Austerity Talk at Battle of Ideas in London

The ‘Battle of Ideas’ festival held at the Barbican in London last weekend included a panel session entitled ‘Piigs can’t fly: Democracy/Technocracy/Austerity’. I was invited to make a 7-minute presentation of my views as expressed at various crisis conferences over the years:

Back in 1986, long before most people imagined that the single currency would really come into being, Paul Krugman wrote of the potential fiscal co-ordination problem: a bias towards excessive restriction because each country ignores the impact of its actions on the exports of others. “Achieving co-ordination of fiscal policies is probably even harder politically than co-ordination of monetary policies. There is not even temporarily a natural central player whose actions can solve the co-ordination problem. None the less, in surveying the problems of European integration, it is hard to avoid the conclusion that this is the systemic change most needed in the near future”.

Without this problem ever having been addressed, the potential for exchange-rate realignment was locked down. As many US economists warned, the euro was a federalist project lacking in federalist foundations, whether minimalist (banking union or federalist insurance schemes) or maximalist (a Washington-style federal budget).

In the face of this existing (anti-Keynesian?; pre-Keynesian?; antediluvian?) institutional structure, Ireland had no choice but to impose austerity (which would have been required even in the absence of the disastrous bank guarantee of 2008). The large primary budget deficits – which meant that government spending would still far exceed tax revenues even if interest payments ceased – precluded debt default.

The actions of the ECB in 2010 in forcing us to pay off remaining unsecured bank bonds (by threatening to cut off liquidity) appear to have been beyond its mandate and it is difficult to think of any reason not to support economist Colm McCarthy’s call for this to be brought to the ECJ. But, as he notes, the need for  retrenchment would have remained.

The Irish experience under austerity has been distinguished by remarkable industrial peace. Paddy Teahon, the chief civil servant behind social partnership, argued that the process had promoted a shared understanding among unions, employers and the government of the key mechanisms and relationships that drive the economy. I wrote back in 2009 that “the Teahon view will be seen to be of validity if some agreement can be reached to reduce public-sector pay until the current crisis is overcome”.

As to whether austerity has worked, it has achieved what it was supposed to achieve, which was to close the deficit and slow the accelerating debt ratio. It was never supposed on its own to get the economy back to work, but rather to position the economy well for when markets rebounded. The flexibility of the labour market makes it easier for Ireland to bounce back from austerity than is the case for Greece for example. So does the openness of the economy, as long as export markets recover.

[All of the other panellists having been hostile to ‘the displacement of democracy by technocracy’, I suggested that:] Many or most economists of my acquaintance in Ireland were content enough with the policies espoused by, and implemented at the behest of, the troika. Technocracy can be viewed as an advantageous buffer between government and – on the other hand – purveyors of snake oil and the representatives of powerful entrenched interests (though technocrats too are not immune, of course, from regulatory capture).

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19 thoughts on “Austerity Talk at Battle of Ideas in London”

  1. “Many or most economists of my acquaintance in Ireland were content enough with the policies espoused by, and implemented at the behest of, the troika. Technocracy can be viewed as an advantageous buffer between government…”

    The question that strikes me from reading the last paragraph is this;
    Was technocracy a buffer between government and others, or was it in fact a replacement of democracy, in all but name, for a period?

    Your support of Colm McCarthy’s call to have the ECB actions in 2010 subject to judicial review is welcome. We need to know whose purse was being protected, when Ireland was forced to pay the creditors of private banks.
    Ireland needs to stop grovelling to EU institutions.

  2. @ JR: Ireland – or rather our government ministers ‘grovelled’ when they capitulated and betrayed us over the ‘bank guarantee’. It was private debt – a lot of it leveraged (hence fiat), and they could have, and should have stood their ground and told the ECB – “Its your problem.”

    Technocracy works in Ireland because our Government is an elected dictatorship – so if they are ‘set-aside’ temporarily, its likely that some more objective policies may be enacted – for a while. That being said, austerity or whatever you want to term it, was and is, completely counterproductive. All its is doing is providing vital life-support to the financial sector of our economy, a sector which has entered a permanent vegetative state. If this is not obvious, then … …

    “It [austerity] was never supposed on its own to get the economy back to work, but rather to position the economy well for when markets rebounded.”

    So what were the missing bits? Or am I missing something?

