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A small thought or two on reading David McWilliams April 29, 2010

Posted by WorldbyStorm in Economy.

I was reading David McWilliams latest appeal in the Sunday Business Post to us to consider the notion of the Greek government defaulting on its debt  (and the problems the Greek face, and by extension the euro and EU seem to increase almost hourly. Incidentally, there’s a quote in there by the head of the OECD, Angel Gurria, who likens the Greek situation to the Ebola virus, suggesting that when one has Ebola one’s only recourse is to chop off the affected leg. Er… not correct as far as I can make out given that Ebola is a systemic disease that affects blood vessels throughout the body and the ability of blood to coagulate, but I guess whatever works to justify what happens next – eh? Thank God he’s not a doctor, or that he has to talk about anything important like … er… er…) – and obviously by extension perhaps ourselves at some point soon, not least given the small but not insignificant fact that our own deficit is larger than theirs.

And I think he’s got a point. Indeed I’m intrigued reading the last but one issue of Prospect magazine to read a not dissimilar thesis…

The arithmetic is horrible. If Greece is to start paying interest on its debt – rather than rolling it into new loans – by 2011 the government would need to run a primary budget surplus (excluding interest payments) of nearly 10 per cent of GDP. This would require roughly another 14 per cent of GDP in spending cuts and revenue measures, ranking it among the largest fiscal adjustments ever attempted.

Worse still, these large interest payments will mostly be going to Germany and France, further removing income from the Greek economy. If Greece is ever to repay some of this debt it will need a drastic austerity programme lasting decades. This would cause its GDP to fall far more than Ireland’s. Moreover Greek public workers should expect huge pay cuts, which, in the country’s toxic political climate is a sure route to civil strife.


European leaders are wrong to think that greece can achieve a solution through a resumption of normal market lending. it cannot afford to repay its debt at rates that reflect the inherent risk. The only means to refinance its debt at an affordable level would be to grant long-term, subsidised loans that cover a large part of the liabilities due in the next three to five years.

The alternative being?

… for [it] to manage its default in an orderly manner. Reckless lending to the Greek state was based on European creditors terrible decision making. Default teaches creditors – and their governments – a lesson, just as it does the debtors: mistakes cost money, and your mistakes are your own.

The authors of this radical proposition? Well, one, Simon Johnson is a former chief economist at the IMF while Peter Boone is a principal in Salute Capital Management.

In our own situation the Sunday Business Post has taken in its editorial to calling for exemplary actions against bankers… and couched in quite similar language to the above when discussing pension top-ups and such like…

‘The flip-side of accepting massive payments in the good times must be taking responsibility when things go wrong’.

Or… here’s a thought, why not make those massive payments just a little bit – or quite a lot – smaller by taxing them more? After all, it is the SBP itself that argues that:

… taxpayers are being asked to pay for the failures and greed of bankers, in simple terms by sacrificing their standards of living.

And there’s the disconnect. A small number of individuals can through their own actions force a situation where they can immiserate many many others. What possible sanction is appropriate? Imprisonment seems to small, other punishments simply pointless. If any of us have ever wondered at the gulf between the actions of war criminals and the justice meted out to them, well, wonder no more.

All that can be done, bar the obvious recourse to law, is to ensure that this process can never happen again.

As it happens Richard Bruton makes the cogent point in the same edition of the SBP that Anglo should fall because… well… that’s what happens under capitalism. It’s an unusual day when I find myself agreeing with Bruton precisely because of his defence of capitalism, but there we have it.

And this is where I point you to a phrase of McWilliams…

As discussed two weeks ago in this column, history argues that the bailout will be unsuccessful, Greece will implode anyway and the bailout money will be wasted. The reason for this is that the financial markets need to believe that Greece has changed fundamentally. This means that it is not good enough to stump up sufficient to stem this crisis; the EU has to stump up enough money so that Greece never flirts with bankruptcy again – or at least in the foreseeable future.

Recapitalising a country is a bit like recapitalising a bank [shades of Swiss Tony there – wbs]. You need to make sure that you inject enough money into the bank – not so much to ensure that it doesn’t go bust now, but that it never goes bust again.

But how could we be sure that the situation in this state has changed – that all is being done to ensure we will not see a reprise of this, if not tomorrow then in ten or twenty years time? The pension fiasco suggests otherwise, suggests all too much – as noted by the SBP editorial – that it is business, and a highly profitable one for various individuals, as usual with government playing the role of bystander (and speaking of sleight of hand – notable how Maire Geoghegan Quinn had to take the bullet by proxy as it were for the sins of the government in not seeing through the Bank of Ireland mess with any conviction. I mean I hold no candle for the ludicrously inflated pension provision for Oireachtas members, but that seems to me to be a different discussion). And what happens if, or more likely when, this happens again? What’s going to be left for the state, or again more likely us, to fund a private sector that has comprehensively failed given the hill we all have to climb now to pay back that which others dumped upon us?


