Congress says ECB and EU 'Not Without Responsibility' for Irish Crisis
15 Apr 2011
Congress General Secretary David Begg has said that the EU and European Central Bank are "not without responsibility" for the current crisis in Ireland.
Addressing delegates at the Public Service Executive Union conference in Galway, Mr Begg said Congress had informed the IMF/EU/ECB troika at a recent meeting that "there are limits to the political acceptability of austerity and these limits are close to being exceeded."
Speaking to delegates on the role of the ECB, Mr Begg said: "I make this point because the people from the EU and the ECB who are dictating the terms of our existence are not without responsibility (for the crisis), nor are they disinterested actors in determining who bears the burden of austerity.
"Be in no doubt that their primary objective is the protection of Europe's banking system."
He later expanded on these remarks in an interview broadcast on RTE's This Week.
Mr Begg said French and German banks had an exposure of some €900 billion to 'peripheral' economies like Ireland. He pointed out that bondholder exposure to Irish banks had declined while ECB emergency funding had risen dramatically.
"The bond holders are getting out under covering fire provided by the ECB," he said.
Addressing the delegates, Mr Begg said the Croke Park deal had not been raised or discussed, in a recent meeting (April 11) between Congress and the IMF/ECB/EU.
He stressed that the austerity programme was causing serious damage and that Ireland had to "fight for some justice. We cannot carry the burden of debt and austerity being laid upon us without serious damage to our quality of life and a generation lost to unemployment and emigration.
"I think it is important to stress a renegotiation of the deal. Otherwise...we are heading for a disorderly default. That is not just my view, it is the view of such bastions of liberal capitalism as The Economist and The Financial Times.
"Continuing with the fiction that we can stay with the package is the triumph of hope over everything we know from the history of financial crises," he said.
He also contrasted the unrelenting focus on 'public service' reform with complete inaction on reform of the banking system - the cause of the entire collapse.
Mr Begg welcomed the decision to restore the Minimum Wage to €8.65 per hour and the Government's promised Jobs Budget in May.
He said the Government must focus on the long-term unemployed and reviving domestic demand in the economy and that they could utilise the resources of the semi-states to implement intensive infrastructural projects.
FULL TEXT OF PSEU ADDRESS FOLLOWS:
ADDRESS TO PSEU CONFERENCE - GALWAY APRIL 15, 2011
David Begg, Congress General Secretary
On Monday evening some colleagues and I met with the members of the EU/IMF/ECB Troika in the Department of Finance.
Our basic message to the Troika was that the burden of debt, and the austerity impositions which accompany it, are unsustainable for a relatively small population of 1.8 million active workers. The deflationary effect of removing €20.6 billion from the economy in three budgets since 2008 is preventing growth. Domestic demand has collapsed in that period reflected in a consumer spend that is still falling. It could hardly be otherwise with 14.7 per cent of the workforce unemployed and 50,000 a year emigrating. No wonder then that the IMF has itself revised downwards its forecast for economic growth this year to 0.5 per cent.
None of this, of course, was unexpected. It can only have been a surprise to those who believe in the myth of so called expansionary - fiscal - contraction or the notion that austerity can lead to growth. It may have happened that way by coincidence in the late eighties but the unique conditions - the beginning of an American investment boom, the advent of the Single European Act and devaluation of the currency - will not happen again. For our part we warned consistently of falling into a 10 year Japanese style slump and that is surely where we are now.
We have arrived at this point through a combination of banking and corporate governance failures. In 2003 the banks borrowed the equivalent of 10 per cent of GDP on interbank money markets. By 2008 that had risen to 60 per cent and this money was funnelled into the property bubble. The banks were borrowing short and lending long and when Lehmann Brothers collapsed in September 2008 the international money markets froze. Deprived of liquidity the Irish banks had to resort to the ECB and the Central Bank. Subsequently what appeared to be a liquidity crisis morphed into a solvency crisis.
The banking crisis was the product of a massive corporate governance failure. It was not the only one. Indeed they have materialised with monotonous regulatory in recent years. First the DIRT scandal, then the planning abuses, Quinn Insurance, the Developers and the Banks again and, a couple of weeks ago, the Moriarty Tribunal Report.
Despite this dismal record the policy failures were not exclusively domestic in origin. Economic and Monetary Union was based on the idea of an optimal currency area. Monetary policy dominated and the ECB operated an interest rate policy that suited France and Germany but was pro cyclical for Ireland and unsuitable. Moreover, deregulation of financial markets combined with low interest rates was irresistible to the Irish banks and at least facilitated the orgy of lending.
I make this point because the people from the EU and the ECB who are dictating the terms of our existence are not without responsibility nor are they disinterested actors in determining who bears the burden of austerity.