    The so-called markets – if you mean the financial ones, are shagged. They are churning the almost cost free fiat money provided by CBs, slicing off their commissions as the money passes from one stage to the next. Finally all that “passes out to the road for the sparrows” is by way of small consumer stuff. Supports some service jobs in dealerships, apparel vendors, pubs, bistros, KFC, McD, etc. etc. But not productive manufacturing by local firms – to make stuff to export. To earn revenue. Call it charity handouts. Some positioning.

    I suppose its the salience of the symptoms that attract attention, not the underlying disease: our developed economies are stagnating. The only real redemption – and its a pretty drastic one, is to default or writedown all unpayable debts, and be damned. But we’re damned anyhows. So what’s the difference?

    This is not the first time western developed economies have stagnated. But it is the first time that public, corporate and private debts are so large that only a sustained rate-of-growth of 10% for 10 years is needed. That’s likely? Like hell it is. And of course its also the first time that China and India (and other Asian economies) are actively undercutting us. Recovery? I believe we should forget it.

  3. When did Dail Eireann approve the social partnership deals? Technocracy is in the eye of the beholder.

  4. “Technocrats are not immune from regulatory capture”…I would suggest this is a gross understatement. Technocrats are the manifestation of regulatory capture!

  5. That the euro was a leap in the dark in institutional terms was known to more people than Paul Krugman.

    http://aei.pitt.edu/1007/1/monetary_delors.pdf

    France and Germany, the two main players, are still struggling to deal with the consequences at an EU level.

    http://www.ft.com/intl/cms/s/0/5479747a-5873-11e4-942f-00144feab7de.html?siteedition=intl#axzz3GlOGQZwc

    No country was forced to join the euro enterprise. Each has had to deal with the consequences of the international financial crisis (and it was and remains international) in areas where no agreement on how to proceed existed.

    Indeed, the central question remains unanswered i.e. can responsibility for effective management of national economies ever be centralised in circumstances where the possibility of creating a full federation is effectively ruled out? The answer IMHO is no (as French ministers are finding out).

  6. “The Irish experience under austerity has been distinguished by remarkable industrial peace. ”

    True but PS salaries have been saved at the expense of the younger generation, many of whom have emigrated having been educated in Ireland . Not everyone got a peace dividend.

  7. @ DOCM

    ” i.e. can responsibility for effective management of national economies ever be centralised in circumstances where the possibility of creating a full federation is effectively ruled out? ”

    If they want the Euro to survive you gotta believe they’ll make it happen. Backs against the wall is the best position for euro decision making IMO.

    Ultimately it depends on how much the Germans love their money. Angela cried when she thought Greece would go or around that time anyway. She changed her mind. She’ll do it again. Otherwise the Euro will be Angela’s ashes.

  8. @ seafóid

    That is a question to which, I would suggest, nobody knows the answer. It is quite clear from the Delors Report, which launched the entire process, that he felt that it would be answered in the negative if governments chose to introduce EMU with the M but without the E.

    It has not happened; yet!

    There are, believe it or not, considerable advantages to having a single currency. I, for one, am pleased to share it. My only regret is that those who advocated abandoning it are not now paid, or receiving their pensions, in whatever was their version of a replacement.

    P.S. It is a bit of an irony that the daughter of Delors, Martine Aubry, First Secretary of the Socialist Party, should have such an antediluvian view of economic theory. I doubt if her father shares, or has ever shared, it.

  9. As Ireland’s budget deficit melts away, the UK’s budget deficit increases.

    https://uk.finance.yahoo.com/news/truly-shocking-already-huge-budget-200430130.html

    Target was 5.6% this year, based on a reduction of 12%. In first six months of this year, its up 10%. Looks like it could be over 6% both this year and next, compared with 3.7% and 2.7% forecast for Ireland.

    George Osborne may be a lot slimmer than Michael Noonan. Alas, the opposite is true for their deficits.

  10. @JTO

    The UK also has a current account challenge.
    Irish deficit is still a problem and if you want to grow your way out of the crisis you need healthy neighbours so Schadenfreude towards the UK is not really coherent.

  11. @Seafoid

    I totally agree with you that it is desirable for Ireland that all neighbouring countries should be doing well, the neighbouring island included. So, I agree with you that caution (on my part) is required when gloating at the UK performing less well than Ireland.

