Right now neo-liberals, while once again dolloping out trillions to corporations, are not talking about the day after corona, the trend to austerity is palpable. Germany has already declared that they want the corona deficit paid down in a few years and to go back to the Black Zero. And what Germany wants, the EU will have to do.
Zack Breslin is a freelance writer and the author of Ireland’s 2020 Election: A Highly Biased, Ideologically Partisan Approach
The world is in the grip of a severe economic crisis. What the IMF now refers to as “The Great Lockdown” is leading to a global recession more severe than at any time since The Great Depression. While Ireland has so far avoided the worse of the tragic scenes that the pandemic has wrought upon some, it is clear that the country will not escape the economic fallout.
With businesses shuttering across the country, unemployment reached 16.5% last month as nearly 400,000 people applied for the new Covid-19 unemployment payment. At the same time, government revenues have fallen precipitously. But to prevent unmitigated economic disaster, the state must counteract the fall in economic activity in the private sector by continuing to increase expenditure. The result is a likely “€22 billion hole in the public finances”.
The last time Ireland endured a severe economic crisis, the country faced years of crushing austerity. As the Irish government undertook significant financial efforts to protect the financial sector, the cost was borne by ordinary people as vital public services were slashed and a raft of new taxes were introduced. Might a similar outcome follow from the current crisis? Is Ireland set for a return to austerity?
In many ways things are different this time. For one, this is a very unusual type of economic crisis. The banking crash of 2008 was a case of the financial sector bringing down the real economy. Today, our difficulties originate in the real economy, a result of the lockdowns that have been necessary across the world. In 2008, the real economy was depressed in order to save the financial sector. This time around, it is a depressed real economy that is likely to cause significant difficulties for the financial sector.
As a result, the particular congruence of interests, ideology and power that prevailed following the 2008 crash is not necessarily in existence today. The financial sector may still hold sway over the economic decisions that governments make but it is questionable whether austerity policies would be their preferred response this time around, at least in the medium term. The austerity that the bankers and their allies in institutions such as the ECB and IMF demanded last time around could today prove to be counter-productive to their interests.
Furthermore, neoliberalism—the ideology which formed the basis of austerity—is in a comparatively much weaker position than in 2008. An economic nationalist occupies the White House while the UK is seeking to withdraw from one of the key pillars of neoliberal capitalism, the EU. Both countries have pursued massive programmes of fiscal expansion in response to the covid-19 pandemic, meaning that the two global powers that were once among the strongest advocates of neoliberalism have weakened their commitment to that doctrine. Neoliberal ideology is in decline.
One reason for this is that, as we look back on the austerity policies of the post-2008 era, it is clear that they were far from a success, even in terms of lowering the debts of the countries that pursued them. Many of the countries that followed austerity policies ended up with higher levels of debt than before they implemented austerity, as well weakening the capacity of the state to mitigate against the various social ills that capitalism brings. The failure of austerity has even been recognised by the IMF, previously one of its most ardent backers, with a well-publicised report in 2013 admitting that they had got the economics of austerity wrong. Even the EU appears to recognise that austerity might not be an appropriate response to the current economic crisis, as strict EU rules pertaining to spending and borrowing have been suspended as nations grapple with theovid-19 crisis.
The apparent rejection of austerity politics at the international level finds its echo in Ireland. The Taoiseach (Irish Prime Minister), Leo Varadkar, has stated that he wants to avoid another era of austerity and hopes that, given the strong state of the economy prior to the crisis, the recovery should be less painful than it was following the banking crisis. His preferred policy is reportedly to increase spending and cuts taxes in order to stimulate economic growth. This would be paid for by increased borrowing on financial markets. It is an approach that appears to be shared by Fine Gael’s prospective coalition partner, Fianna Fáil, and negotiators hammering out the terms of coalition have done so on the basis that a future coalition would not seek to implement austerity measures.
According to reports in the Irish Times, the two parties “envisage using economic growth to tackle a deficit caused by extra spending to deal with Covid-19 rather than austerity measures seen during the financial crash.” This is perhaps unsurprising as, leaving aside the economic efficacy of austerity, the likely precarious position of the proposed coalition means that implementing austerity could prove to be impossible in any case, all the more so given the strong showing of the anti-austerity Sinn Féin in the recent election. The political landscape is thus quite different to that in the aftermath of the 2010 bailout when the Fine Gael/Labour coalition had a commanding majority that gave them had a free hand to implement the troika-dictated austerity programme.
With the Irish economy set to contract by 7 or 8 percent this year, the large deficit necessitated by the response to Covid-19 can only be sustained if Ireland returns to growth in 2021. The predictions are that the country will do so, with the IMF’s recent World Economic Outlook report predicting a robust 6.3% growth in 2021 (although Irish GDP statistics are highly problematic). Such recovery will be reliant as much on external factors as it is by what the Irish government does. The cliché that Ireland is a “small, open economy” very much holds true and, as such, the country’s economic fortunes are contingent on global trade and on global financial markets.