1. Jim Monaghan - April 30, 2010

What now for those who recommend Keynesianism in a single small country?. As far as I can see reformism does not have an answer that does not involve massive cuts. The Germans will not lend the money unless they see evidence of this. The only intellectual honest alternative is a break with Capitalism.Outside of the SWP/SP and the alphabet left no one is advocating this.
Only good news is probably shutting down Anglo. By the way why does the Irish people have to pay the costs. As far as I know when an ordinary company goes broke only the creditors lose their money.
More cuts next year.


Pope Epopt - April 30, 2010

Interesting Jim, I’m beginning to come to the conclusion that despite all the good work done by TASC, Micheal Taft et. al. Keynsian economic stimulus does not look feasible, in that debt servicing and repayments will swamp national budgets. I’m not happy with this but it may well be that social democratic solutions have been cleverly ruled out.

This is the great achievement of the financial plague-rats over the last two years. They have made their unsustainable debt-mountains the unsustainable debt-mountains of national States. Insolvent states have much less room for maneuver, and national policy becomes a beauty parade of austerity. Dialectically this was also a pretty stupid move, because they have blocked the social democratic / welfareist pressure release valve.

Stimulus can only be afforded when these debts are written down. The state that had managed an early, comprehensive default and writing down of debt would now be best placed now, given the short memories of the international money markets. No one took this option.

I’ve argued since this crisis began, that we (the Republic of Ireland) should default early on state and private debt. This would establish some sort of independence financial sector, but also make economic choices possible.

But that’s not on the cards, at least for now. States will go to extraordinary lengths to maintain the fiction of the value of debt, and the discipline of repayment.

So a break with capitalism may be all we have left. And I haven’t a clue how that is to be achieved.


Pope Epopt - April 30, 2010

That would be Keynesian.

Can we have our preview button please? If only as a mental health intervention.


LeftAtTheCross - April 30, 2010

“States will go to extraordinary lengths to maintain the fiction of the value of debt, and the discipline of repayment.”

That’s the game in a nutshell, it’s a house of cards waiting to collapse. As you say, the break with capitalism seems almost inevitable at this stage. How and when will come as a surprise to most of us I’m sure.


2. Paul Wilson - April 30, 2010

McWilliams reasons for advocating a Greek default are probably self serving, the Euro was seen originally in some quarters as a bulwark against the sort of speculators who forced Sterling out of the EMS. This alas has proved not to be the case. Nonetheless he has a point, a default is an option, the Greek people could be better off. Argentina found this to be the case and there was not a lot anyone could do about it. Given the recent insulting comments by Merkel and Co about Greece it seems obvious that Greece has been ill served by it’s membership of the EU/NATO bloc, from the Turkish invasion of Cyprus in 74 to the theft of the partly Greek owned Trepka complex in Kosovo. Of course Greece like Ireland has always been part of the EU awkward squad. BTW wheres John Palmer our pro EU poster now?


3. sonofstan - April 30, 2010

As you say, the break with capitalism seems almost inevitable at this stage.

Well possibly, the revolution is closest when it seems furthest away.

I have to say though, the more likely scenario is this; even if there is sovereign default in 3,4,5 +eurozone countries, and even if the Euro, and possibly the EU, goes down the tubes, we – because we will surely be one of them – will go back to where we were in 1971, a poor, desperately unequal, country on the edge of a smaller, but, comparatively, richer European core, with poor social services, poverty and massive emigration – not as fancy IT specialists, but as nurses, builders and domestics. And the scope for building even a sketchy social democracy will be non-existent, thanks to IMF supervision.

And there’s no alternative: we are not Venezuela and we don’t have barrels of oil to trade in order to support a ‘socialism in one country’ model. If we spurned the IMF/ EU, our currency – an Punt Nua – would head for the floor; we wouldn’t be able to buy anything, and since most of what we sell is made by companies that aren’t owned here, our much vaunted ‘exports’ would disappear. Instead of ‘mere’ hardship, you’d be looking at actual hunger….


LeftAtTheCross - April 30, 2010

SoS, that’s an accurate assessment alright, but it’s also where many or most of the states / societies in the developing world are at the moment also. If there’s an alternative to being inside the gated community of the neo-imperialists, and which isn’t in the slums of the mass of humanity as you have described it, this side of world revolution anyhow, it’s not a vision that has received much of an airing to date.


LeftAtTheCross - April 30, 2010

To expand, some of the issues have been aired by the eco-movement, in as much as the collapse of the status quo (because of peak oil and climate change in that worldview) will lead us into a different ecomomic model that is closer to the floor than where we are now, but the hardship during the transition after the collapse is something that’s not often discussed on the Left. Not saying it’s something to be relished by any means, more that maybe we should be taking on board some of the “transition” mindset from the eco-crowd.