    However, I am also looking for the break-up and end of the UK asap, and Ireland doing better than the UK is a big help towards this. A scenario in 2017 in which Ireland has moved well ahead of the UK in GNI per capita (it already is ahead, but only just), is free of austerity with the UK still stuck in it, has much lower interest rates than the UK due to lower inflation and better balance-of-payments, is all-round perceived as economically and socially more successful than the UK, and then another referendum in Scotland and one in N. Ireland, would be ideal. All this now seems increasingly likely. The only area in which the UK is currently doing better than Ireland is unemployment, but the gap is narrowing quite rapidly.

    Once the UK is no more, I will naturally wish England all future success. Why, I might even support England in the 2020 World Cup if N. Ireland, Scotland and even Wales are free by then.

  12. @JohnTheOptimist

    So what? The British deficit is in Pounds. Which they print.
    Ours is in Euros. Which we don’t. And when we try the ECB get all aflutter cf. promissory notes.

    British unemployment meanwhile, a measure which actually matters, is about 6%….. not far off half Ireland’s unemployment rate.

    For anybody who can keep score, MMT has won the fight, the orthodox community just hasn’t realised it yet.

  13. “British unemployment meanwhile, a measure which actually matters, is about 6%….. not far off half Ireland’s unemployment rate.”

    A lot of the newer UK jobs are crap . I don’t think a 6% unemployment rates tells you much, nor does the US rate. It’s about quality not quantity because demand is what counts.

  14. fyi

    …. the European dream has continued its gradual metamorphosis into a dystopian nightmare — one whose ultimate goal is to slowly, softly snuff out all lingering remnants of Europe’s centuries-old democratic traditions.

    […] As the Daily Telegraphcolumnist Peter Oborne noted in a fascinating review of the late Peter Mair’s book Ruling the Void: The Hollowing of Western Democracy, anti-EU parties are on the rise throughout Europe:

    […] As the Transnational Institute notes in its working paper “Privatising Europe: Using the Crisis to Entrench Neoliberalism“, the dark irony is that “an economic crisis that many proclaimed as the ‘death of neoliberalism’ has instead been used to entrench neoliberalism.”

    […] Since the EU bailout frenzy began the prime ministers of Ireland, Portugal and Spain are now little more than branch managers for the European Central Bank and Goldman Sachs.

    […] Of course none of this would be possible if it weren’t for the abject failure of modern nation-state democracy — not only in Europe, but around the globe. As Mair wrote in the first paragraph of his book, although the political parties themselves remain, “they have become so disconnected from the wider society, and pursue a form of competition that is so lacking in meaning, that they no longer seem capable of sustaining democracy in its present form.”

    http://ragingbullshit.com/2014/10/21/death-by-a-thousand-cuts-the-silent-assassination-of-european-democracy-2/

  15. I’ll be very surprised if the next poll shows similar after the EU presenting Cameron with a bill for £1.7 billion.

    http://www.bbc.co.uk/news/uk-politics-29754168

    Having said that, it is entirely possible that the whole sham row has been stage-managed. The EU came to Cameron’s rescue during Scotland’s referendum, with blood-curdling threats about how a free Scotland would not be allowed to join the EU. In their new spirit of togetherness, it is quite possible that the EU agreed to (a) present Cameron with a huge bill (b) Cameron refuses to pay it (c) the EU withdraws the bill or reduces it to a small fraction of its original (d) Cameron is hailed as the heroic resister to the EU, the saviour of Blighty, the conqueror of Scotland, and gets re-elected easily.

  16. @ JTO

    It seems that it is a good deal less complicated than your taste for conspiracy theories allows.

    What occurred was clearly just another Whitehall communication cock-up, it being hard to know whether Cameron was furious because of this, the damaging political timing or a suspicion that he was being set up by the Commission, the last theory being easily debunked by it.

    http://europa.eu/rapid/press-release_MEMO-14-601_en.htm

    You can consult the first link on the so-called “own resources” decision and in particular Articles 4 and 5 dealing with the two-thirds rebate that the UK gets on its net contribution to the EU budget and the mind-boggling accountancy required to implement it (including a reduction in the cost to Germany, the Netherlands and Sweden which has to be carried by other countries, including Ireland).

    There is more to life than Cameron’s desperate efforts to avoid being outflanked by UKIP; and the UK public knows it.

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