January 28, 2001

Ireland: a severe case of political schizophrenia

Posted in Politics ·
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In 1973, Joschka Fischer liked to spend his afternoons kicking policemen. The young Fischer was one of the leading lights of the German radical left with very close links to the Baader/Meinhof Group.

Fischer and his mates were intent on ridding Europe of the scourge of American imperialism, advocating extreme left-wing economics and revolutionary Leninist politics.

Back at the ranch, the young George W Bush was swilling Buds, watching ball games and hanging out in the clubby, conservative world of Ivy League college fraternities. His father, meanwhile, was positioning himself at the centre of the American political establishment; he scampered up the greasy pole and was appointed head of the CIA in January 1976.

For the young Fischer — now German foreign minister and pillar of the German establishment — George W Bush would have represented the enemy, as he was the over-privileged, apolitical son of the future head of the American “Gestapo”.

For both Bushes, the radical Fischer represented the classic “red under the bed”: a typical, ungrateful European who, having been liberated, was now turning on the liberator, fuelled by idealistic, woolly-headed, utopian notions of equality.

Yet more intriguing, is the fact that Ireland has evolved into a modern political hybrid. It has the social aspirations of the “kinder, gentler” Joschka Fischer and the tax policy of a “winner-takes-all”, individualistic George W Bush.

The economic implications of this political schizophrenia lie behind the EU Commission’s recent dressing down of Charlie McCreevy and suggest that we are now on a direct collision course with our European neighbours, which could culminate in a new and virulent strain of euroscepticism.

Since 1973, Ireland has followed two conflicting paths. Our political elite has pushed us ever closer to the EU in social terms and much of the consensus commentary has reflected this shift. Given that the EU project is rooted in mainstream continental political theory, the entire gig is characterised by slightly left of centre social democratic thinking.

Not surprisingly, Ireland and Irish politicians now display what might be termed “Swedish” aspirations when it comes to the provision of healthcare, education, childcare and the like. People expect the state to provide a high quality public service because politicians of all hues have made this Swedish-style approach central to election rhetoric over the years.

In direct contrast, the very same politicians and policymakers have spent the last 30 years ensuring that we followed the “me, myself, I” American approach to the economy. Governed by the twin objectives of lower tax and deregulation, Ireland’s economic soul is more like that of the US than the EU. Therefore, politicians promise lower and lower taxes as well as better and better social services.

But the combination of Joschka Fischer’s welfare state and George W Bush’s tax system can only be achieved when the Irish economy is booming.

This leads us to observe yet another inconsistency. Due to the influence of the US and Britain, Ireland’s economic cycle is largely linked with the Anglo/American business cycle and almost unaffected by that of continental Europe. In fact, the last time Europe was booming in 1990-92 in the wake of German unification, Ireland went into a cyclical slowdown, unemployment rose and commercial property prices actually fell because European interest rates were so high and the US and Britain were in recession.

Looking at trade and investment flow and ignoring the flags and symbols of nationhood, Ireland could be seen as a small part of the Anglo/American economy, which happens to trade in the eurozone. Our wages, job opportunities and incomes are more influenced by Greenspan than Duisenberg. It is arguable that we are condemned to boom when Europe is in a trough and vice versa.

Ireland also displays the financial and investing habits of the English speaking world, which leads to a third inconsistency: our sensitivity to interest rate movements. Unlike our continental neighbours, it is typical for Irish people to borrow at flexible, short-term interest rates. In contrast, continentals borrow for long-term fixed periods.

This makes the continental economies considerably less sensitive to temporary movements in short-term interest rates. When interest rates are low, we borrow excessively; when they are high, we don’t borrow at all. Therefore, we are much more susceptible to violent swings in credit cycles.

Indeed, the credit cycle explains much of Charlie’s good fortune and the European Commission’s angst. When the country is borrowing as much as 25 per cent of GDP each year, it is hardly surprising that the government’s coffers are bulging. The more we borrow and spend, the higher the tax take to the government and the better the budget figures look. In fact, this week many an indignant Irish minister (including Charlie himself) pointed to our falling public debt/GDP ratio as evidence of economic kudos. But with the private sector debt/GDP ratio exploding, a monkey could predict that the public debt to GDP will fall and will continue to do so as long as cash machines spew out filthy lucre. There is no alchemy to the fact that Ireland has swapped state debt for private sector debt. A lot of Charlie’s apparently responsible ratios are themselves the by-product of irresponsible, headless chicken borrowing by the rest of us.

The buoyancy of revenue also enables us to reduce our corporation tax further, prompting angst on the part of the commission. The ultimate irony for the commission is that by facilitating an active “beggar-my-neighbour” tax policy here, the EMU project and low EMU interest rates are actually exacerbating the future political tensions between Ireland and its partners.

The commission had to fire a shot across our bows, not because Irish inflation would undermine the euro, but because if the governments of Italy, France or Germany were to start giving away cash like Santa Claus, the euro would definitely suffer. On the basis that each member state has signed up to the Maastricht Treaty, which provides that no member state should risk excessive inflation, I suppose the commission was only doing its job.

Looking forward, when the credit binge finally winds down, partly driven by the slowdown in the Anglo/American area, we will not be able to reconcile Joschka and George W without running a damaging budget deficit. At that stage, if the euro and European interest rates are not falling rapidly, then unemployed voters, sitting on mountains of debt will have to point the finger at someone — and who better than faceless EU bullies?

Given the popular indignation displayed this week, a cynic might argue that Charlie McCreevy has dipped his electoral toe in euro sceptic waters and found it fairly pleasant. He knows a vote winner when he sees one and he thinks, in voters’ eyes, little, plucky David will beat big, bullying Goliath hands down.