The sovereignty myth

Walk down any high street in Ireland and you will see the outlets of large companies that have their head offices in the UK, and who regard their Irish shops as nothing more than elements of their domestic chains. Some English Premiership teams have more Irish support than all home soccer clubs put together.

92% of Irish primary schools are under the management of an organisation that has its headquarters, and the formulation of its philosophy, in Vatican City, which is in the middle of another nation’s capital. Not too long ago a senior Irish politician could start a debate about whether, spiritually, Ireland was closer to Boston or Berlin.

It’s not entirely fanciful to believe that if “Coronation Street” were to be abruptly discontinued on Irish TV we would have rioting in the streets. Almost one hundred thousand Irish people receive their salaries from US companies established here, in return for which they happily embrace US corporate culture. This includes the understanding that they are expected to work without Trade Union representation, unlike their compatriots in indigenous industries, many of whom are forced to acquiesce to exactly the opposite condition in return for being vouchsafed a job.

None of the above facts has ever given rise to as much as a murmur about the fear of Ireland’s identity being undermined. Yet, when it looks like we are about to be the recipients of necessary fiscal discipline by certain countries with whom we freely entered into a monetary union, and who now want to save that union in order for it to continue in operation for our mutual benefit, we hear no end of bleating about how our sovereignty, no less, is being attacked and undermined.

As my American friends might say - give me a break.

OMG! A new referendum

There is a growing expectation that there will have to be a referendum in Ireland on EU treaty change, to allow for shared decision making on budgets and taxation by the countries within the Euro zone, which is known as fiscal union. Up to now the Euro zone has only had monetary union, which has meant that member countries have ceded their powers to set interest rates or regulate the money supply to the European Central Bank, but were left free to decide on such matters as taxation rates and whether or not the national budget should be balanced.

For some, like the current government, the need for a new referendum is unwelcome news. It is likely to be divisive and there is no guarantee it will be passed. Because of the attitude of certain of our Euro zone partners, most notably Germany and France, it is looking likely that Ireland’s not agreeing to fiscal union could create serious issues about the actual survival of the Euro as a hard currency and / or the part that Ireland might play in a re-designed European single currency system.

Readers of Stack Six will be aware that we follow an enthusiastic European line here. It is not too much to claim that the development of the European Union and Ireland’s place in it have been the most significant macro events that have occurred during this writer’s lifetime, having been born just a few short years after the end of World War II.

It is easy now to forget the changes that were forced upon the Irish Republic as a condition of entry to what was then known as the Common Market, and which evolved into the European Union. Some examples include: the end of the rule that meant that women had to resign from all Civil Service and many other jobs on getting married; the repeal of legalised discrimination that existed against gays; an end to corporal punishment in schools; a ban on capital punishment; and a general requirement to abide by the anti-discrimination measures of the Treaty of Rome, which set the whole thing off.

Even the NCT car test, which has contributed, along with a zero tolerance for drunk driving, to a halving of the annual rate of road deaths in Ireland since it was introduced in January 2000 [the actual reduction between 1999 (413 deaths) and 2010 (211 deaths), is 49%], was only established in Ireland because of an EU directive. It is easy to argue that we would have moved with the times in regard to these matters anyway but our history does not give any scope for comfort in this regard – we needed that external stimulus.

All relationships suffer from time to time. Those that are worth keeping are also the ones that are worth working on when difficulties arise. Ireland’s membership of the EU falls squarely into this category. An important element of our association with Europe, and a highly desirable facility in its own right, is our use of the Euro as the unit of currency. It has given us significant trade benefits, a defense against speculative attack on what would be our own ‘soft’ currency if we were not part of a currency bloc, very low mortgage rates, elimination of currency exchange costs and risk for travelers and businesses in the rest of the Eurozone, pricing transparency for same, and an additional incentive for US and other foreign direct investment into Ireland.

All of that is worth holding onto.

Martin Wolf on The Great Economic Crisis

Martin Wolf

I would like to share an article that appears in yesterday’s (Nov 30^th 2011) Financial Times, by Martin Wolf, that paper’s chief economics commentator, and an associate editor.

To my thinking, this article encapsulates well where we are at the moment in terms of both Ireland and the global economy. Those whose job or inclination it is to look out for their particular national interests, especially politicians, need to understand that, no matter what their ideological position, we now live and work in a global economy, for better or worse. Actions that are taken or advocated without that in mind cannot make a useful contribution.

Two comments by Wolf stand out. They are

“Fiscal indiscipline did not cause this crisis. Financial and broader private sector indiscipline, including by lenders in the core countries, was even more important”.

and

“Ireland can adjust as a small, open economy by displacing tradeable output elsewhere, where necessary. If Italy and Spain both tried to do this, they would be engaging in a costly and probably hopeless effort at beggaring their neighbours: costly, because the main way to do so would be to drive down wages via yet higher unemployment; and now hopeless, because the competitive advantage of Germany is so strong”.

