There is Another Way for Bullied Ireland

As another one of the so-called "PIIGS" countries is being led to the slaughterhouse, it is worth asking whether all the carnage advocated by the European authorities
is really necessary. Ireland is in its third year of recession, and
income per person has already declined by more than 20% since 2007.
Unemployment has more than tripled from 4.3% at the end of 2006 to 13.9%
today.

The baseline projection from the International Monetary
Fund (IMF) is that debt stabilizes at close to 100% of GDP by 2014, but
even that depends on the volatile and sometimes contradictory sentiments
of the "bond vigilantes" - who don't always seem to know what they
want. One day, the bond markets are happy because the government is
cutting the budget and laying off workers; the next day, they relearn
their national income accounting and realize that this will shrink the
economy, and make the deficit and debt burden bigger relative to GDP.

Unfortunately,
the European authorities do know what they want: they want to squeeze
Ireland, they want more fiscal tightening and they want to shrink the
size of the government. And they want it now, even if it means that
Ireland will sink further into recession.

So, it is understandable that the Irish government would resist an agreement with these authorities - which include the European Commission, the European Central Bank and the IMF. The European Financial Stability Facility was set up in May with the proviso that contractionary conditions would be attached to any "bailout".

Is
there an alternative? Yes - in fact, there are many. It is perfectly
feasible for the European authorities to help Ireland recover from its
recession without subjecting the economy - and the people - to further
punishment.

Ireland is a small economy of just 4.5 million people,
with a GDP of about 166bn euros. With a small fraction of the funds
already set aside for this purpose, the European authorities and IMF can
loan Ireland any funds needed in the next year or two at very low
interest rates. We are talking about some 80-90bn euros over the next
three years, out of a 750bn euro fund.

Once these borrowing needs
are guaranteed, Ireland would not have to worry about spikes in its
borrowing costs like the one that provoked the current crisis, in which
interest rates on their 10-year bonds shot up from 6 to 9% in a matter
of weeks. This creates self-fulfilling prophecies in which a debt burden
becomes unsustainable - because the "bond vigilantes" think it might
be.

The European authorities could scrap their pro-cyclical
conditions and, instead, allow for Ireland to undertake a temporary
fiscal stimulus to get their economy growing again. That is the most
feasible, practical alternative to continued recession.

Instead, the European authorities are trying what the IMF, in its July 2010 Article IV consultation with the Irish government,
calls an "internal devaluation". This is a process of shrinking the
economy and creating so much unemployment that wages fall dramatically,
and the Irish economy becomes more competitive internationally on the
basis of lower unit labor costs. This would allow the economy to
recover from the stimulus of external demand (that is, by increasing its
net exports).

Aside from huge social costs and economic waste
involved in such a strategy, it's tough to think of examples where it
has actually worked. And it's even less likely in this case, when you
look at Ireland's major export markets: the eurozone, UK and US - which
don't look like they will be sources of booming demand for Irish exports
in the immediate future.

If you want to see how rightwing and
19th-century-brutal the European authorities are being, just compare
them to Ben Bernanke, the Republican chair of the US Federal Reserve. He
recently initiated a second round of "quantitative easing", or creating
money - another $600bn dollars over the next six months. And today, he made it clear
that the purpose of such money creation was so that the federal
government could use it for another round of fiscal stimulus. The ECB
could do something similar - if not for its rightist ideology and
politics.

While Ireland may seem outgunned in any confrontation
with the European authorities, it is far from powerless. The European
authorities and their banker allies do not want to see Ireland default
on its debt or exit from the euro. This is true for all the "PIIGS"
countries, although they all face different situations. But Ireland has
already lost more, in terms of output and employment, than it might have
lost in a restructuring/default and, possibly, even by an exit from the
euro.

The question is, how much more are the Irish willing to sacrifice in order to satisfy the wishes of the European authorities?