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.