November 23, 2015
On the fifth anniversary of the troika’s arrival, let’s be clear on what has actually helped us recover
Six years after its inaugural outing, the atmosphere at the Global Irish Economic Forum on Friday in Dublin Castle couldn’t have been more different. Back then, there was a palpable sense of panic and many reasons to be fearful; this time, there was a sense of a steadied ship and many reasons to be optimistic.
This weekend also happens to be the fifth anniversary of the bailout. That was the weekend that the IMF rocked into town and nailed their demands to the door of the Department of Finance.
One of the more galling episodes in the run-up to this anniversary has been watching the IMF’s chief negotiators pointing the finger of blame at the ECB about Frankfurt forcing successive Irish governments to take on odious bank debts rather than burning bondholders. It’s a pity they were not so vocal on the issue of odious debt at the time, and it underscores just how pointless this institution now is, in Europe at least.
Let’s remember what the bailout was in reality. The bailout wasn’t so much a bailout, which at least visually conjures up the image of a friend in a canoe bailing out water to keep the canoe afloat. These European bailouts were really a response to the financial markets declining to lend to the stricken states.
Once the private sector refused to lend, the public sector had to, or the economies would have imploded. This is where the IMF and the EU came in. They lent to us, and we committed to do certain things – and this public commitment, and the troika’s oversight, coaxed the markets to lend to our government again.
But everyone knows that a balance sheet with too much debt, like Ireland’s, is made more robust by less debt, not more debt. The bailouts mean the opposite. A balance sheet that was laid low by too much debt was forced to take on more debt. However, as the ECB undertook to buy all this debt if necessary, the risk premium of this debt fell – the rate of interest fell.
Is a country with more debt less or more risky? Traditionally, you would say more risky, but with the ECB backstopping the government bond market, the opposite has occurred. However, in terms of what prompted the Irish recovery, while Italy, Portugal and Greece remain in the doldrums, this bailout doesn’t explain things adequately. For example, the chief baiter of debtor countries, Finland, is now in recession, so it’s clear that the state of the public finances isn’t sufficient to explain the recovery for the man on the street. If public finances alone were sufficient, Finland would be booming.
What affects the man on the street are the employment opportunities around him in the real economy. The government’s narrative is that the recovery – which is still fitful – was due to some European confidence fairy which magically spread confidence dust all over Ireland after the bailout.
But the bailout only replaced private creditors with public creditors. We are still debtors, just to different creditors.
I don’t buy the government’s story – not because I don’t want to, but because I can’t, as a trained economist, see how this eurozone transmission mechanism might work.
A much more plausible reason that would explain Ireland’s recovery and Finland’s recession, for example, is the fact that incontrovertibly the Irish economy is an Atlantic economy. We do most of our trade with the Anglo/American world, most of our investment comes from the English-speaking world and over 80 per cent of all Irish exports are generated by American multinationals. Trade between Ireland and Britain is now €1 billion a week.
As a result, when the Anglo-American world does well, it drags its little cousin, Ireland, with it. In the past few years, this Atlantic economy has been doing exceptionally well, and the resulting trade and investment have pulled up Ireland with it.
As domestic demand fell in response to the balance sheet implosion of 2008 and the subsequent austerity, some of this demand was replaced by demand from America and Britain, allowing Ireland to stay afloat.
Once the ship was steadied slightly, people could then relax a bit about the future and so we see what Keynes described as “animal spirits” begin to take over. Animal spirits are what make people spend a little more, invest a little more and take a bit more risk, because they believe in the future and – as they say in sport – they back themselves.
Why do people begin to back themselves? People back themselves because other people back themselves.
What I mean by this is that we are social animals and we are profoundly influenced by the group dynamics all around us. We are easily and quite irrationally influenced by the actions of others. We behave as a herd rather than as sovereign individuals. We do things because other people do things. This means that we are programmed to get giddy when everyone else is giddy, and also we get depressed when others get depressed. We are creatures not so much of habit but of other people’s habits.
Over time, people become confident from the bottom up, not the top down. This leads to people taking a bit more risk, maybe opening a business, and then demand begets more demand because we all buy and sell to each other. Therefore my spending becomes your income, and vice versa.
Economists call this the business cycle; I prefer to call it human nature. Time tends to heal balance sheets, if you can buy enough of it. The bailout allowed Ireland to buy a bit of time – and it is time, not some enormously sagacious economic policy, that is in the process of healing Irish balance sheets. Animal spirits emerge as we are programmed to be optimistic and to believe that the next venture will be the one that works, so we get back on the horse!
That’s it. No miracle, just human endeavour.