Fintan O’Toole: All that austerity was a mistake. Awfully sorry

So it was a mistake, all that austerity, all those cuts that blighted people’s lives, all that squalor, all that doubling of child poverty, all that creation of mass homelessness. Awfully sorry.

This week, Prof Christian Kastrop, who was a key figure in the euro zone's response to the great banking crisis of 2008 (he was president of the Economic Policy Committee of the Council of European Finance and Economic Ministers and of the Eurogroup) told The Irish Times Berlin correspondent, Derek Scally, that Ireland was hit with unnecessarily harsh austerity measures a decade ago at Berlin's behest.

“I never understood back then why programme countries making progress were hit with overblown austerity measures rather than more restraint … I don’t want to play down a sometimes negative role of the Germans. They could have been more generous towards Ireland in many cases without overdoing things.”

The story goes that there was simply no choice but to punish the most vulnerable people in Irish society for the economic crimes of the banking and property moguls

Little by little, the official narrative of the austerity years has been unravelling. The story goes that there was simply no choice but to punish the most vulnerable people in Irish society for the economic crimes of the banking and property moguls.

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It is all very religious – the sins of self-indulgence had to be expiated by harsh penance. “We” had to be disciplined by suffering. And for the most part, “we” bought the line. In 2012 a referendum to endorse very tight fiscal rules (effectively banning Keynesian economics) passed comfortably – it was our way of saying, as the old confessional prayer had it, that we would “strive earnestly to be truly sorry”.

Recently, however, another key figure in the austerity policy, Robert Watt, secretary general of the Department of Public Expenditure and Reform, acknowledged that those fiscal rules actually make very little sense. (Those of us who said this at time were reckless populists.)

Before that, Ajai Chopra, who headed the International Monetary Fund team that was centrally involved in the so-called bailout programme, told the Oireachtas Banking Inquiry in essence that the other two parts of the troika – the European Commission and the European Central Bank – had no real idea what they were doing.

More broadly, even most mainstream economists around the world have long since rejected austerity as counterproductive – it deepens recessions by cutting demand, and the consequent collapse in tax revenues and rise in unemployment-related payouts makes the fiscal hole bigger. (Total tax revenues in Ireland declined by a third in 2010.)

The assumption at the heart of all this was, as the Austrian writer Robert Menasse has put it, "the Germans' idée fixe that all financial policy must be subordinate to battling inflation because inflation leads to Hitler. The fact that, historically, an austerity policy – which helped to make Hitler possible in the first place – lay between Germany's hyper-inflation and the Hitler years, cannot undermine the German fiscal-political myth, nor can, for instance, the fact that the American Fed is continually printing money yet the inflation of the dollar is below that of the euro.

“A press for banknotes: for the Germans that’s a machine that, when you insert paper into it, spits out Hitler. That’s why only Germans are allowed to be near such a machine, to make sure it never gets turned on.”

Withdrawing money from an economy in deep recession makes as much sense as applying leeches to sick people to drain their blood and make them better

Or indeed, as happened to Ireland, that it actually gets turned off, that money is withdrawn from an economy in deep recession. The idea makes exactly as much sense as the old medical practice of applying leeches to sick people to drain their blood and make them better. It made the recession longer, deeper and much more socially destructive than it needed to be.

And yet, the narrative has not changed. The fetish of “hard money” (the sadomonetarist notion that public spending is a frivolous indulgence to be curbed by “tough” measures) is still “common sense” in most media and political discourse. It seems ever thus.

Reviewing Robert Skidelsky’s Money and Government in the current issue of the New York Review of Books, David Graeber summarises the pattern over the centuries: “Always we see the same sequence of events: (1) The government adopts hard-money policies as a matter of principle. (2) Disaster ensues. (3) The government quietly abandons hard-money policies. (4) The economy recovers. (5) Hard-money philosophy nonetheless becomes, or is reinforced as, simple universal common sense.”

This is of course exactly what happened in the euro zone. When the woeful Jean-Claude Trichet was replaced by Mario Draghi, the ECB started, in effect, to print money on a massive scale. This magic money tree is called quantitative easing, which makes it sound like an expensive laxative. It was only for banks and the holders of financial assets.

For the poor, the old slogan still applied: sorry, we’ve run out of money. Politicians and public economists largely played along with the fiction: even while the ECB was printing money on a vast scale, the ordinary citizen must still be led to believe that such a thing is impossible.

In this story, there is no accountability. There is none at a European level – who wants to take on the might of 'the German fiscal-political myth'? – and none domestically

And even through this big increase in the money supply patently did not do what the respected economists said it would – which is to cause inflation – the rest of us are still expected to believe that increased public spending will inevitably cause inflation.

As Graeber puts it, “pretty much all political debate had to set out from a ritual acknowledgment of the perils of government spending. This continues to be the case, despite the fact that, since the 2008 recession, central banks have been printing money frantically in an attempt to create inflation and compel the rich to do something useful with their money, and have been largely unsuccessful in both endeavours.”

Yet most media commentators and mainstream politicians ignore the evidence and hold on to the morality tale in which sin (the Celtic Tiger) was followed by repentance and penance (austerity), which led to redemption (sure we’re all grand now).

And in this story, there is no accountability. There is none at a European level – who wants to take on the might of “the German fiscal-political myth”? And there is none domestically either.

Labour (as it always does) has paid a very heavy price for its role in imposing an austerity that is now acknowledged by its architects to have been “overblown”. But Fianna Fáil and Fine Gael, who never challenged the German narrative and instead obediently inflicted the pain on those least able to take it, will never admit that they got it wrong – even if the Germans do.

This matters, not just because we need to understand the immediate past, but because when the next recession comes, they will do it all again. Austerity remains “common sense” so it will be imposed again, then quietly dropped when it proves disastrous – but not before it has wrecked real people’s lives.

And when things settle down, the idea of austerity as restorative medicine will be common sense again, its obvious truth untarnished by anything so vulgar as evidence.