WORLD VIEW:The alternative visions of economists must focus better on what is possible internationally
IRELAND BADLY needs a strategy to handle the euro zone crisis, rather than reacting defensively to all its latest twists and turns. This requires a political as well as an economic understanding of the dynamics in play at European and national levels.
Most economists here are ill-equipped to provide this because they take too little account of the politics involved and often grossly underestimate the social costs of unilateral action. They gain the limelight because alternative approaches are rarely proposed or debated.
These should involve analysis of the crisis, proposals to tackle it differently and ways to create EU alliances of those with similar interests. Inevitably this draws in left/right politics as well as the interplay of national interests. Both dimensions need to enter the debate on Ireland’s growing indebtedness, how it links up with that of the euro zone as a whole and what are the best ways to create an alternative strategy.
Above all, this is a banking crisis that escalated into a credibility challenge for the EU’s common currency and its economic basis. Banks were part and parcel of the financialisation of international capitalism from the 1990s, the backdrop for planning the euro. The global collapse in 2008 which triggered Ireland and the euro’s crisis exposed that, creating an imperative now to downsize the sector and reduce its dominance of the wider economy.
Conventional neo-classical economists were ill-prepared for this, believing markets had become self-correcting. At most they analysed the varieties of capitalism, losing sight of capitalism tout court. In Ireland, they failed to link the property bubble to the exploding credit system fuelled by international wholesale capital. It fell to the relatively new discipline of international political economy, bringing together politics, economics and international relations, to identify the problem clearly.
Writers like the pioneering analyst Susan Strange put power at the centre of their analysis of changing state-market relations. Her books Casino Capitalism (1997) and Mad Money: When Markets Outgrow Governments (1998) foresaw the dangerous gap opening up between territorially bound nation states and weak intergovernmental means to regulate markets. In principle, European integration can close this gap. But she agreed with many of the more orthodox economists that monetary union was incomplete. The euro zone crisis cruelly exposes the shortcomings of this design.
It presents an existential problem between fragmentation and deepening or completing the system. Ireland’s unfortunate position at the centre of the storm does indeed give it a perverse bargaining strength, as many economists recognise. But when they urge unilateral default rather than alternative collective action at European level, it leaves one to wonder whether and how the resulting costs will be distributed and what the political consequences would be.
In global as well as national terms they recall the early 1930s. Enda Kenny was quite right to reject such a “lethal injection”. That is the real contagion.
Three alternative European solutions deserve political support from Ireland: a Eurobond system to pool a proportion of EU state indebtedness and thereby collectivise the risk of exposure to speculative markets; a dedicated tax on financial transactions that would yield valuable new sources of revenue and act as a disincentive to such speculation; and a sustainable continental investment programme to regenerate employment.
A Eurobond system as proposed by the economist Paul de Grauwe and several leading EU political figures would take 60 per cent of state indebtedness on to the books of the European Central Bank and allow it to issue bonds based on that security.
This would have the stronger economies protect the weaker ones, substantially reduce interest rates, and create a new international bond market to soak up excess liquidity.
It could be tweaked against moral hazard, though not as easily against somewhat higher interest rates for the strongest economies like Germany. It would undoubtedly deepen the system – but stabilise it too.
Many believe its creation is part of the developing logic of this crisis, in which case the task is to steer Ireland in that direction. But it has been curiously under-discussed by Irish economists. Few references to it can be found on the IrishEconomy.ie website – and even fewer to a financial transaction or Tobin tax.
This makes real sense given the scale of the financialisation problem by reducing its dead hand on the Anglo-American variety of capitalism and hence on the various continental manifestations. Support comes from right and left; but is resisted by the same Tim Geithner who vetoed Ireland’s proposed bondholder haircut, according to Morgan Kelly, writing here last week. It could readily be applied at European level, ahead of a global tax. But it badly needs more vocal support.
The third idea goes against other current orthodoxies which put budget consolidation well ahead of employment creation – a solution that is not producing growth but deflation. It proposes a new investment deal at European level, along with greater emphasis on sustainable growth.
Ideas like these need to be put politically in the public domain if the case for unilateral default and exit from the euro zone is not to gain more traction.