|Politics precedes economics and so it follows that if there is an economic crisis there must be a political cause. Economics might influence human behaviour, but politics is determinant.
Objectively Europe should not have an economic crisis. Its debt is dwarfed by the USA's and yet nobody can deny that Europe is in economic turmoil. Why?
The seeds of the current crisis were sown in 1989. Western Europe was absorbed in its own project when the deck had to reshuffled following the collapse of the Soviet house of cards. Germany was distracted by the prospect of unification and France feared that the European project would be abandoned.
Perhaps Francois Mitterrand, Helmut Kohl and Giulio Andreotti thought that economics could, after all, determine politics. They hoped that a single currency would counter the centrifugal force of EU enlargement. But the primacy of politics remains. The contradictions of a single currency in a heterogeneous polity could only be resolved by skilful political management. But Sarkozy is not Mitterrand. Merkel is not Kohl and Christian Democracy has collapsed in Italy so the question of who is in charge in that country is irrelevant.
The unravelling of the European project proceeded with the undermining of the Commission which had a unifying function. The powerful states began to meet and decide things among themselves and the financial markets could not help noticing.
The Irish State is not solely responsibly for its crisis. It played by the rules and before the crisis had one of the lowest State Debt to Gross Domestic Product ratios in the Euro zone. Perhaps it should have realised that private debt was as important as State debt and an escalation of private debt would very quickly impact on State debt, especially if the creditors were outside the State. But if it failed to appreciate this the same could be said of Europe. Europe had no provisions relating to private debt in its Growth and Stability Pact.
Before the crisis EU interest rates were uniform across the Euro zone. But as soon as the countries of the periphery ran into trouble the question of default arose. The markets began to lose faith in the politics of Europe. If there was no longer the political will to continue the European project the imbalance that the EU has with the rest of the world, which is not a problem, becomes less important than the imbalances within the Euro zone.
The word credit originates from the Latin word credere "to believe". At around 2007 international investors ceased to believe in the Celtic Tiger story. The present Government acted quickly to make the necessary adjustments and was praised by international commentators for obtaining "first mover advantage". The implementation of those adjustments has been successful if measured purely on economic criteria. The State's financial position is projected to be better than plan for 2010. Our trading position has also improved. The State will return to a balance of payments surplus in 2011.
This is in contrast to most other EU countries, not least our nearest neighbour.
Manufacturing output has surged ahead. It is likely to be up 10% in 2010.
The Achilles heel has been our banks. This prompted the Government to resolve this crisis in the most transparent and aggressive manner imaginable. A recent Goldman Sachs report indicates that the cost of the banking crisis will be about 22% of GDP. This is less than the forecast of NAMA (28%). No one knows how much the Germans will have to pay to resolve their banking crisis. Estimates range from 30% to 50% of GDP.
Goldman Sachs—in contrast to the prophets of doom who write for The Irish Times—thinks that NAMA will make a substantial profit and that the Irish banks would be over capitalised if market conditions were normal.
But economic criteria count for nothing if the politics have no credibility.
There has been a run on the Irish banks due to political incoherence from the EU. Angela Merkel has speculated on torching senior bond-holders as a way of resolving sovereign debt and the European Central Bank has failed to perform the function of a central bank, which is to provide liquidity to the system. There also appears to be a desire on behalf of elements of continental Europe to pretend that the banking crisis in the EU is confined to Ireland. All of this has caused a flight of deposits from the Irish banking system.
The incoherence at the EU level has been exacerbated by domestic incoherence. After more than three years the Greens have wobbled at the worst of all possible times. The opposition to Fianna Fáil has indulged in an orgy of moral denunciations which has undermined the State's ability to negotiate with the IMF and EU.
As we go to print the EU and IMF have agreed/imposed a deal on the Irish State. The interest rate on the 67.5 billion drawdown facility will probably be a punitive 5.8%. The markets are not impressed. The EU has not made up its mind whether to punish Ireland or help her emerge from the crisis. As a result, the uncertainty will spread to other vulnerable countries within the Euro zone.
The media in this country, aided by the British media, delight in our alleged loss of sovereignty. In contrast to the continental media the viability of the State is being called into question.
The Irish Political Review completely rejects this passive approach. The State must rediscover its self belief. If it does not, all economic prescriptions are doomed to failure.
The problem both in Ireland and the EU is political, not economic.
C O N T E N T S
Ireland: The Political Crisis. Editorial
Ms Laffan's Thoughts. Editorial on The EU And The Crisis
The Irish Times And Our Gallant Allies. Editorial
Readers' Letters: Poppies At Celtic. Martyn Joseph Gallogly; Remembering The Minutes. Eamon Dyas
Falling Off The Tigger? Editorial
Global Crisis. Eamon Dyas
Editorial Digest. (SF Victory; Gerry Goes South; Maggie's Poppy; Alex Attwood; Humanists Too!; NI Assembly; DUP; Tories v. UUP; Robinson & Education; Unionist Ireland; Prisoners; Policing NI; Roads; Rail; Royal Giggle; Bad Health; Dublin March; Corruption; Recession
The Means Test. Wilson John Haire (poem)
Mickey Dwyer. Obituary
Shorts from the Long Fellow (Why Save Anglo Irish Bank?; Bondholders & Depositors; Media & Crisis; NAMA Profits; Crony Capitalism; Fianna Fail; Labour; Fine Gael; Corruption?; Irish Times Perspective; Tin-Tin Award
Ireland & The Great War. Pat Walsh reports on Collins Barracks Event
Protestants In West Cork. Jack Lane (review)
Performance Economics. John Martin (review)
Driving Ol' Éire Down. Seán McGouran
The Harris Privilege. Report
1641 Massacre. Pat Muldowney (unpublished letter)
The Earl Of Strafford And 1641. John Minahane (Letter, with response)
Es Ahora. Julianne Herlihy (Rare Old Times; More Media Figures)
The Ghost Of Admiral Hall. Tim O'Sullivan (reply to Jeff Dudgeon)
Jack Jones Vindicated. Manus O'Riordan (part 4)
Biteback: Legitimacy? Nick Folley (unpublished letter)
Naval Warfare. Pat Walsh (part 5)
Does It Stack Up? Michael Stack (Betting Winnings; Banking Crisis; Public Sector Crisis; Bank For International Settlements)
Tears Of Ice. Wilson John Haire (poem)
Cultural Cringe. Seán McGouran
War Veterans. Report of Letter by Mick Nugent
Labour Comment, edited by Pat Maloney:
Quo Vadis? ICTU Lets Itself Down