Greek medicine necessary – bailout or not – and Ireland could learn a thing or two
This Western Debt crisis is, at its heart, a pretty simple beast. If you live beyond your means as a country for too long, you will eventually get into serious trouble. Just because IMF visits and bailouts have traditionally been the preserve of “banana republics” and truly impoverished nations doesn’t mean that axiom won’t hold true in Greece or Japan or Ireland or even the USA.
The difference between those countries who are quickly held to account and those that get more time to try to work their way out of a debt crisis is CONFIDENCE. And confidence, like all non-facutal measures of performance, can be terribly wrong.
The financial world has clearly lost confidence in the Greeks. All but the Japanese themselves have lost confidence in Japan. The efforts to “pay our way” in Ireland are designed to continue to keep a degree of confidence in Ireland. And in the USA, where meta-conditions are least conducive to politicians ever dealing with an ever-mounting debt crisis, people can’t buy enough Treasuries, meaning that they are very happy to lend their money to the US government.
At the heart of the Greek narrative, for the moment, is the austerity – usually preceded by the word “crippling” – where public sector jobs are to be cut, public sector wages are to be cut, the minimum wage is to be cut, pensions are to be cut, and a range of public entitlements are to be cut.
As I talked about on Friday, most of this is going to happen so that a tranche of bailout money sourced from the citizens of Europe can be released that will mainly go back to the international banks who lent money to Greece over the past decade.
In short, “crippling austerity” for the average Greek citizen, so that foreign banks don’t lose money.
That same narrative is actually 100% true for Ireland, except that (to those unaffected directly at least) the Irish austerity measures never seem to attract that “crippling” word.
Greece’s alternative is to default and leave the Euro. Ireland’s alternative is also to default and leave the Euro – although Ireland’s range of creditors are no longer just a bunch of junk bond houses, rather a more serious range of institutions like the IMF and the ECB.
The judgement to be made is whether or not short-term pain now is better than longer-term pain that may not save those economies anyway. As the Greeks have put it – “do I want to be killed now or die later?”
In any scenario, and in every country, the unpalatable fact is that these austerity measures have to be taken, no matter what.
Greece, even in a default/Drachma scenario, would have to make these sorts of cuts – maybe even deeper cuts – in any case.
What’s the difference to being asked to make these cuts now? It is that outflow of money back to the European bankers. A people might agree to a “war effort” to save their own country. But they won’t do it to save German and French banks. They won’t do it to save the Euro or the EU. They won’t do it if they know that the best they can hope for is to be back with a begging bowl again in a couple of years.
There will always be an element in a society who will feel that the global game is rigged. There will always be a group of people who feel that life is unfair and the tables are tilted in favour of the rich and that societies must work hard to level outcomes, not just opportunity. If Greece, or even Ireland, tried to go it alone, they would continue to try to hold sacrosanct all the entitlements and benefits that a country may have promised its people. I understand their sentiment, but they are so very wrong.
Ireland’s government spending is overdue a massive haircut. You may be surprised to hear me say that given that Finance Minister Noonan just introduced a new budget with yet more spending cuts.
But when times are tough, I believe that you need to scrutinize every Euro in an economy and decide if it is being used to its greatest marginal utility.
Ireland’s public sector, in size terms, is not overlarge. But it is overpaid. That is what European benchmarking tells us.
Starting with the pay and pension benefits of elected political leaders, Ireland should cut across the board. That sets a tone – it is another one of those “first thing you do, first day in office” moments that the FG/Labour coalition blew. It doesn’t just set a tone – it gives credibility and context to difficult public choices. Like the pension levy, some of these actions will take a lot of flak, but are fundamentally necessary.
The Irish civil service should be trimmed by 10%.
Wages should be cut, across the board, by 20%.
Strict performance management process should be implemented and managed well.
Elected officials should see a pay cut of 25% and should see significant cuts to their pensions.
The Taoiseach should take a 30% pay cut and see a significant reduction to pension (he can make it up on the speaking circuit)
Pensions for those who are 50 or older should remain untouched.
Pensions for those who are between 45 and 50 will be delayed 3 years and reduced by 10%.
Pensions for those who are between 40 and 45 will be delayed 5 years and reduced by 10%.
Pensions for those under 40 will be delayed 7 years and reduced by 10%.
The Croke Park agreement should be ripped up. It is an anachronism now.
Money saved will either be used to pay down debt or to make more stimulative investments for the nation (education, infrastructure and so on). It is understood that government spending cuts do take money out of the real economy (those civil servants spend their wages and pensions on goods and services too). So when we make these cuts we must have a credible plan to do better things with the money.
You see the tone? This is exactly the sort of thing that Ireland would have to do if it left the Euro and went back to the punt. In a national effort to put ourselves back on a path to national recovery, people may be persuaded to swallow this sort of thing if it is well presented by people who seem to be willing to make sacrifices too.
But Irish people, like the Greeks, won’t engage with this sort of program if the money saved is being used to pay Anglo bonds, or to repay loans with interest rates that are 5 times the level that the ECB is charging private banks to borrow money. You can’t blame them – it seems unfair and it is unfair.
However this plays out across Europe – and at some point in the future, here in the USA – the countries that can recover will have balanced fairness and sacrifice in just the right balance. It will take not just technocratic excellence, but superb motivational and leadership qualities. In Ireland’s case, it will also take the courage to go it alone.