Be in no doubt that their primary objective is the protection of Europe's banking system. Between them French and German banks are exposed to the tune of €900 billion to the peripheral countries. These are the bond holders who cannot be burned. It is very interesting to plot the course of bond holder exposure to ECB and Central Bank provisioning of the Irish banks. Bond holder exposure has declined from about €100 billon to less than €30 billion while ECB/Central Bank funding has increased dramatically. The bond holders are getting out under covering fire provided by the ECB.
So, while it is correct to say that we would have been sunk without the massive support our banks received from the ECB, it is equally true to observe that the support was not wholly altruistic.
Ireland has to fight for some justice. We cannot carry the burden of debt and austerity being laid upon us without serious damage to our quality of life and a generation lost to unemployment and emigration. Over half those unemployed are now in the long term category.
I think it is important to put the stress on renegotiation of the deal. Otherwise, sooner or later, we are heading for a disorderly default. That is not just my view, it is the view of such bastions of liberal capitalism as The Economist and The Financial Times. A unilateral default is favoured by some people here and their view will probably be reinforced by the outcome of the recent referendum in Iceland.
Advocating for default is, in my view, a high risk strategy. Certainly it is very hard to calculate the consequences. Still we can speculate that it would, for a time at least, close off all sources of borrowing. That would mean that the money available for public expenditure would be the money raised in taxes. Given the gap that now exists between revenue and expenditure this would do serious damage to public services, social transfers and employment.
Argentina defaulted on all its debts in 2001-2002. The banks were paralysed when deposits were frozen indefinitely. The exchange rate for Pesos to US Dollars went from one to more than three practically overnight. Deflation of -1 per cent changed to inflation at 30 per cent and stock prices crashed by 30 per cent.
While debt default in history is more common than you might think - Greece was locked out of money markets for 53 years - it is not to be contemplated lightly. A negotiated restructuring, involving a longer time period, Europeanisation of some of the debt, debt for equity swaps and lower interest rates - or some combination of these, is the logical alternative. But continuing with the fiction that we can stay with the package is the triumph of hope over everything we know from the history of financial crises.
One thing we did not discuss with the people we met on Monday night was the Croke Park Agreement. It was not raised by them. They did have a view about the growth of public expenditure over the years but we were able to point out to them that the OECD had found that this was at a slower rate than economic growth. It happened over a period when there was a cumulative surplus of revenue over expenditure of €58 billion while debt was paid down to the lowest level in the EU.
We were also able to remind them that Olli Rehn himself had observed that the size of the public sector was small by international standards.
As regards the present crisis we drew their attention to a report by the Schuman Foundation in late February which contrasted Ireland and Greece:
'Ireland's problem is very different from that of Greece. In Athens the bankruptcy of the state and the public finances brought down the banks; In Ireland it was the banks and the private sector that brought down public finances'.[1]
Even though the Croke Park Agreement was not raised at the meeting it was the first thing I was asked about by the media afterwards. The truth is that there has been cynicism about the agreement in media circles from the beginning and it has not been dispelled by the progress made so far.
From what I know I have no reason to believe that it will not do what it says on the tin or that it will not achieve the targets specified for this year.
In a general way I am inclined to the view that public sector reform is more complicated than many commentators will allow. Much of the theorising around it has been bedevilled by the neo-liberal disposition of the public-choice school. It assumes that people in organisations are motivated only by individual self interest. This is far too limited to provide understanding of key aspects of organisational behaviour.
It is also the case that, whereas the private sector responds to the law of supply and demand, public services are rationed. This is very obvious in health, for example.
There are three reasons why it is difficult to construct an optimal organisation form in the public sector viz:
The goals of many organisations are unclear. Staff can only carry out the will of the administration if the administration knows what it wants the staff to do;
Formal systems of monitoring and accountability either entail very high transaction costs or else are simply impossible because of lack of specificality of the underlying activity;
All delegation involves a trade off between efficiency and risk.
Success ultimately depends on having a clear perspective on the type of public service it is intended to achieve and the leadership to achieve it. The leadership is both political and at the level of public service management. Unless this clarity of vision and purpose exists there is a danger of the project being caught up in principal - agent ambiguity.
Notwithstanding these complexities it is a fact that the quality of the public service is vital both to the quality of life of citizens and the economic competitiveness of the country. No Government can afford not to try to optimise the efficiency and effectiveness of the public sector.
The Croke Park Agreement is the vehicle which can make this happen. Through it public sector unions and Government can achieve their legitimate objectives of security of employment and wages on the one hand and achieving more with less on the other.