These stand out not because they allow us to further castigate bankers, builders and regulators, there’s been enough of that, but because they should provide confidence for those politicians and civil servants who are charged with guiding us through these stormy waters.

Wolf has convinced this writer that there is no easy answer to the current crisis. However, an understanding of what’s going on is a good place to start when looking for the solution.

Martin Wolf’s article can be read here. The link is to an online magazine in Australia (Business Spectator) which carries it. The Financial Times website sometimes requires registration, which will deter at least some potential readers.

This is an important article.

Nouriel Roubini thinks Ireland 'has a chance'

Nouriel Roubini, the US Economics professor who has gained fame for predicting the housing bubble, the disaster that would come of poorly understood mortgage backed securities and the eventual recession, and who is now best known for his brutally frank judgements on current economic matters, actually had some kind words for Ireland recently. He believes that we are “in with a chance” because of our long standing policy of attracting high-tech foreign direct investment.

You can hear what the professor has to say in the video above, which was recorded during a discussion on the margins of an economic conference in Australia.

For what it’s worth, the Dutch far right also seems to give Ireland the benefit of the doubt, even if by default. They have been quoted as calling for the expulsion of Greece, Italy and France from the Eurozone, the first two because they have blotted their copybooks and France because Nicholas Sarkozy is seen by them to be interfering too much in the economic affairs of other nations. To illustrate that logic or consistency was never a far-right area of strength, they say nothing about Germany, whose Chancellor has, if anything, been even more prescriptive to her Euro neighbours than the French president.

Should we be worried that the Dutch far right has not singled out Ireland? What are we doing that would please them, or can we hope that they just forgot we were members of the GIIPS group (this is the format I will be using for this group of countries – acronyms that make up pejorative terms are not only intellectually lazy but also fail to add anything helpful to the debate)?

One way or another, the Euro story keeps on rolling.

18 yo boy racers get control of Ferrari

A piece by John Waters in today’s Irish Times seems to claim that Ireland’s acceptance of the Maastricht treaty, which gave us Euro entry along with low interest rates and which tied our economy to those of Germany and France, is the root cause of the fiscal and monetary problems we suffer from at present.

This is a nonsensical, disingenuous argument. France still enjoys triple A ratings on its government debt and Germany has one of the strongest economies on the planet. For a while Ireland, too, had money to burn. Unfortunately, burn it we did.

John is right, though, when he talks of collective amnesia. If we didn’t suffer from it we would remember that, at the time of Euro entry, each country joining had to convince the EU that it had its finances in proper order, by having national debt and budget deficits within set boundaries. It is reasonable to presume that they were meant to stay that way. That the common currency meant we no longer had the ability to devalue our way out of high inflation is not new news. It was drilled into us, over and over again at the time, that this was going to be the case.

It seems central Europe took it for granted, or was convinced by our negotiators, that the Irish government, its Finance department and their economic advisors understood these fundamental economic principles. But it appears they did not.

What happened in practice was that the good old Republic of Ireland went ahead and took advantage of all the nice things that Euro entry had to offer, such as significant trade benefits, defense against speculative attack on our currency, very low mortgage rates (which we abused), elimination of currency exchange costs and risk for travelers to the rest of the Eurozone, pricing transparency for same, an additional incentive for US foreign direct investment into Ireland - and ignored the responsibilities it brought, the most important of which was to control our inflation.

To illustrate the point, imagine what it might be like if a group of eighteen year old boy racers were given control of a souped up sports car, for example a Masarati or a Ferrari, after having convinced the provider that they were actually mature, fully trained, experienced professional drivers.

The sports car in this analogy is the highly tuned European economy that German (and Dutch, and Nordic) prudence and efficiency had nourished over the years since the last war, and which was well known to be predicated on the control of inflation so that it is positive (deflation is also bad) but low.

The supplier is the European Union and you can work out for yourself who the boy racers are.

We broke every rule in the book. 120% mortgages, lending for everything from property development to foreign homes to whatever you’re having yourself. Spending went completely out of control. State capital projects routinely came in so far over budget that the numbers were shocking. We had a banking compliance system that became a global joke. We had a government that bought its way through successive elections without any regard for, and it seems now, no understanding of what an inflation differential between us and central Europe would eventually lead to.

All is not lost, however. We do seem to have woken up and, as everything is relative, we actually now start to look good by comparison to the most errant Euro member, Greece. With a bit of luck this present crisis will allow us to learn by bitter experience.

With a bit more luck we will be allowed to stay in the Euro, despite our demonstration of an embarrassing immaturity when it comes to the most basic economic principles.

And by the way - entering into a mutually beneficial multinational, legally binding agreement, that the other parties expect your country to adhere to, does not constitute loss of national sovereignty, no matter what the venerable Olivia O'Leary says, as quoted in John Waters’s article.

Democratic deficit - what democratic deficit?

In the beginning there were 17 separate currencies where there is now only one, the Euro. This currency unit was set up as a result of the Maastricht treaty, which was democratically tested in Ireland by means of a referendum. The agreement, voted on and passed by the Irish people, included that the common currency would be monitored by the European Central Bank, now known as the ECB.