4. Pope Epopt - April 30, 2010

We may be moving into the territory of economic social collapse that the Transition Movement prefigures. Their analysis of the material conditions that could well pertain is often reasonably good, but their political and social analysis is utterly naive.

Or perhaps child-like would be a better word. Which isn’t entirely a bad thing – children can demand the impossible in an entirely realistic way.


LeftAtTheCross - April 30, 2010

Pope, couldn’t agree more. Just suggesting that some synthesis could be beneficial, on all sides.


Pope Epopt - April 30, 2010

I’d have to violently agree with you that a marriage would be a blessed thing to be part of. I’ve not a baldy how that might be brought to pass, however.


5. Paul Wilson - April 30, 2010


Re 3
I thought Ireland was sitting on substantial reserves of natural resources, some of which have been given to Shell for free.


sonofstan - April 30, 2010

Hmm…enough to fund the entire economy for the foreseeable future as Venezuela can? I did some quick sums – based on the figure the SP give here:
And I reckon we’d get 5-7 years out of it….

But I’m willing to be proved wrong.


6. THATS NOT MY NAMA! - April 30, 2010

See the BBC has made him the focus of their article on ‘Ghost Estates’ along with Ciaran Cuffe http://news.bbc.co.uk/1/hi/world/europe/8653949.stm


Tim - April 30, 2010

That’s an interesting article.
I remember colleagues buying homes in remote places, “only” an hour’s commute from Dublin by train and car, and thinking it was a bit of a price to pay for three bedrooms and a deck. I had no idea of the scale of building in Ireland. Did anyone?
One woman I knew bought out the far side of Swords, a tiny place in the high e300,000s which is probably worth f*** all now. Sad to see hard working people getting so frenzied and irrational.


ejh - April 30, 2010

I’ve seen similar articles about ghost towns in Spain, though given that the BBC correspondent never goes out of Madrid, fewer than I might have.

Huesca, my local town, is full of huge housing blocks that aren’t finished and may never be, as well as blocks which are finished and yet are empty.


Tim - April 30, 2010

There must be, at this stage. Agents in Ireland were selling holiday homes in places most people can’t spell. Turkey and Bulgaria must be full of empty flats now.
how frustrating for Polish workers, who came to Ireland to work and save up money for their first home, to return to Warsaw and find that in the meantime the Irish had bought them all and driven the prices through the roof!


WorldbyStorm - May 1, 2010

That must really really piss people off. Can’t say I blame them. Although, on the other hand wouldn’t prices also be falling there eventually?


7. Garibaldy - April 30, 2010

Glad to see someone has posted that BBC link. Save me writing a thread on it now 🙂


8. Pope Epopt - April 30, 2010

There is another narrative for saving European capitalism. I doubt it will endear itself to either McWilliams or the habituées of this parish.

Over at the Irish Left Review there are detailed proposals to combat the Greek financial crisis. They come from a group of economists associated with the European Trades Union Institute. I can’t find their names but assume they intersect in some way with the members of the ETUI advisory group.

They debunk some myths about the Greek worker:

For Greece has not – as is often claimed or implied – lagged behind Germany in raising productivity: on the contrary hourly labour productivity increased more than twice as fast in Greece than Germany during the ten years of the euro since 1999. Nor do frequent claims in the media of Greek ‘laziness’ stand up to scrutiny: average annual working hours are the longest in Europe (and hundreds of hours per year longer than in Germany!). The problem has been with nominal wage and price setting.

As I understand they propose that Europe starts acting as a unitary fiscal entity and that the ECB starts acting like a real central bank. It should issue bonds and print money to pay for rising wages and prices in Germany, so that country becomes a demand motor for the rest of Europe.

They make a classic Kenyesian appeal to history thus:

…it is in Europe’s vital interests to resolve the Greek crisis on the basis of rising incomes across the continent and to put in place the needed machinery to cope with competitive and fiscal imbalances in the future. The future of the euro area as a whole is at stake. There is a serious risk of a falling Greek domino knocking over a series of other countries. Portugal and other countries now stand where Greece was a few months ago.

The economic, political and social costs would be enormous. Has Europe learnt nothing from the 1920s when Germany was, in many ways, in a similar situation to Greece today? Prevented from raising exports to service its foreign debt (reparations) by mercantilist policies, Germany embarked on a disastrous course of deflation and depression which paved the way for the horrors that followed. Today as then, deficit countries cannot simply save their way out of crisis, they must have the opportunity to grow their way out. And this is also the only way to limit the damage to surplus countries, who are otherwise also destined to lose out in terms of growth, employment and financial stability.

Social democracy in one country might have been made impossible, but social democracy in the EU might still fly. Discuss.


WorldbyStorm - April 30, 2010

I like it on first reading, but I’ll have to go away and think through some of the implications. Appreciate that PE.


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