Currently, the outlook for the world economy is grim, to say the least. The Great Lockdown means that some of Ireland’s most important trading partners will experience severe recessions this year. The IMF predicts that the UK economy will shrink by 6.5 percent while the US will contract by 5.9 percent. Crucially for Ireland, the eurozone is set to fare even worse, with economic activity falling by 7.5 percent. Recovery for these economies is forecast for 2021 but this is predicated on the assumption that the second half of 2020 sees the pandemic contained and the lockdowns gradually lifted. This is far from certain.
Even if the pandemic is brought under control and we see a resumption of normal economic activity over the next few months, Ireland would remain in a somewhat precarious fiscal position. Unemployment would be likely to remain high throughout 2021 (the IMF anticipates this at being nearly 8%) and the debt to GDP ratio would rise significantly. This could make it more expensive to borrow from international markets, and while Ireland currently has no problem raising the money it needs (it recently borrowed €6 billion at an interest rate of just 0.24%), there are some concernin signs that global investors are starting to worry about Ireland’s fiscal position. The highly influential pro-market US think-tank, the Heritage Foundation, has issued a warning to Ireland, noting that there was a “real risk that the government might . . . undertake deficit-spending measures in an attempt to mitigate the impact of its economic lockdown”.
This could be interpreted as a timely warning that the solvency of the Irish state remains reliant on the willingness of international markets to lend at low interest rates. Despite the current ease with which the country can borrow, such willingness should not be taken for granted. Last year, the head of the National Treasury Management Agency, the body that issues debt on behalf of the state, warned that Ireland was an unusual country in that the “foreign capital we borrow comes from investors who are all overseas” and that these investor can “change their mind…[or] they can charge you more…[meaning] that we are quite exposed”. His concerns are shared by the Irish Central Bank which last year questioned the sustainability of Ireland’s fiscal position and warned that “a negative economic shock could cause the deficit and debt to start rising again”.
We now have our economic shock and while Ireland appears to be dealing with the pandemic better than many others, its fiscal position is actually worse than most. National debt per capita is higher than anywhere else in Europe and has only been sustained due to a combination of high growth, larger than expected tax takes from the multinational sector and, most importantly, low interest rates. If international investors become overly concerned about the extent of extra spending the government undertakes then Ireland’s cost of borrowing could rise once more, particularly as the likely context will be one in which government revenues will be falling.
In the short term this is unlikely. The European Central Bank (ECB) launched a €750 billion bond purchasing program last month and this has not only calmed the markets dealing in government bonds but also meant that eurozone governments have had some space to expand the public spending needed to battle the economic effects of the lockdowns. The result for Ireland is that the state has been easily able to continue borrowing cheaply, thus funding whatever spending the government needs to commit to.
But this does not mean that problems will not arise in the future and there are fears that The Great Lockdown could yet evolve into a general banking crisis. If the recession is prolonged, European banks, many of whom are yet to fully recover from the 2008 crisis, may be in trouble as struggling businesses fail to make repayments on their debts. Such a situation could even result in a repeat of the eurozone crisis and ultimately lead to harsh austerity measures in Europe’s peripheral economies, including Ireland.
For now, the EU and the ECB have prevented this and, in a reflection of the extraordinary times we live in, the recent €500 billion package agreed by EU finance minister will not come with the usual stipulations of tax hikes and spending cuts for debtor nations. But this is a temporary relaxation of the rules and, given the hawkish orientation of countries such as Germany and the Netherlands, it remains extremely unlikely that in the long term the EU’s fiscal rules will be overturned. If countries such as Italy or Greece require stabilising loans in the future, these will probably be conditioned on the implementation of austerity measures.
This raises the prospect that as the EU’s peripheral nations start their recoveries from The Great Lockdown, they will do so with increased debt levels and against the backdrop of austerity. They would find it extremely difficult to raise money on international bond markets and the eurozone crisis could be reignited. Investors might once more start to speculate on a breakup of the eurozone and we could see a full-blown sovereign debt crisis spreading to multiple European nations.
Given Ireland’s extremely high levels of debt, the state might not be immune to the contagion. Investors could seek to offload Irish bonds, with the result being that the ability of the Irish government to issue new loans at sustainable rates of interest could be much diminished. In such a scenario, there would be calls for the Irish government to cut spending in order to demonstrate to the market that it has the ability and will to meet its loan obligations. The Irish government may feel as though it has no choice but to pursue some austerity measures in order to reassure the market. And if the Irish government struggled to lead reassure investors, it could be forced to draw money from the European Stability Mechanism. This too would necessitate austerity as it is probable that the relaxation of conditionality will not last long beyond the current lockdown phase.
As a member of the eurozone, Ireland does not have full control over its macroeconomic policy. The state cannot expand its supply of money in a way that those with their own currency can. Instead, Ireland is reliant on a central bank that in the past has shown itself to be fiscally conservative to the extreme. As such, Ireland’s economic sovereignty is somewhat of a mirage and current fiscal policy is predicated on a number of external factors that the Irish government has only a marginal influence upon.
Ireland’s leaders, and future leaders, currently promise that the country will not return to austerity. Such promises should be seen, at best, as aspirational. If The Great Lockdown lasts longer than expected and government debt begins to pile up, if global growth falters in 2021 or if there is a re-emergence of the eurozone crisis, Ireland could once more be faced with a familiar choice: default or austerity.