Some features of the current scene are without precedent: a high-tech multinational banking crisis, inextricably linked to failing sovereign debt within a currency union that has no coherent fiscal structure.
The seeds were sown at the outset. It is patently absurd, for example, to set a single interest rate and impose it on sixteen democratic countries whose fiscal objectives and policies are as fundamentally diverse as their temperaments, languages, cultures, natural resources and traditions – characteristics that are inevitably reflected in their social and political values and priorities. Binding them together in the straitjacket of a common currency with no manoeuvrability, when the world economic climate is unpredictably volatile, is a recipe for dissension, fragmentation and, ultimately, strife.
Ireland: prosperity built on straw
Ireland is the classic instance of what goes wrong when a unique blend of national characteristics and circumstances doesn’t fit the mould into which it has been cast. Ireland has two distinct economies. Its private sector continues to flourish with exports per capita close to Germany’s and industrial output up 12 per cent in the past 12 months, due in large part to dogged adherence to its low-tax strategy.
Ireland’s ruinous public sector tells a different story. The putative cuts in public service pay are riddled with exemptions for senior civil servants. Pay levels across the spectrum, including even nurses and teachers, remain significantly higher, even after cuts, than averages in the developed world. All this, coupled with scarcely believable extravagance and profligacy on the part of bureaucrats and party officials, have contributed to an annual budget deficit of 30 per cent of Ireland’s GDP and an unemployment level of 14 per cent.
its baseless credit mountain was creating a mirage of prosperity
While its baseless credit mountain was creating a mirage of prosperity the European Central Bank kept interest rates low, mainly to suit Germany’s export-driven priorities, when what Ireland really needed was an interest rate hike to cool an economy over-heating to stewing point. The result? A property bubble that left a mass of debt-strewn debris when it burst.
When French and German leaders complain that Ireland’s low tax regime amounts to ‘’unfair and harmful tax competition’’, remember that the French are Europe’s masters of anti-competition. Its government, with impunity, takes huge stakes in major companies like EDF to exploit its monopoly power to acquire electricity generation and supply companies in other countries – while shutting its doors to foreign investors.
No country is blameless
When, for political reasons, the EU’s vetting agency turned a blind eye to the accounting chicanery that let Greece into the fraternity, market investors permitted it to borrow at low ECB rates on the strength of Brussels backing, ignoring the underlying instability of borrowing cheap for an insanely unsustainable spending programme.
The Spanish abused years of easy credit in a frenzy of property speculation in which profitable family businesses were sold off to raise cash to buy property at any price. Result? Spain now has the highest per capita mortgage liability in the EU. The ultimate stalemate: unsaleable real estate held as collateral for toxic mortgages. Foreclosure would be an exercise in futility.
The best pointers to survival strategies are to be found outside the Eurozone in places like Iceland, where bank debts were over 6 times GDP. Their government brazenly announced that, while they would protect domestic deposits, there simply wasn’t enough money to repay all the debts the bankers had run up. The pain was sharp, but not prolonged, and its economy is back on track. In Sweden, the argument that tax cuts mean vicious spending cuts was exposed as false. Essential services have been protected in the face of a significant lowering of taxes. Consumer confidence is at a 10-year high.
Trying to achieve economic harmony between member states with structurally embedded disparities doesn’t work. It was all too visible at the outset. Few were looking.