Ireland should 'do an Argentina'

Ireland should 'do an Argentina'

 

      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

 

Guardian (UK)

 

November 22, 2010

 

http://www.guardian.co.uk/commentisfree/cifamerica/2010/nov/22/ecb-ireland-bailout-argentina

 

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.

 

Ireland is currently experiencing a 14.1% unemployment rate.

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 Ireland by the ECB/IMF is

completely unnecessary. If the ECB committed itself to make

loans available to Ireland at low interest rates, a

mechanism entirely within its power, then Ireland would have

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 Ireland's government was a

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. Ireland's problem was certainly not out

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 Ireland's workforce to suffer

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 Ireland's workers, along with workers in

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 Ireland to reverse these

conditions. In other words, the issues that Ireland's voters

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

subjecting Ireland and other countries to double-digit

unemployment for years to come.

 

The other point that should be kept in mind is that even a

relatively small country like Ireland has options.

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

more attractive.

 

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

pushing Argentina to pursue ever more stringent austerity

measures. Like Ireland, Argentina had also been a poster

child of the neoliberal crew before it ran into

difficulties.

 

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

Argentina, which became known as the "A word". It even used

bogus projections that consistently under-predicted

Argentina's growth in the hope of undermining confidence.

 

Ireland should study the lessons of Argentina. Breaking from

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 Ireland and every country must realise is

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

Conservative Nanny State: How the Wealthy Use the Government

to Stay Rich and Get Richer <www.conservativenannystate.org>

and the more recently published Plunder and Blunder: The

Rise and Fall of The Bubble Economy. He also has a blog,

"Beat the Press," where he discusses the media's coverage of

economic issues.

 

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