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 percent 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 five 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, to 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 neo-liberal crew before it ran into difficulties.
But, the IMF can turn quickly. Its austerity program lowered GDP by almost 10 percent 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 the 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 getting 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 realize is that if they agree to play by the bankers’ rules, they will lose.
Dean Baker is an economist and Co-director of the Center for Economic and Policy Research, in Washington, D.C. This article was first published in the Guardian on 22 November 2010 and republished by CEPR under a Creative Commons license. See, also, Andrew F. Cooper and Bessma Momani, “Negotiating Out of Argentina’s Financial Crisis: Segmenting the International Creditors” (New Political Economy 10.3, September 2005); Eric Helleiner, “The Strange Story of Bush and the Argentine Debt Crisis” (Third World Quarterly 26.6, December 2005); Eduardo Levy-Yeyati and Ugo Panizza, “The Elusive Costs of Sovereign Defaults” (Inter-American Development Bank Research Department Working Paper #581, November 2006); Samir Amin, “Managing the Euro: Mission Impossible!” (MRZine, 17 June 2010); Luiz Carlos Bresser-Pereira, “Greek Debt: Default or Restructuring?” (MRZine, 10 July 2010); Yanis Varoufakis, “A Modest Proposal for Overcoming the Euro Crisis” (MRZine, 5 November 2010): Tracy Alloway, “Who’s Bailing Out Whom?” (FT Alphaville, 18 November 2010); Landon Thomas Jr., “In European Debt Crisis, Some Call Default Better Option” (New York Times. 22 November 2010); Bob Davis, “Amid Irish Aid, a New Option: Some Critics of Latest Bailout Propose Sovereign Default to Keep Debt in Check” (Wall Street Journal, 23 November 2010).
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