eurozone by the middle of the decade.

In fact, the orthodoxy is being reinforced. Ireland and the peripheral countries are caught in the middle of a power struggle among Europe’s institutions: between the Council, the Commission, the Parliament and the ECB. The March ECB Monthly Bulletin highlights the ‘hard-line’ stance- very evident in Dublin last week- being pursued by the ECB in relation to ‘Economic Governance in the EU ’aka  Economic Union. The ECB criticises the Commission and the Council, and also a recent special Task-Force set-up to look at the issue, for being far too ‘soft’ on convergence towards Economic Union. The template for Political Union – the structures on which it’s being  created and which will enforce it – are based on those of the ‘core’ countries; that is , those with the financial and political clout.
This tells us that Economic Union is now being driven from the centre, as the over-riding priority, to reinforce Monetary Union. What we are looking at is de facto Political Union, without Treaty changes and by the middle of this decade.
 The destruction of Ireland’s economy for at least a generation will not be allowed to stand in the way. For those who look to Ireland’s historic spiritual and cultural links with a Europe which we played no small part in shaping, this orthodoxy is an exercise in political nihilism. But with the ‘Bailout’ Ireland, and its unique Constitutional prerogative of holding a Referendum is consigned to ‘cold storage’; if we chooses to be.  The choice is yours. It is right that Germany and other ‘Core’ countries, with their own domestic political agenda, should be free to move to full Political Union, should they so choose.It is equally right that Ireland should decide that our economy simply cannot live in the vice-like grip of the orthodoxy that is being imposed on Peripheral countries within the Eurozone in order to make Political Union a reality. The solidarity and the empathy and the mutual support which should characterise the Eurozone  are simply not there.
Ireland’s relationship with the Eurozone is like a personal relationship that has turned destructive. There is no Trust, there is certainly no Empathy. There are no shared values or vision. On one side, there is a temporary vulnerability; on the other, there is an agenda focused on power and control. They are held together by a kind of negative dependency, fear and by the emotional capital which they have invested. It is the nature of such relationships that they will ultimately break down.
When this happens, there has to be a process of healing and rebuilding, based on the resources and the resilience and the gifts of the individual. The same is true of countries.

Ireland can be rebuilt – but there is no evidence whatever of this happening within the Eurozone orthodoxy that has now gained such an ascendency and is being imposed on Ireland and the Peripheral countries. Leaving the Eurozone with dignity and an unbreakable commitment to rebuild within the EU would, if that were the outcome of a national debate, represent a positive catharsis. We need a ‘Kieran Fitzgerald’ moment.   

Professor Ray Kinsella is on the Faculty of the Smurfit School of Business UCD. (Edit post)