At the height of the Greek debt crisis, when Europe was putting together rescue packages to guarantee the ability of EU member states to repay their sovereign debts in order to avoid contagion through lenders panicking at the prospect of other overstretched European countries perhaps being driven to default, the countries most at risk were Portugal, Ireland, Italy and Spain.
While it was widely believed that Portugal was the most vulnerable of these, in fact it is Ireland which has been the first to be driven to seek support from the European Fund and from the International Monetary Fund (IMF), as the rates of interest that it has to pay in order to refinance its indebtedness have been remorselessly climbing up to hit the level of unaffordability – as indeed they have been for Portugal as well.
The result is that Ireland has now had to apply to the EU and the IMF for a rescue package worth over $100bn. This is money that will have to be repaid, with interest, but at a lower rate than borrowing on the open market. Some $20bn of this will go to trying to keep Ireland’s teetering banks afloat, while the rest will be used to make good Ireland’s projected budget deficit for the next three years.
Symptoms and causes
Ireland’s downfall centres around its absurd speculative property bubble, which burst dramatically with the onset of the world capitalist economic crisis.
The bubble accompanied the ‘Celtic Tiger’ mini-boom that had brought prosperity to much of Ireland on the basis of its ability to attract foreign investors by offering relatively low wages and very low levels of taxation. However, for the country to continue to thrive, its products needed to be sold, but this became difficult as the economic crisis began to bite.
As the economy dwindled, the speculative property bubble burst. This left the banks that had lent to developers with staggering amounts of bad debt – estimated at some €70bn – which the Irish government promptly undertook, by effectively nationalising the Irish banks, to underwrite with taxpayer money in order to save them from collapse.
While this measure undoubtedly helped masses of small savers who had their money in bank accounts, those who most benefited and collared the vast majority of the bailout funds were the finance capitalists – local and foreign – whose fingers would otherwise have been burned by what turned out to be bad investments.
Squeezing the working class
To pay for this bailout, the Irish government resorted to the time-honoured bourgeois method of squeezing the working class. A year ago it announced cuts of €1bn on public-sector pay, cutting the salaries of public servants. There were further cuts of €760m on social welfare, €980m on day-to-day spending programmes and €960m on investment projects.
However, despite the imposition of these draconian measures, Ireland’s economy has gone from bad to worse, thus proving that there is no escape from what is at heart a crisis of overproduction through further restricting the purchasing power of the masses or of the government. These measures can self-evidently only make a crisis of overproduction worse.
Creditors assessing Ireland’s creditworthiness will have taken note of a number of alarming indicators, which made them believe that, even if their money was guaranteed by the Irish state, there was a real danger of losing it.
Irish sovereign debt, which stood at an alarming 65.5 percent of GDP in 2009, is projected to have risen to 176 percent in 2010, according to Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics (PIIE), citing Eurostat data.
Ireland’s gross external debt (ie, both public and private) stands at approximately 1,000 percent of GDP ($2,131bn). The net external debt position was 75.5 percent of GDP a year ago. It hardly bears thinking about how much it has risen to since.
Further cause for concern was the drop in GDP, coinciding with a precipitate rise in the budget deficit. In fact, because tax income was still being used to prop up the banks, the budget deficit rose from some 12 percent in 2009 to a projected 34 percent in 2010 – the highest percentage in Europe and a record for Ireland.
In other words, Ireland was clearly, despite cuts, still spending even more in excess of its income that it had been previously, and, moreover, that income was falling steadily. In fact, Gross National Product – the amount of the Gross Domestic Product that remains in Ireland – was falling even faster than GDP.
An increase in the rate of unemployment to over 13 percent meant that tax income was falling, while welfare expenditure was increasing – notwithstanding the cuts. In the meantime, major foreign investors were continuing to pull out of Ireland in search of larger profits in lower-wage countries, typified by Dell’s removal to eastern Europe.
So, despite every effort on the part of the Irish government to safeguard their interests at the expense of the taxpayer, ungrateful overseas and corporate depositors began withdrawing large amounts of money from Irish banks – a run to the tune of $25bn that took place largely over last summer.
Certain very large creditors, however, were not in a position to withdraw their funds so easily, the largest being the UK and Germany, with loans outstanding of $149bn and $139bn respectively – a lot of money to lose! It is no wonder then that pressure was put on the Irish government to cover itself by an application to the European Financial Stability Facility (EFSF) and the IMF.
Nevertheless, it is becoming very clear that the numbers are too large to be covered simply by squeezing the Irish working class. Even the Financial Times advocated making “creditors share losses if a bank proves insolvent”, rather than leaving the EFSF to pick up the entire bill.
It considered that it would be “a fatal mistake” for the EFSF money to be used to put Irish banks on a sounder footing. “It would keep the Irish people indentured to those who recklessly fund their banks: EFSF funds must, after all, be paid back by taxpayers.” (Editorial: ‘Europe must heed Ireland’s lesson’, 16 November 2010)
And Angela Merkel, the German Chancellor, pointed out a few months ago (possibly precipitating creditor panic, though it was bound to emerge eventually), that at least some of the losses are going to have to be borne by creditors: “We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”
In Ireland’s case, creditors are going to have to be required to write off at least a percentage of what is owed to them – up to 50 percent has been suggested, and subsidiary bond holders at Anglo Irish Bank have already been subjected to an 80 percent ‘haircut’.
How will the crisis ever be overcome?