Monitoring means, and was always understood to mean, ensuring as far as possible the continued viability of the currency and the setting of the interest rate that would be attached to it, which affects most particularly the rate of inflation in the Euro zone and the exchange rate of the Euro against other global currencies.

Sixteen other states of the European Union have a stake in all of this. They were, and are, entitled to assume that ratification of the Maastricht treaty would mean that all member states would abide by the rules by which the common currency was set up, and that all members would accept the oversight of the ECB, which was specifically charged with that task in the Maastricht treaty.

In the olden days if a country found it had allowed its inflation rate, and therefore its competitiveness, to exceed what was prudent, its currency could be devalued either explicitly, or stealthily by market forces. This solution was not available, and was never going to be available in terms of their economic relationships with the other Euro zone states, to those countries that had signed up for the Euro.

All this was known at the outset. It was understood, or should have been understood, by the economists whose job it is to advise the finance ministers and compliance agencies in the various countries. And the same economists would not exactly need to have been qualified to the level of Nobel Prize winners to be able to come to grips with this principle.

What has now happened is that a number of member states of the Euro zone have taken their eyes off the ball to the extent that they have allowed inflation to increase well beyond the rate that has been achieved in some other Euro countries, most notably Germany, so there is now a serious imbalance in competitiveness within the Euro zone. Not only that, but a number of these same countries have either borrowed more than they can afford to repay or have allowed their banks, as in the case of Ireland, to lend too much, cause a property bubble which has burst, and then have their unsustainable wholesale loans guaranteed by the state.

These developments have a direct and serious bearing on the viability of the Euro. Default on sovereign debt by a Euro member state would be devastating for it. However, those Euro zone countries that have been able to keep their inflation rates and borrowings at acceptable levels, such as Germany, France, The Netherlands and Finland, and are now clamouring for the ECB to do its job and bring pressure to bear on these errant members to rectify the situation by living within their means and in other ways acting responsibly, are being accused of contributing to what has come to be characterised as a “democratic deficit”.

I’m afraid I don’t see it, this democratic deficit. Even when Nicholas Sarkozy lashes out at politicians in Italy and Greece in his frustration at seeing some of their number playing local political games with the Euro crisis, it hardly qualifies as an all-out attack on the sovereignty of that state. It might be a call for all concerned, even at this late stage, to live up to their legal and moral obligations as representatives of a country that freely, and democratically, signed up to the Maastricht treaty, and were happy indeed to take advantage of the very significant trading, foreign direct investment inflow, low interest rates, elimination of currency exchange overhead, reduction of exchange rate risk and the pricing transparency benefits of the monetary union that have been there since its inception, and which the prudent and compliant members would like to see continue. Instead of castigating them, we might take a leaf from their book.

Mr. Fintan O’Toole, c/o The Irish Times newspaper, please take note.

Ireland is not Greece

Mario Draghi, the new president of the European Central Bank, having taken over from Jean-Claude Trichet, has put the current debate about the possibility of Ireland getting a discount on the financial responsibilities it has assumed for the debts of its banks nicely into context.

We are indebted to Laura Noonan of the Irish Independent for asking the question, at Draghi’s first regular monthly press conference as ECB president, as to whether or not the Greek example, where banks with exposure to Greek sovereign debt have been persuaded to take a write-down of 50%, could be used as a precedent for Ireland. His answer was as follows:

“One has to keep in mind that the Greek situation is exceptional and unique - and unique. The sovereign signature, in spite of the recent turmoil, remains a pillar of financial stability, in the Euro zone and in the rest of the world. We are confident that the Irish government could comply with the measures announced, and the Irish government itself said it will do whatever it takes. So one has no reason to doubt about the commitment of the government”

In other words, Ireland has the opportunity to make a serious and very valuable contribution to resolving the current crisis in the Euro zone, and in so doing reassume its position as a member of the core, committed group of European Union member states. It can do this by reinforcing the value that has always been placed on a guarantee by a sovereign state, and in this case one that also happens to be part of the Euro zone. Greece’s misfortune is not that it does not want to do this; it is that it cannot.

Those of the Irish political opposition who are calling for a unilateral default by the government, whether it’s on Anglo Irish bank bonds or on Irish sovereign debt, either do not understand the consequences of what they call for or, much worse, are prepared to cause serious if not fatal damage to the European project, of which the Euro currency is a major component. Theirs is a desire to achieve a short term gain at a cost that represents extremely serious long-term damage. This damage is not even related to the regard or otherwise in which we would be held by our fellow Europeans, but rather to what would result from a grave setback to, or failure of, the European Union. See this previous StackSix entry to get a sense of the material significance of the EU to Ireland.

The historical, political and philosophical importance of it goes much, much deeper than that.

Also see this Financial Times article on "Why it's worth keeping the EU dream alive". Then read the comments for a lively debate on the issue.