June 13, 2013
Here’s something bold. Not only is the European economy not going to recover but a secondary depression is now on the cards. The putative European recovery has evaporated – as anyone with a grasp of Leaving Cert economics would have forecast a few years ago given the policy mix adopted.
Not only is austerity not working on the periphery in places like Ireland, Spain and Greece but the core of Europe is weakening rapidly and the most fragile country on the continent is now France. Economic indicators – ranging from unemployment to industrial production and corporate earnings – have deteriorated so rapidly in France in the past few months that it is almost certain that France will enter a recession in the summer months.
Meanwhile, today in Germany, something bizarre is happening.
The head of the German central bank is taking the German representative on the board of the European Central Bank to court.
The Bundesbank is claiming that the ECB’s latest move to “do whatever it takes to save the euro” is against the German constitution.
Last year, the ECB claimed that it was ready to buy the IOUs of dodgy European countries in order to prevent the euro imploding.
The Germans cried foul and claimed that this was tantamount to financing delinquents on the periphery. And now they are all in court.
And it’s not just any court, it’s the German constitutional court in the small town of Karlsruhe.
This court has seen all the greatest German constitutional battles of the past 50 years. The Federal Republic elevated the position of the constitutional court to that of the independent central bank following the Second World War.
Having been destroyed by Hitler – a man who treated the constitution as no more than a worthless piece of paper – the new Germany gave the court enormous powers.
It is here that the Germans will decide whether the ECB is being anti-constitutional.
Now why does all this matter to Ireland? The first reason is tactical. If the Germans decide that the ECB buying the bonds of member countries is unconstitutional, we will not be able to exit the troika bailout; at the very least it will be extremely difficult. “Exiting the bailout” has apparently fixated the Government. Even though all this means is having the sovereignty to borrow yet more – in a country where too much borrowing caused the problem in the first place.
In addition, the Government talks at length about regaining sovereignty – but if you look at the plan for deeper European integration, it’s based on totally giving away sovereignty. So we are regaining our independence in order to throw it away!
We could call this fanaticism “bailout exitism”; where simply exiting the bailout is the end, not the means.
Irrespective of these inconsistencies, we still have to find a medium-term strategy to allow Ireland to exit without the troika. Given the fact that we have too much debt and too little growth, Irish bond yields couldn’t remain low without the ECB’s understanding that it would buy Irish IOUs if necessary.
Why might the ECB be so necessary for Ireland? Surely, after five years in the convalescent ward years, we don’t need a monetary Sugar Daddy anymore?
Yes we do. In fact, we need one now more than ever. Last year the ECB’s tactic was to buy time when there was the very real threat of default in Spain and Italy.
By saying that it would buy bonds of countries and then announcing it would do so in enormous quantities – as long as the countries stuck to a fiscal plan – the ECB ensured money flowed into Spain and Italy, bringing down bond yields.
However, this rally in peripheral bond markets – Ireland included – was rented, not earned. The ECB rented it until the real economic recovery could earn the rally outright. But as we are seeing all over Europe, especially now in France, the real recovery never arrived. Worse still, the economy stalled and went into reverse.
But why are our government people so shocked? Europe has a liquidity trap: the banks don’t want to lend and the people don’t want to borrow, so it doesn’t matter how low interest rates are, they don’t work.
In addition, governments peddled the nonsense that countries could grind down wages in the slump and this would somehow make them competitive. But this view is fantasy, not reality. Companies don’t react to slowdowns by cutting wages. A recent study by the Central Bank of Ireland that covered a survey of “14,975 firms from 14 European countries, representing around 47.3 million employees. Just over two per cent of firms had cut wages over the last five years at the time of the survey”.
This is extraordinary. Most firms said they didn’t want to cut overall wages because it would affect morale and the good people would leave. This implies that in a downturn, firms prefer to lay off new workers than force overall wage cuts. This both increases the overall rate of unemployment and reinforces the insider/outsider dilemma in the workforce, pitting those in work against those out of work.
The upshot of this is that taxes fall and dole payments rise, pushing up budget deficits. As deficits rise, the financial markets take fright and flee the afflicted country.
This forces governments to cut spending at exactly the wrong time. Then, as growth slumps and bond buyers flee, the ECB must come in with a promise to stand behind the countries.
THIS promise is what has the Germans up in arms, but surely they can see that the budget deficits are the consequence, not the cause, of the problems. But they can’t, so they do what Germans always do when they don’t like the look of something – legislate against it, as if by outlawing something you can make it go away. But that’s what they are doing anyway, and they are taking it seriously. Yesterday, the conservative newspaper ‘Allgemeine Zeitung’ wrote in a front-page editorial: “It is one of the most important court cases in history.”
As France heads into recession, the rally will peter out and the Germans are right to be worried. So too, for that matter, should be the “bailout exitists” in the Department of Finance.
I’m chairing a debate – ‘What is the point of the Leaving Cert’ – on Saturday, June 15 at the Dalkey Book Festival. Tickets available here.