Agree or disagree with him, Morgan Kelly’s analysis in the Irish Times last week is a must read. Closing Ireland’s €20 billion deficit by €6 billion in 2011 spending is all fine and well, but it won’t do enough to stave off the EU/IMF he argues.
Kelly contends that bad news from AIB and BoI will drip-feed over coming months (as more household mortgages go bad) and Ireland will be unable to borrow unaided in 2011.
According to Kelly, Ireland is insolvent but still liquid. The country still has enough cash in the bank to struggle on into 2011 but it has no underlying capacity to repay the liabilities it has amassed, much of them accruing from the bailout of Anglo, AIB, BoI etc.
September 2010 saw Ireland replace debts it accrued to foreign banks (dating back to the 2008 guarantee) with debts to the European Central Bank. So now there’s no longer any chance to default to foreign bondholders. If we can’t repay from here on the default would be to our own Central Bank.
And we can’t repay, according to Kelly, and Ireland will cede control to the EU and IMF. The IMF/EU will dictate the rate of interest on a bailout fund. Kelly reckons the ECB might impose a high interest rate to make an example of Ireland, lest anyone in Madrid or Rome think they can trick around with high budget deficits, thinking the ECB is a soft touch.
If the interest rate on the bailout fund is higher than 2 per cent Ireland won’t be able to repay the bailout monies, according to Kelly. Ireland’s only chance is to achieve a high rate of GDP growth.
According to Constantin Gurdgiev the EU/IMF will impose a rate of around 4.5 per cent and Ireland will have to achieve an annual growth rate higher than 6.5 per cent to meet the repayments.
For anyone with an eye to Ireland’s environment, the idea of 6.5 per cent year-on-year economic growth is a destructive cocktail. A key part of the problem in the ten years to 2007 was the breakneck levels of growth.
To boot, Ireland is under growing pressure to sell assets: Coillte, Bord na Mona, Bord Gais, Eirgrid, ESB and RTE are increasing on the line. Sure, semi-states have their flaws, but retaining them in State ownership allows room for reform and change. And this contrasts with the Eircom experience, where ownership by venture capitalists has proved a recipe for asset stripping, cut-and-run profit-taking, and something of a come-what-may attitude to longer term consequences.
Eamon Ryan was on Friday’s Drivetime programme with Mary Wilson on RTE Radio One making the pitch to retain ESB et al. (There’s an irony here: a considered stance by Ryan on the banks and he wouldn’t be fighting such a rearguard action on sale of the semi-states.) What now for the semi-states if we enter an era where the control held by Irish politicians is much reduced?
Growth and Debt
Annual economic growth rates of 6.5 per cent – which Gurdgiev regards as a minimum to avoid default – are the last thing any western country should be striving after. GDP growth brings adverse environmental consequences because more production, consumption and disposal lead to greater use of resources, higher levels of carbon dioxide, and increases in other pollutants.
The problems with growth were signalled years ago by Robert Kennedy and charted in detail recently by Tim Jackson . As summarised elsewhere on this blog, there is a level of wealth beyond which the chief consequence of further growth is environmental and societal harm – and that level of wealth Ireland reached in the 1990s.
But under the yoke of debt Ireland ‘needs’ GDP growth to pay off borrowings – and it is forced to keep expanding its economy so that higher levels of productivity and profits might at some point overhaul the debt payments.
As compound interest requires more to be paid back than was lent out, the growth imperative takes centrestage. All economies Pay Day Loans have to swell under the growth/debt paradigm – and the amount by which each country’s economy must expand has a lot to do with how indebted it is.
The problem doesn’t stem so much from GDP growth itself but debt-based finance that we have allowed take hold.
If debt-based finance is treated as sacrosanct, as Richard Douthwaite noted many years ago, the world will be unable to escape the growth/depression cycle and find a type of economy that is actually sustainable over the long term. We cannot expand our economies and reduce the emissions brought about by that expansion. Yes we can have one of them – but not both.
Restructuring debt and banning compound interest
This is being missed currently. The pressure now on Ireland to sell assets and swell its economy is just a symptom of a failing system. Viewed against the map of Ireland, the debt/growth bind is more glaring than Greece, Portugal, Spain and Italy, but the same problem has been – or is being – visited on these countries too.
Phasing out debt-based finance is the only way to get out of the requirement for economic expansion, and once that’s gone there’s no longer the compulsion to grow a country’s economy to repay outstanding debt.
Does banning the charging of compound interest by 2015 or 2020 sound radical? A longer historical perspective tells a different story. Many ancient societies had a better understanding of the consequences of compound interest than we do, banning usury for example. Unlike us, there was a greater acceptance that there is not always more and more, that finite resources cannot be made infinite.
Fiddle with a fantasy, or acknowledge the fact of limits
It is POSSIBLE for the Irish economy to grow at 6 or 7 per cent a year. I’m not disputing this. In the same way it’s possible for Ireland’s politicians to buy into the notion of high growth in future years. Indeed, most of them are already doing so, saying that they believe all will be ‘manageable’ if certain budgetary cuts are made.
But this does not take from the fact that such growth is undesirable. Our financial system should merely be a tool by which society supports itself, not a bind that locks humanity into self-destruction.
Continuing to put economics ahead of environmental considerations simply because of the way we’ve arranged our financial system is cutting the branch we sit on.
Societies have collapsed before after undermining their environments, stretching right back to ancient civilisations in the Indus Valley and Middle East.
Surges by European countries to exploit resources for GDP growth will harm Europe’s environment – and the EU is supposed to take a global lead here, being the longest-standing offender when it comes to environmental damage.
The challenge for Irish politicians is to make common cause across other European countries. Negotiations over debt restructuring and phasing out compound interest won’t be easy. But if Europe is to lead it has to do just that.
After the failed Copenhagen climate conference European politicians expressed dissatisfaction with how the US, China and others turned their backs on climate justice.
Europe’s leaders know that economic growth – other than that which enables the world’s poor to attain a comfortable standard of living – takes from those same people they profess to help. The more growth among those who already have plenty, the further the planet’s resource carrying capacity is exceeded, and the further richer groups of nations – like Europe – turn their back on their supposed priorities.
There a clear link between environmental and financial stewardship. Very recent history has highlighted the need for robust regulation across all members of the eurozone. This wasn’t appreciated centrally – in Frankfurt, Brussels or Berlin – as well as in Athens, Dublin or Lisbon.
The question now is whether Frankfurt, Brussels and Berlin will repeat the same mistake again, overlooking what actually happens in member countries, this time leaving Europe and beyond in an unfixable mess of runaway emissions and car-crash climate change.