Cóir interview with Professor Ray Kinsella about the direction of the EU, and the important economic questions that arise for voters as the second referendum on the Lisbon Treaty approaches.
The discussion ranges from the recession we are now experiencing, to the effect of the Lisbon Treaty on our economic difficulties, to comparisons with Iceland.Professor Kinsella argued that further EU centralisation would be the wrong course for Ireland to follow. What we really needed, hew pointed out, was serious work on national policy to make the long-overdue adjustments to help make us a competitive and productive economy.
The following article contains the essence of that conversation and is not a direct transcript of conversation except where indicated.
Last May, before the June 12th referendum on Lisbon, Professor Ray Kinsella argued that a No vote would best protect the Irish economy. The leading expert on banking warned that with a global recession looming, Lisbon was “a bad treaty for Ireland for a number of concrete reasons.” In particular, Professor Kinsella warned that the treaty could negatively affect Ireland’s open economy which has profited from a low corporate tax base, and wrote that the coming economic uncertainty would see many job losses. His foresight was in sharp contrast to the government who rubbished talks of a recession by accusing the commentators who saw it coming of talking down the economy.”
Ireland Inc. as he saw was living on borrowed time. Being kept afloat by foreign direct investment, the domestic economy was leaning heavily on a speculative market that was just about to collapse. With a global recession on the horizon, Ireland needed to retain control of her economy to enable the adjustment that would be required. He predicted (correctly) that we would not have a soft landing, but Ireland that needed to take firmer control of her destiny with proactive steps to make it an attractive location to invest, and to increase its productive competitiveness. The Irish political establishment, who were blind to the catastrophe created by the woeful policies of the previous ten years, could not see that.
Cóir: Did voting No to Lisbon have any detrimental effect on our economy? Did it add to or cause the recession.
The Lisbon Treaty has nothing to do with the present recession. The treaty itself has very little relevance to the international economy. Its concern is still the internal administrative, legislature, and governance issues that were raised during the last debate. The Lisbon Treaty would not make it any easier for the EU to devise and implement policies or strategies to tackle the international economic crisis we are now in. In its absence the EU is getting on with its efforts to address the economic crisis we face unhindered. We didn’t for instance need the Lisbon treaty to agree on the Basle II agreement on capital adequacy for banks.
If one were to contemplate the argument that it (the Lisbon Treaty) is a necessary strategic step towards recovery it makes very little sense. The Lisbon Treaty was drawn up during a time of strong growth (and most countries signed up to it during this time) so it seems to be a redundant agreement designed for a completely different set of circumstances to the present ones. On those arguments alone it is perhaps a useless agreement for the recessionary times we now face.
Having said all that though, it must be stated above all; that the Lisbon Treaty is not a policy document for the recession. The EU will face the recession and draw up its economic policies and agreements with or without the Lisbon Treaty. As we know the Irish government has the prerogative to make decisions for Ireland on international economic policies so long as it doesn’t affect our Constitution. It is only the constitutional element which makes the Lisbon treaty a referenda matter, but the government can carry on at the moment, as they have done, working with their EU partners in devising EU policies in response to the crisis.
Cóir: Did our membership of the euro zone have any negative effect on our economy? What are the positive effects it brought?A common currency has obvious positive advantages for an economic area. It allows for comparison of prices and trade without the need for currency exchange and its associated costs. For the administrators of a common market a single monetary system is the desired position.
The fiscal policies of the euro zone, controlled by the European Central bank, are orientated towards German economic interests. During the past ten years low growth and low inflation were the primary objectives for the policymakers of the Eurozone; and its one-size-fits-all policies were calculated to maintain this German stability.
So how did Ireland’s inflation grow so rapidly under the same policies? Well, the truth is that although Irish inflation far outstripped that of the EU average if you were to take out the gross inflation in property from the inflation calculations on a year to year basis Ireland was closely in line with the EU average.
The fact that Ireland availed of the low interest rates of the European Central Bank, and exploited so spectacularly the credit available on the international markets, was incidental to the centrally-orientated policies of the Eurozone. Ireland’s micro-economy is a minor concern to Eurozone policy makers whose chief concern is the stability of the large central economies of France and Germany. The Irish property bubble, fuelled by a multitude of short-sighted lending leveraging systems, was chiefly of our own doing though.
The truth of the matter is that Ireland’s problems were chiefly internal and still are. Ireland is lacking in political direction and with its pursuit of its present economic policies vis-à-vis the banking bailout, is throwing good money after bad.
I am in agreement with the growing consensus that it is time to wind down many banks such as Anglo Irish Bank, and that to do so would not shake the confidence of the international markets in Ireland Inc.
Unfortunately there does not seem to be the vision in Irish politics to revise their economic approach and their relationship with the fiscal institutions. At this stage the government have lost the impetus to drive the banks in a new direction which is equitable and serving of the country, and they don’t seem capable of a new vision. Unfortunately, this leaves the people bailing out banks, at a huge cost, and the banks still pursue an objective of correcting their books, not doing what is right for the country.
Added to this, giving bailout money to the banks only serves the interests of the banks as they are building their reserves to reduce their loan-to-reserve ratio, and they are not passing it on to the public in loans. So paradoxically, instead of stabilising the economy it only stabilises the banks.
