Balance on restructuring debt necessary


WORLD VIEW: Escaping the passive mentality of being ‘peripheral’ means having confidence to reshape the euro regime

SUDDENLY, IRELAND is “peripheral” again. The term disappeared from our public discourse in the late 1990s, but has now been resurrected by the euro zone and banking crises. Why that is so reveals much about Ireland’s self-understanding, then and now.

Peripherality was used to describe a condition of comparative underdevelopment in the European communities in the 1970s and 1980s, and then to specify how this might be overcome by the new structural funds. Ireland played a key role in designing them in 1987-93, and benefited commensurately when they doubled. The flow reached 4-5 per cent of national product just when national budget consolidation cut in, giving a real stimulus to the economic take-off after 1993.

That delivered real catch-up growth, making Ireland a model for others to follow. The flow of US investment during the Clinton years helped resituate us out of the EU periphery and into a more central position in a wider transatlantic world of globalisation. Political and social psychology adjusted to a new self-confidence that saw opportunities unfold.

The structural funds continued, but gradually the prospect of Ireland becoming a net contributor to the EU loomed – evidence that gaps of wealth and income had been narrowed ahead of launching the euro.

Confidence turned to arrogance after the 2001-2 recession, coinciding with the property boom and the bubble economy (as more sustainable economic indicators fell away). It could be seen in resentment of EU economic guidelines and criticisms, in diminished commitment to political innovations which could benefit Ireland and in the typical bubble sense of invulnerability.

As a result, political leaders and public opinion were quite unprepared for the 2008 shock and the subsequent ones which resulted in the EU-IMF rescue package last year. Portugal, Ireland, Italy, Greece and Spain – the PIIGS suffering most from the euro zone crisis – are precisely the states that benefited from the structural funds two decades earlier and were then classified as peripheral to the wealthiest central zones of the EU.

Notwithstanding the progress these states all made in the meantime, before the funds were shifted to the central and eastern states which joined the EU in 2004, they are now back in the firing line of structural adjustment. Did the catch-up effort fail? Was the euro-design flawed? Should they not make common cause to protect their interests in renewed arrangements?

The structural funds opened up peripheral markets to core economies just as much as they helped the weaker ones develop. This was especially the case with finance capital, which flowed lavishly from German, French, UK and Dutch banks to Ireland, Spain, Portugal and Greece from 2003-4, riding on the euro’s introduction and the wider deregulation of global finance over those years.

Equally significant was that the rules actually laid down for all participating in the euro zone were for the most part adhered to by the formerly peripheral states. Thus, Ireland and Spain never breached the 3 per cent deficit rule between 1999 and 2007, whereas Germany did so four times. In 2007, Spain had a surplus of 2 per cent and a government debt of 36 per cent of its GDP, and Ireland’s was 3 per cent and 25 per cent respectively.

Portugal’s accumulated debt is well below Italy’s and its budget deficit has in fact been falling quickly, yet it too has been forced to seek an EU-IMF package by aggressive markets and distorted rating agencies.

The real story here is not in public but private finances. Greece was exceptional because of its breach of the public rules; that pioneering role firmly implanted itself in the German and the northern core states’ public consciousness as a potential moral hazard for other peripheral ones – a risk that must be prevented with punitive interest rates and conditionalities. Even harsher penalties were imposed on Latvia and other eastern states in 2009.

But generalising in this way is wrong if the problem is private, not public debt, since lax fiscal discipline is not its basic cause. The real problem is how fast budget surpluses collapsed in the face of private debt. This is a problem of market, not moral,hazard. It originates in the financial supply from core to periphery just as much as from peripheral demand for such funds.

That requires a balanced approach towards restructuring debt rather than loading it on to peripheral taxpayers, a far firmer effort to discipline markets and rating agencies, and renewed efforts to find alternative ways of taxing financial transactions at European and global levels to deter such speculation.

Eleanor Roosevelt said no one can make you feel inferior without your consent. The same applies to peripherality. Escaping from that passive mentality means having the confidence to redesign the euro regime along these lines by forging political alliances. Labour needs to do that with its Social Democrat allies, Fine Gael with its Christian Democrat ones – and both with the other states suffering from the euro zone’s incomplete design.