What’s new pussycat (Celtic tiger edition)?
Back in May when Greece was in the process of getting its “bailout” I kept wondering why it had to be that Greece would accept such harsh conditions when it held an ace up its sleeve. The proposed package of austerity, which would make the economy worse, was only an issue as long as Greece felt it needed to stay on the euro. Greece once had drachmas, and could have them again. That alone would have been better for Greece by allowing them the flexibility of devaluation. There might have been some termoil in the transition but with people rioting on the streets it is hard to see how it could have been much worse.
At the time, going off the euro was not seen as a legitimate option, and the main reason was that it could have potentially led to the breakdown of the euro itself. Which is the ace. If Greece had threatened to leave the euro, it would have had much better bargaining power to seek a major write-down of its euro-denominated debt in exchange for staying.
It is worth noting, since reporters for the mainstream media outlets don’t seem to get it, that these so-called “bailouts” or “rescue packages” are not for the people of the afflicted country, but their creditors. That “bailout” is not a grant but an increase in the debt that people are eventually going to have to pay, on top of the fiscal austerity they must accept. There are two sides to any transaction, and why creditors should be fully protected rather the other way around is a choice, a bad one.
But this dynamic plays itself out time and again in previous financial crises, especially where the IMF has been involved. The 1997-98 Asian crisis was a fairly egregious case of feted economies all of a sudden made out to be demons in need of harsh economic medicine.
So as the game has moved on to Ireland, how’s that rescue package working, Greece? Are investors so much more confident that financial flows to Greece have restarted, unemployment is falling and the economy is recovering? Uh, no.
Yet now we see Ireland in the crosshairs. The Irish people (I do have Irish blood, but I swear its not affecting my position on this) are going to undergo a wave of cuts and pay back higher debts well into the future so that Irish creditors can get out relatively unscathed (principal intact, anyway, according to one report). Ireland should not accept this bad deal, and instead give the euro the finger unless they come up with a much better offer. This is a nation that spent much of its history fighting English colonization; why roll over so easily to Euro-colonization?
Dean Baker has a recent commentary that describes the real alternative model for Ireland: Argentina. So let me just quote him:
[E]ven 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.