Cóir: Would a Yes to Lisbon be of any assistance in our economic recovery?Professor Kinsella didn’t think it would. He said that:
“The Lisbon Treaty has nothing to offer in that regard and it is a further step in a direction that the EU embarked on a long time ago. Policy makers (many with the best of intentions who may not have been aware of where their policies would take them) have steered the EU on an evolution where values centred on the human person have given way to economy-driven values.”
“That is not to say that a well structured economy cannot be centred on the human person. It can. As a matter of fact, good business practice is necessary to uphold these aims because good business and order leads to a better quality of life, a meaningful place in society, and the enhanced dignity of the human person.”
“However, the truth of the matter is that the EU views people as an economic unit, and whether that unit is measured as a member of the proletariat or a consumer; both visions demean the human person as they see him or her as an extension of a political philosophy. For instance the shift away from the traditional farming model over the past forty years has been a disaster. Socio-economic policy should be centred on the dignity of the human person but this policy, like most others within the EU, is centred on markets and the cheapest way at any particular time to supply them. The dangers of this policy, with its overdependence on transport and energy, are obvious (as the food price hikes, particularly in grain, of 2007 are testament to) but there is also the loss of social cohesion and community. Unless these factors are the first priority, the policy offers no long term hope.”
Professor Kinsella also pointed out that Irish politics unfortunately have a laissez-faire attitude to socio-economic policies and have shown a history of looking to others for ideas and leadership. The past ten years were an unfortunate example of this attitude and the denial of the government that we were blundering our way into dire trouble through borrowing and unsustainable growth only serves to highlight the sheer lack of purpose and planning within Irish politics.
Our leaders will say that the Lisbon Treaty will offer a unified Europe, a solid block with power to be a driver of global policies. However, Professor Kinsella says this is simply not true.
Rather, he argues, the EU is a single block and it is presently making decisions on policies to tackle the global crisis and protect itself from the worst effects of the recession. What this attitude says is that the Irish government and our financial institutions are without ideas and are willing to do as they have always done, follow the lead of everyone else while dabbling in cronyism. The government(with all the financial experts at their disposal) stood by as if they were blind and let the economy burn itself out in a blaze of inflation and borrowing based on unsustainable growth. This orgy is indicative of the problem with Irish politics which can only be described as middle-man politics.
Cóir: Is there any truth to the claim that Ireland would be another Iceland without the EU?No. There were scary parallels between the meltdown in Iceland’s economy and the implosion of Ireland’s economy. Both leveraged their economy to extraordinary levels: they both borrowed heavily using present assets and reserves as surety. Iceland borrowed at a ratio of ten to one. Iceland then lent out and invested abroad. Of course when the recession hit they found that all these investments could no longer be backed with any real money.
This spectacularly greedy speculation all sounds familiar to us. But the difference is that Iceland did it on a far greater scale to Ireland and was more dependant on it than we were.
Being members of the EU did not cushion us or save us from the fallout of this. The truth is that if intervention is called for it will probably be the IMF who will step in and not the European Central Bank. If the ECB or Germany stands in to bail Ireland and Spain, Greece, etc. out, it could spell disaster for the Euro and for the German economy (which is seen as a sort of barometer for the health of the European economy as a whole).
Always a pragmatist and never lending himself to hyperbole, Professor Kinsella outlined two alternative scenarios for the next ten years. A “the right way” giving the best outcome for Ireland arising from the best policies, and “the wrong way” charting a prediction of the worst outcome over the next ten years and the policies that could lead us there.“Well, there is no best scenario just a least bad scenario. In both cases I think the government will fail to form a budget later in the year and foreign help will be sought to bail us out of a very tricky financial situation.
“If the government fail to form a budget they will likely fall and the IMF will be called in to provide a backing loan, most likely for a ten year period. The conditions of this loan will be brutal and we will feel the pain of this for a long time. This outcome, while having painful consequences and requiring considerable adjustments in the standards we have become accustomed to, is one of the better scenarios.
“The worst I could predict is that a contagion will form after the government falls and Ireland defaults on its loans. A contagion is a bit like a run on the banks but in this case it would be international lenders and investors rushing to withdraw any money they have invested in Ireland’s economy.
“If Germany then stands in to guarantee Irish liabilities and props up the other ailing EU economies of Spain, Portugal, and Greece to prevent the crumbling of the EU project, the euro could lose its stability and no longer be perceived as an international reference currency; i.e. a currency by which exchange rates are referred. At the present the euro holds the position in the EU that the US dollar holds globally. The Dollar lost this position in the 70s when the US borrowed excessively to finance the Vietnam war, the resulting loss of confidence in the Dollar led to its loss of its position as a Global reference currency which in turn led to floating currencies and disruption to the markets and the stability of the US economy. A similar loss of stability to the euro would be a massive setback to the EU.
“Possibly the EU as a financial backer is not capable of steering Ireland and its other ailing economies through the next ten years. Each country must take a pro-active part in its own recovery including cooperating at an international level to bring stability to financial markets through stable financial practice. This is possible; it has already begun, and will continue with or without the Lisbon Treaty. The Basle II agreement on capital adequacy for banks is a good start to curtail the bad practices that have grown in banking, and other steps will be taken. It is a mistake to presume that this won’t be done without the Lisbon Treaty coming into force.”