I am sure that both sides are canny enough to know that the Croke Park deal is the only viable way to achieve a result and neither will allow it to be blown off course by the brickbats thrown at them. This requires a sense of realism all round and I would remind critics of the public service of two key facts:
1. The Irish public service employs only 14 per cent of the labour force. This makes it one of the smallest in the OECD on a par with the United States;
and
2. There is no parallel or precedent in any other EU country for the 14 per cent pay reduction accepted here.
The Public Services Committee negotiated the agreement in the teeth of opposition from all sides. Now we have to make sure that it fulfils the expectations reposed in it.
Without doubt the single most serious social problem we face is an unemployment rate of 14.7 per cent, way above the OECD average of 8 per cent. We are about to see that increase again with the shakeout of jobs from banking consolidation. Just three years ago we had virtual full employment at 4.5 per cent.
The new Government have promised a 'Jobs Budget' in May. This is a welcome policy change and I would like to suggest some issues that the budget needs to address.
A renegotiation of the bailout deal is of the highest importance. We must ease the pressure on domestic demand because it is in the domestic economy that the jobs will come. Many speak of an export led recovery and that is important. But it will not create jobs in the numbers needed to make a dent in unemployment.
On the same theme, domestic economic activity is being constrained by the lack of credit availability to SMEs. IMF/EU are insisting on shrinking the loan: deposit ratio from 1.74 to 1.225 by the end of 2013. This means that loan advances would have to fall from €294 billion to €210 billion by the end of 2012, a contraction of 30 per cent. Unless something like the Labour Party's idea of an investment bank is operationalised then it is hard to see how the position of SMEs will do other than deteriorate.
Because private investment has collapsed so dramatically it is imperative that the state takes some initiative to get the economy moving. Selling state assets would be the wrong thing to do. In the medium term a State Holding Company to leverage the resources of the semi-state companies for investment is the way to go. But we need to do something in this area immediately.
What I suggest to get early results is to parcel out labour intensive infrastructural projects to the semi-states and charge them with implementation. They could finance them from their own resources as most are profitable. Most also have experience in project management and management structures and network capability to move quickly.
As I mentioned already, nearly half those unemployed are long term unemployed. To prevent these people from being permanently disconnected from the labour market we also need to re-find the capacity for activation which we were good at in the mid nineties.
This forthcoming Jobs Budget is of vital importance. The scale of its ambition must be such as to give some hope to people, especially to those between 15 and 24 where unemployment is so heavily concentrated.
Earlier this week we were treated to the news that AIB lost €10.4 billion last year. We know too that we will have to stump up another €13.3 billion to recapitalise the bank, bringing the total amount of citizens' bailout to €20.5 billion - exactly the amount taken out of the economy in three austerity budgets since 2008. Another 2000 jobs will be lost and perhaps a further 4000 are at risk.
There was a time when a civil service or banking job was the key to a secure future. There was a time when it was possible to look forward in confidence to a pension in old age. Now that too has been put in question because the NPRF has been committed to the bank bailout.
If we were to crystalise the cost to us of this calamity it is in personal economic security. It no longer exists. The next decade will be dominated by the implications of debt at 120 per cent of GDP, the cost of servicing that debt and the absence of the NPRF in circumstances of an ageing population.
I am pleased that the Government is to restore the minimum wage to its previous level. It is a more significant development than has been recognised in commentary on the decision. I recall that Brian Lenihan first pushed out the boat on this at the McGill Summer School in 2009. The minimum wage is not directly significant in the economy but removing it allows all wages above it to fall. That was the motivation for the action of the previous Government.
Despite suggestions to the contrary the EU/ECB - although not the IMF - are up to their necks in this too.
And for all the talk of reform the structure of the European banking system remains fundamentally unaltered. The hedge funds remain unregulated, there has been no reinstatement of the equivalent of the Glass Stegal Act to separate retail and investment banking and, of course, the bonus culture operates as it always did.
On Monday night we told the Troika bluntly that they had no legal competence - not to mention moral authority - to interfere in the labour market and to BACK OFF!
We also told them that there are limits to the political acceptability of austerity and these limits are close to being exceeded.
I always try to end on an optimistic note but in current circumstances the best I can do is refer you to the words of Pentland Mehaffy, one time Provost of Trinity College:
'In Ireland the inevitable never happens and the unexpected constantly occurs'.[2]
ends
Irish Congress of Trade Unions,
32 Parnell Square, Dublin 1.
Tel: (01) 889 7799; m 087 9174171
--------------------------------------------------------------------------------
[1] Deloy, Corinne (2001). Schuman Foundation.
[2] Cited in Sorensen, George (2010) 'Globalisation and Development: Ireland and Denmark in Comparative Perspectives' in Michael Boss (e) The Nation State in Transition. Denmark. Aarhus University Press.
