Muddling through to the next catastrophe

ECONOMICS:In his latest broadside on the economy, David McWilliams argues that Ireland's subservient attitude to our euro masters will do us no good in the long run

The Good Room, By David McWilliams, Penguin Ireland, 256pp, £14.99

Claud Cockburn, my grandfather, liked to quote a toast given by a French diplomat in the early 1930s at a party in Washington DC. The room was full of bankers and grandees, celebrating the news of the latest successful rescue effort for the latest failing European bank. They had the sense that the worst days of the financial crisis were finally behind them.

“In the moment that remains,” their host said, “between the crisis and the catastrophe, we may as well raise a glass of champagne.”

They are not raising any champagne glasses in Brussels or Berlin these days.They are not that foolish. But if you listen hard enough, you can hear the sound of officials quietly patting themselves on the back.

True, the euro zone has formally slipped back into recession, for the first time since 2009. The European Union does not have a budget for next year. Greece is still a mess. And even in Ireland – the great poster child for economic adjustment – the latest European Commission forecasts show domestic demand falling, not rising, in 2013, for the sixth year in a row.

But the world is not about to come to an end, and nor, it seems, is the euro. The feeling in the corridors of European power and the financial markets is that the single currency is going to survive.

If you’re one of these cautious optimists, you might not want to read David McWilliams’s new book. He thinks it’s just about conceivable that things will get better from now on and that the “catastrophe” of a messy euro break-up can be avoided. But he doesn’t think a break-up is off the table. Far from it. Nor does he think it’s necessarily the worst-case scenario.

In fact, he thinks we might look back at the “successful” rescue of the European single currency and decide that that was pretty catastrophic too, at least for countries such as Ireland, laden with private debt that no one is willing to write off.

McWilliams has a nice phrase to capture the “muddling through” approach to the crisis that European leaders have followed until now. He calls it the Irish Divorce. Out of fear, the members of the single currency have been trying to lock themselves into a loveless marriage, just as many Irish couples stayed together, unhappily, in the 1970s and 1980s, when divorce was illegal and even separation was taboo.

Economists used to be good at this kind of thing, at criss-crossing the line between economics and everyday human experience, using one to illuminate the other. Adam Smith and John Stuart Mill were storytelling economists in that sense. So were 20th-century thinkers such as John Maynard Keynes and Hyman Minsky, who understood the human dynamics of financial crises better than anyone. The theory had to fit the numbers, but it also had to provide a narrative about the economy that made sense to the people who lived in it.

Forgotten history

As many have now lamented, policymakers and financiers forgot a lot of that past history in the decades leading up the crisis. Instead, politicians and financial markets mistakenly put their faith in the “quants”, with their fancy financial tools that promised to make risk disappear and bring about perpetual, noninflationary growth.

Now everyone recognises the theories were, well, a bit flawed. But, McWilliams argues, the people at the heart of decision-making in Europe are trying to carry on as they were before. They’re still ignoring the storytellers, still clinging to economic models designed for normal times, not the aftermath of a financial crisis. “Mainstream economic thought has been labelled as radical, and the truly radical has been branded as mainstream, to suit the ambitions of the European political elite and the short-term interests of the banking system. It’s as if the lunatics – or, at the very least, some really weird people – have taken over the asylum.”

McWilliams is no Keynes – or Hyman Minsky. He’s a bit too glib for that, and a bit too fond of demolishing straw men. In the quotation above, “mainstream” economic thought seems to include the ideas of everyone who agrees with him. This is not to be confused with the “conventional wisdom” of those in power, which, naturally, McWilliams believes is always wrong. The thinking of real-world politicians and economists can’t be divided so neatly. People such as the governor of the Bank of England, Sir Mervyn King, for example, agree with McWilliams on some things and disagree on others.

But this book isn’t designed for nitpicking economists like me. It’s designed for normal humans. For them, McWilliams has a great knack for bringing a complex economic story to life. He is also funny. In economics, that is a rare and persuasive combination. I can’t think of anyone else who would use the balance sheets of the two teams in the 2012 European Champions League final to illustrate the economic and cultural differences that lie at the root of the euro-zone crisis. Nor do many serious economics books begin with the story of the Castlegregory Gaelic football team. They were all-Ireland junior champions in 2010; now most of them live abroad. So “Generation Hype has turned into Generation Skype.”

You can have too much storytelling. There’s a fictional narrative running through The Good Room, in alternate chapters, about a young teacher and her extended family, drowning in negative equity. I’m not sure it really works. But then perhaps I am not the right person to ask. If you could really explain the financial crisis in fiction, I would be out of a job.

Relevant title

One of the best analogies is the title itself, The Good Room, though it’s a pity McWilliams waits until chapter 11 to explain its relevance to the crisis.

His description of his granny’s “good room” in Co Cork, where he grew up, and the strange charade that would take place there whenever small-time dignitaries visited the house is more engaging – more literary, in fact – than any of the fictional part of the book. “In the Good Room, my granny’s lovely singsong Cork accent disappeared. In its place, a weird noise came out of her, something like a cross between the Queen Mother and Marty Morrissey.”

For McWilliams, Ireland is in the mess it’s in because “at pivotal moments . . . Irish negotiators behave rather like my granny when faced with the local doctor: they adopt a subservient position and cling desperately to a notion of respectability” or “It’s as though we don’t want to embarrass our neighbours by reminding them that we’re bust and that they actually lent money to banks like Anglo and expected to get it back.”

That is McWilliams at his feisty best. In a similar vein, he writes of the “ruinous aversion to small risks” on the part of Ireland’s leaders. Though the Irish economy has shrunk by a quarter in five years, he says the Government is still trying to keep up appearances with its friends in Brussels and Frankfurt. And that threatens to make everything even worse.

That “ruinous aversion” is not unique to Ireland; it’s a natural feature of nearly every serving politician in the world. Why would you ever want a crisis tomorrow, when there is a chance of putting it off? Listening to critics of European policies, especially in the UK, they seem often to rest on a hidden assumption that Europe’s politicians are actually stupid, that what is obvious to everyone outside is somehow not obvious to them. In fact, they usually see reality very well; they just can’t always do very much about it.

McWilliams does not quite fall into that trap. In his chapter on Germany he shows real sympathy with the forces acting on German and other politicians, which have brought us to this point. The story of the euro might be a tragedy, but it wasn’t just a stupid mistake.

And what happens now? McWilliams is not foolish enough to say. But he does think that the current version of muddling through will not endure. Sooner or later, he thinks, the euro zone is headed for a moment of truth, when countries will either be forced together – with enormous implications for national sovereignty – or end up with a genuine divorce.

He thinks the European Central Bank’s offer to help governments by purchasing their debt in the market has brought that crunch point closer.

I’m not so sure. But for McWilliams, like that French ambassador, the euro zone still has a catastrophe to come. Its members just have to decide which one.