The plan hatched by the Irish government, the IMF and the EFSF, all centres around cutting public spending even further, saddling every Irish family with a debt of €25,000.
The idea would be that by depressing wages to an all-time low, investors would be attracted back to Ireland as it would be so cheap to produce there, enabling massive profits to be made, thus restoring Ireland’s economic health. At the same time, the state – now owning the banks – would sooner or later be able to take advantage of a recovery in property prices to make good all its investment in purchasing bad debt.
The chances of this pipe dream materialising are remote in the extreme. Ireland’s economic position has deteriorated throughout the years in which the world’s largest economies were indulging in a stimulus exercise to try to kick-start the world economy into recovery, a stimulus from which most are now having to retire after losing billions.
If Ireland, which favoured investors with a corporate tax rate of only 12.5 percent – much to the fury of its European competitors – could not make good when there was stimulus spending around, what chance is there now that the stimulus spending is very much reduced? What chance is there now that most of the countries to whom Ireland could hope to sell are themselves inflicting cuts in public spending and impoverishing the masses of consumers through higher taxes, lower public-service salaries, lower welfare benefits and the excising of thousands of jobs?
One can be certain that Ireland’s creditors will be inclined, as far as they are able, to grab the money and run, leaving the Irish state to slide into bankruptcy. This will of course threaten the solvency of the European Union as a whole ...
In the meantime, the ‘haircuts’ that Ireland will be imposing will certainly panic the creditors of other European countries, especially Portugal and Spain, and it can be expected that the Greek and Irish sagas will very soon repeat themselves in those countries. Moreover, to the extent that the ‘haircuts’ eat into the assets of banks and other financial institutions of other countries, they will exacerbate the banking crisis in those countries too.
Meanwhile, the Irish rescue will take up some 10 percent of the EFSF. As a result, “the rescue package for Ireland put paid to Europe’s hopes that a ‘shock-and-awe’ €750bn backstop, arranged after a bail-out of Greece in May, would impress financial markets so much that it would never need to be used”. (‘Europe signs up to Irish rescue’ by John Murray Brown, Joshua Chaffin and Tony Barber, Financial Times, 22 November 2010)
It is now apparent, only a relatively short time after it was cobbled together, that even this ‘shock-and-awe’ fund has its limits, and it is generally considered that these limits are insufficient to save Spain, the biggest economy at immediate risk: “The Irish problem will be contained,” said Guillaume Fonkeness, chief investment officer at Pharo (a large macrofund). “For us contagion is the issue ... If the market loses confidence in Spain, then all bets are off. Spain is too big to bail.” (Quoted in ‘Contagion fears over “too big to bail” Spain’ by Sam Jones, Financial Times, 18 November 2010)
In these circumstances, no less a person than the President of the EU, Heman Van Rompuy, thinks that there is a danger that the euro, and even the EU itself, will collapse. On 16 November, he told the European Policy Centre in Brussels: “We’re in a survival crisis. We all have to work together in order to survive with the eurozone, because if we don’t survive with the eurozone we will not survive with the European Union.” (Quoted in ‘Ireland crisis could cause EU collapse, warns president’ by Julia Kollewe, guardian.co.uk)
Conditions on bailout
In Ireland, further severe cuts are expected to be announced that will attack, among other things, the minimum wage and benefits – so that, as ever, the very poorest are expected to contribute to payment of debts to the mega-rich.
The coalition government led by Brian Cowen is busy thrashing out the details of a plan to raise €5bn in extra taxation and €10bn in further spending cuts, to be incorporated in a budget to be passed on 7 December.
The Greens, on whose votes Cowen has to depend to force through these measures, have been forced to announce their withdrawal from the coalition in protest at these unpopular measures, deeply resented by the Irish people generally. However, they have agreed to stay on long enough to vote the measures through parliament so that the EFSF bailout will not be jeopardised.
After that, the government will fall and there will be a parliamentary election in January, when no doubt the Irish people will express their deep disgust – by which time the present government will have committed the country irrevocably to a counterproductive austerity regime.
No way out under capitalism
There is no escape from a world capitalist crisis of overproduction. Too much has been produced in the world relative to the ability of people and governments to buy, and recession is therefore inevitable, with all its ensuing misery for the masses of the people, and mounting desperation that inevitably culminates in wars between countries as they try to manoeuvre at each other’s expense.
Measures can be taken that shift the losses in one direction or another, but the losses are inescapable. Productive capacity is destroyed, and working-class people sit at home – if indeed they still have a home – unemployed, lacking the necessities of life because they have produced too many of the necessities of life.
The need for socialist planned economy to take over from capitalism has never been so starkly obvious. This is prevented by the fact that bourgeois states protect private wealth at all costs, as the Irish experience dramatically demonstrates. That private wealth must be forfeit, for it allows a class of multi-billionaires to control all significant economic activity through their ownership of the means of production, and to dictate that production shall only take place when it produces profit for themselves, leaving millions without jobs or sustenance in times of overproduction.
It allows the rich to speculate with the wealth created by working people, creating bubbles like the one in Irish property, rather than using resources for the satisfaction of material, cultural and spiritual needs of the masses.
The working class must seize the means of production from its private owners, and must put them to use in producing an ever increasing sufficiency of goods and services to cater for the masses. Production must be motivated by satisfaction of people’s needs, not by the possibility of a profit for a handful of rich entrepreneurs and kings of finance.
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