by Andrew Pollack
The epidemic of national crises in the European Union spread in November to Ireland, whose government responded to global bankers’ demands for repayment of debts with a savage four-year austerity plan worth $20 billion.
The plan includes thousands of public-sector job cuts, a 12-percent decrease in the minimum wage, steep increases in the value-added tax, and massive service cuts.
The plan, however, won’t touch the country’s 12.5% corporate tax rate, a rate so low that, coupled with low wages compared to most of the continent, it has made Ireland a popular base for multinational corporations’ factories.
Taxes had already been raised and public workers’ salaries slashed by up to 20% as the Irish economy shrank 7.1% last year.
The ruling party, Fianna Fail, was supported in calling for the austerity plan by the Green Party, but the Greens later announced that they would pull out of the governmental coalition. Signs that the crisis was far from over came the day after the plan was agreed to as protests began, the government stepped down, and Moody’s lowered the rating on Irish debt several notches.
Worried that accepting a bailout would ruin the country’s credit rating, the Irish government had for weeks resisted applying for a bailout, insisting it could make enough cuts to satisfy bankers on its own. And once granted, the bailout didn’t do much to reassure investors. One reason is that they see looming debt repayment problems in Portugal and Spain.
All three countries are suffering from the hangover of popped housing bubbles and the resulting financial shocks. In addition, their room for maneuver is limited by being part of a European Union whose currency is tied to a fixed exchange rate. Unlike countries such as Argentina and Russia, which devalued their currencies to escape debt crises—or like the U.S. and China, which do so to boost their competitive position and increase exports—Ireland and other troubled European countries that use the euro have no such option. EU membership also requires submitting to the dictates on how large a country’s debt and deficit can be relative to GDP.
Before the bailout, investors made clear, including by letting the euro’s value plunge, that they were just as worried about Ireland’s woes spreading to the rest of the continent. The bailout came from a fund set up last year when Greece appeared on the verge of bankruptcy. Yet worries persist about whether the fund is big enough to bail out other, larger economies such as that of Spain.
Some liberal economists called for giving Irish banks a “haircut”—economic jargon for letting investors pay the price of their own investing follies. But following the pattern set in the United States—the world’s most important economy and home to its biggest banks—the EU never gave any serious thought to any option other than reassuring bondholders by opening the public troughs further to them.
This was despite the fact that the ludicrously high Irish banking losses—standing at $109 billion, or 50% of the economy—could hardly be said to bear any relationship to real economic assets. Similarly, Ireland’s total external debt is a fantastic 10 times the size of its economy. Such lunatic ratios are just the most extreme manifestations of the insane speculative frenzy seizing capital around the world.
During the G-20 summit in Seoul of major industrial powers, European financial chiefs from Germany, France, Italy, Spain, and Britain made clear to bondholders that at most they might be asked for a voluntary commitment to help cover some of the losses suffered in Ireland, Portugal, or similar debt-ridden countries. And they indicated that even if such voluntary pledges were adopted, they wouldn’t be requested until 2013, meaning current bondholders would not be affected.
Such beneficence is most touching, especially as it is precisely investors in those countries, and the U.S., who stand to lose the most in a default. In the euro zone, more than 2 trillion euros in sovereign debt belonging to Greece, Ireland, Spain, and Portugal is held largely by German, French, and British banks.
Germany, possessing the continent’s strongest and healthiest economy, has been particularly stern in its demand that smaller EU countries impose austerity. This is one of several indications that the uneven development on the continent has been barely impacted by the supposedly unifying dynamic of a multinational economic union—which is exactly what one would expect from a union built on the inevitably contradictory interests of capitalist nations.
In the country from the lower tier that is next expected to face a crisis, Portuguese Finance Minister Fernando Teixeira dos Santos said his government was preparing a budget that would cut wages, freeze pensions and raise taxes. Like the Irish government, he begged the bankers to give him a chance to impose cuts on his own without a bailout and all the strings attached to it.
Meanwhile Spain—another second-tier, hard-hit victim of the housing bubble and the broader crisis—is struggling to close its own deficit of 9% of GDP with a stagnant economy and unemployment over 20%. In late November the spread, or risk premium, between Spanish and German bonds widened to a record high of 2.3%.
Modest protests against the Irish government’s plan broke out immediately, and larger ones are expected. Meanwhile, revolutionaries in the country are raising an alternative perspective, demanding nationalization of the failing Irish banks, with all losses to be eaten by wealthy investors. They are also demanding redirection of bailout funds to public works and jobs, and mortgage reduction.
They call for a United Socialist Europe, built on the democratic rule of workers, in place of the current capitalist European Union—which takes its orders from bankers, bondholders, and corporation executives.
Working-class resistance to the bosses’ “solutions” to the crisis has spread from mass strikes and rallies in Greece, to a near-revolutionary situation in France, mass student demonstrations and occupations in the UK, and a late November general strike in Portugal. With proper leadership, this continent-wide contagion of revolt could be fatal for the capitalist system.