The Irish people expected to pay in austerity cuts
for their banks' sins have another option. Reject
the ECB and IMF, ditch the euro
by Dean Baker
November 22, 2010
When a firefighter or medical team make a rescue, the person
is usually better-off as a result. This is less clear when
the rescuer is the European Central Bank (ECB) or the IMF.
As a result of bailout conditions that will require more
cuts in government spending and tax increases, the
unemployment rate is almost certain to go higher. The Irish
people are likely to wonder what their economy would look
like if they had not been rescued.
The pain being inflicted on
completely unnecessary. If the ECB committed itself to make
loans available to
mechanism entirely within its power, then
no serious budget problem. Its huge projected deficits stem
primarily from the combination of high interest costs on its
debt, and the result of operating at levels of economic
output that are well below full employment - both outcomes
that can be pinned largely on the ECB.
It is worth remembering that
model of fiscal probity prior to the economic meltdown. It
had run large budget surpluses for the 5 years prior to the
onset of the crisis.
of control government spending; it was a reckless banking
system that fueled an enormous housing bubble. The economic
wizards at the ECB and the IMF either couldn't see the
bubble or didn't think it was worth mentioning.
The failure of the ECB or IMF to take steps to rein in the
bubble before the crisis has not made these international
financial institutions shy about using a heavy hand in
imposing conditions now. The plan is to impose stiff
austerity, requiring much of
unemployment for years to come as a result of the failure of
their bankers and the ECB.
While it is often claimed that these institutions are not
political, only the braindead could still believe this. The
decision to make
Spain, Portugal, Latvia and elsewhere, pay for the
recklessness of their country's bankers is entirely a
political one. There is no economic imperative that says
that workers must pay; this is a political decision being
imposed by the ECB and IMF.
This should be a huge warning flag for progressives and, in
fact, anyone who believes in democracy. If the ECB puts
conditions on a rescue package, it will be very difficult
for an elected government in
conditions. In other words, the issues that
will be able to decide are likely to be trivial in
importance relative to the conditions that will be imposed
by the ECB.
There is no serious argument for an unaccountable central
bank. While no one expects or wants parliaments to
micromanage monetary policy, the ECB and other central banks
should be clearly accountable to elected bodies. It would be
interesting to see how they can justify their plans for
unemployment for years to come.
The other point that should be kept in mind is that even a
relatively small country like
Specifically, they could drop out of the euro and default on
their debt. This is hardly a first best option, but if the
alternative is an indefinite stint of double-digit
unemployment, then leaving the euro and default look much
The ECB and the IMF will insist that this is the road to
disaster, but their credibility on this point is near zero.
There is an obvious precedent. Back in the 2001, the IMF was
child of the neoliberal crew before it ran into
But the IMF can turn quickly. Its austerity programme
lowered GDP by almost 10% and pushed the unemployment rate
well into the double digits. By the end of the 2001, it was
politically impossible for the Argentine government to agree
to more austerity. As a result, it broke the supposedly
unbreakable link between its currency and the dollar and
defaulted on its debt.
The immediate effect was to make the economy worse, but by
the second half of 2002, the economy was again growing. This
was the start of five and a half years of solid growth,
until the world economic crisis eventually took its toll in 2009.
The IMF, meanwhile, did everything it could to sabotage
bogus projections that consistently under-predicted
the euro would have consequences, but it is becoming
increasingly likely that the pain from the break is less
than the pain of staying in. Furthermore, simply raising the
issue is likely to make the ECB and IMF take a more moderate position.
What the people of
that if they agree to play by the bankers' rules, they will lose.
Dean Baker is the co-director of the Center for Economic
and Policy Research (CEPR). He is the author of The
to Stay Rich and Get Richer <www.conservativenannystate.org>
and the more recently published Plunder and Blunder
Rise and Fall of The Bubble Economy. He also has a blog,
"Beat the Press," where he discusses the media's coverage of