Minister of
Finance Brian Lenihan claimed last night that the economy hasn’t stalled and
that in spite of a lot of evidence to the contrary it has stabilised. Economic
indicators which had appeared to indicate some economic growth now seem to have
fizzled out. Given Lenihan’s track record it’s no surprise that many will be
sceptical about his claims, especially when the figures seem to demonstrate the
opposite.
The last
couple of years have seen perhaps the most disturbed period economically in the
whole of the history of the state. The consequence of the period of rapid
growth between 1995 and 2007 has been, if anything, to make the crash even more
dramatic as the bubble of speculation and inflated property prices imploded.
The crash represented a clear break with the preceding period.
The
unemployment figure rocketed as tens of thousands of thousands of jobs disappeared.
The imposition of levies, attacks on welfare payments and cuts in public
expenditure have further cut demand in the economy piling more and more
pressures on working people. However, despite this the headline predictions for
Gross Domestic Product are for a 0.8% growth in the economy in 2010. But how
accurate is this figure? Manufacturing growth is “feeble” according to a study
by NCB stockbrokers reported by Finfacts on 2nd September.
The recent
news that the number of mortgage holders in arrears for more than six months
has increased by 12% is just one of a number of indicators that the economic
situation is still poor. Unemployment is still on the rise and now stands at
455,000. Mortgage lending has fallen and retail sales are still static. The
economy is still very sluggish and of course a 0.8% growth in GDP has to be
balanced against a fall of 7.1% in 2009.
The huge
hole in the state finances amounted to a €24,641,000,000 last year. This is the
background to the cuts in state spending and to the vicious McCarthy report: An
Bord Snip. Cuts in public sector pay and in spending have further depressed the
economy. However, there are other pressures particularly from Europe. Economic
growth in the sixteen country eurozone fell slightly in August after relatively
higher growth in the second quarter of 2010.
RTÉ reported
on the 28th August:
“The Governor of the European Central Bank has urged
governments to cut spending and public sector wages as the best way to fix
their national accounts.
Speaking at a conference of central bankers in the United
States, Jean Claude Trichet said he was sceptical of calls to postpone fiscal
consolidation and boost stimulus spending.
He urged governments to be ambitious in their debt
reduction plans, citing Ireland’s achievements from 1994 to 2007.
Mr Trichet said reducing the debt overhang and achieving
sustainable borrowing levels for all is the only option if governments want to
create strong, sustainable and balanced growth.
He said debt reduction plans that focus on cutting
spending and the government’s wage bill are more likely to succeed than tax
increases.
But he warned that, unlike in previous years, governments
could not rely on falling interest rates to help them, as rates are already at
record lows.”
The fragility of the economy has also been demonstrated by
the downgrading of the state’s credit rating with Standard and Poors from AA to
AA-. S&P were the last of the credit agencies to downgrade Ireland this
year. RTÉ explained the reasons behind this on August 24th:
“However, the agency warned of a further downgrade if
fiscal costs of supporting the banking sector continued to rise.
It said the cost of support to the banks will weaken the
Government’s financial flexibility over the medium term.”
The consequence of the reduction in the state’s credit
rating will be to increase the interest rates that Ireland needs to pay on
government bonds. The pressure therefore as expressed by the European Central
Bank is for more cuts to offset this process.
Bailing out AIB
In other words there is a
more or less direct trade off between the cuts and the state of the Irish
Banks. But the vulnerability of the Irish Banks also explains the rumblings
within the coalition over the future of AIB. The putative plans to split AIB
into to two parts seem to have been dropped in favour of slowly winding the
bank down. The Irish Times
reported on 2nd September:
“An orderly wind-down of
Anglo Irish Bank over a lengthy period has emerged as the favoured option of
most Ministers.
The Cabinet had a lengthy
discussion on the future of Anglo yesterday, and said in a statement afterwards
that it was united in its determination that the issue should be resolved at
the least cost to the taxpayer in a way that gives finality.
“The Government is
working with the EU authorities to that end; it is also in active discussion
with the EU Commission about the future of the bank guarantee,” added the
statement.
Government sources said
later that a wind-down had now become the more likely option, while the good
bank/bad bank solution favoured by the bank itself had dropped down the scale.
Minister for Finance
Brian Lenihan will travel to Brussels for a routine meeting with his fellow EU
finance ministers on Monday, and the issue of Anglo is expected to feature in
discussions.
A final decision on the
fate of the bank will depend on the view taken by the European Commission and
the European Central Bank on the issue.
In recent days, Fianna
Fáil and Green Party Ministers gave conflicting signals about the desirability
of a rapid wind-up of Anglo.
However, Ministers from
both parties yesterday insisted they were united on the issue”
But it is the scale of the potential black hole at the
centre of AIB which is giving the government nightmares. The minimum
exposure of the government to AIB is marginally higher than the whole of the
budget deficit for 2009. But this figure may well be an underestimate. Another article in the
same edition of the Irish Times explains the urgency of situation:
“Anglo was first
recapitalised last year with a €4 billion cash injection from the State, but
this capital requirement has been exceeded many times over following the
transfer of its property loans to the National Asset Management Agency (Nama).
The commission is
attempting to gauge the accuracy of projections which suggest that splitting
Anglo into good and bad banks is the option with the lowest cost to the
taxpayer, that is, some €25 billion.
With ratings agency
Standard Poor’s suggesting Anglo may ultimately need €35 billion – something Mr
Aynsley rejects – officials want clarity as to the exact extent of its capital
requirement if it is to remain open as a going concern.”
So not
only is the economy in a particularly fragile state, but the governments
efforts to bail out the banks will force further cuts in state spending which
will further deflate the economy. Regardless of whether the economy stumbles to
0.8% this year or not, Ireland has entered a long and damaging period of
austerity. This is the background to the slash and burn economics of Brian
Lenihan and Brian Cowen. It is a clear sign that Irish capitalism has entered a
new stage. There is no way out on the basis of capitalism.
