At the end of March the Fine Gael/Labour Government announced a €24 billion bailout for Ireland’s four remaining banks. In so doing, the government indicated that their banking policy is a mere carbon copy of that previously pursued by Fianna Fail and the Green Party. Here, socialistparty.net, looks at the very real prospect for default which haunts the establishment.
This total capitulation to the demands of the markets and the European Central Bank was a clear indication that “Labour’s way” was always a sham and “Frankfurt’s way” was now government policy.
The bailout was a complete abandonment of the Fine Gael election pledge that “not one red cent” would be given to the banks without so-called “burden-sharing”, ie some payment by bondholders.
The bailout – the fifth in three years – brought the total cost to date of Ireland’s bank bailouts to e70 billion. Per head of population, this is 10 times the size of the bank bailouts that have taken place in the USA in recent years.
The bill for the bank bailout is now to be presented to the Irish people in the form of cutbacks, privatisations and fresh attacks on public sector workers.
The Programme for Government targets the public sector for 25,000 job cuts. This is additional to the 16,000 jobs cut from the public sector over the last 2 years.
Now, despite e2.3 billion in “savings” from the public sector in recent years (e1.3 billion from axing jobs and e1 billion from the public sector pension levy pay cut) Fine Gael and Labour are demanding more.
Under the terms of the EU/ECB/IMF deal public sector pay cuts are due to be implemented in October 2011 if there have not been sufficient “savings” brought about by “efficiencies” (spending cuts) and by job cuts.
The Government are to review the Croke Park Agreement in May and now want a further e310 million in “savings” on the issues of jobs and pension entitlements.
Labour Relations Commission head Kieran Mulvey has suggested that forcing workers to work longer hours without extra pay is the key to reaching this target.
Labour’s Minister for Public Reform Brendan Howlin, has threatened that unions which refuse to co-operate with this agenda are liable to face direct pay cuts and “loss of job security” (sackings).
But will the bailout and fresh public sector cutbacks solve Ireland’s economic crisis? Or will they, in fact, worsen it? These are key questions for the workers’ movement in this country.
Ireland’s national debt is ballooning under pressure from falling tax revenues and from the cost of the bank bailouts.
In 2007 Ireland’s debt/Gross Domestic product (GDP) ratio was just 25% – low by international standards. By the end of 2010 – before the latest bailout – this had risen alarmingly to 95%.
The Department of Finance estimates that the debt/GDP ratio will rise in the aftermath of the bailout to 107% by the end of this year, increasing to 110% by the end of 2012 and 111% by the of 2013 before falling back to 109% by the end of 2014.
However, these figures are optimistic compared to those provided by others. For example, the ratings agency Fitch expects Ireland’s debt/GDP ratio to rise to 116% in 2013/14 and, in the event of contraction in the economy, to 128% by 2015.
Irish capitalism is now caught in the maw of a giant contradiction: the same austerity policies which are being introduced as a way of cutting the debt/GDP ratio are choking off economic growth, lowering tax revenues and undermining attempts to resolve the debt crisis.
This is clearly shown by the fact that the authorities have had to revise economic growth projections downwards in the face of austerity and the bailouts.
In October 2010 the Central Bank predicted that Ireland’s GDP would grow by 2.4% this year and that Gross National Product (GNP) would increase by 1.7%.
However, by February that forecast had been revised downward to a prediction of 1.7% GDP growth and an actual shrinkage of GNP.
The Central Bank is more optimistic than the International Monetary Fund who predicted 0.9% GDP growth for 2011 last December before virtually slashing that projection in half with a revised forecast of a mere 0.5% in April.
A 100% debt/GDP ratio is a very dangerous place for an economy to arrive at.
It means that in order to simply pay the interest on the debts the country’s economic growth rate plus inflation rate must equal the rate at which interest is being paid.
For example, if Ireland pays off its national debt at an average interest rate of 5% at a time when inflation is at 2% then the economy needs to grow at a rate of 3% per annum just in order to stand still.
This is why Fitch have predicted that Ireland might still have an 87% debt/GDP ration by 2020 after a decade of austerity even if average annual economic growth rates were 3%.
Ireland’s situation is doubly precarious given the abnormally large gap between GDP (representing total economic production including that of the multinational sector) and GNP (representing domestic economic production). This gap is significant given that the bulk of tax revenue accrues from the domestic sector.
In Irish terms a debt/GDP ratio of 115% equals a debt/GNP ratio of 140%. Given these figures it is clearly no longer a case of “whether” the Irish state defaults on its debt but rather one of “when?”.
The right-wing economist Constantin Gurdgiev has stated on his blog that towards the latter end of the 2011-2014 debt repayment period the Irish state will be paying somewhere between e13 billion and e15.4 billion per annum to the ECB and the IMF on interest payments alone. To put this in some kind of perspective, the total annual state spend on education (primary, secondary and third level combined) is around €9 billion.
David McWilliams writing in the Sunday Business Post recently reported that traders on Wall Street regard an Irish sovereign default as inevitable stating “No one here believes a word that comes out of the European Commission, the ECB or the organs of the Irish state.”
Fine Gael TD Paschal Donohue has argued in a recent small pamphlet (“Should the 31st Dail be the Default Dail?”) that a default would result in cutbacks five times harsher than those introduced in recent years. While Donohue may exaggerate the case he is more correct than McWilliams and other economists who argue that a sovereign default could be “relatively painless”.
The key conclusions for activists in the workers’ movement from all this are:
o Further austerity will worsen the economic crisis not solve it
o Further austerity will not avoid a default crisis but hasten it
o Further sacrifice by working people is utterly pointless given the inevitability of default
o The workers’ movement must resist austerity now and at the point of the default crisis
o Activists must organise with great vigour to reclaim the unions and fashion them into fighting organisations on behalf of working people
o The workers’ movment must put forward a socialist alternative to the bankruptcy of capitalism.