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Economics & Finance

Irish unions seek a soft landing to harsh economic measures

David Begg

Could a consolidated EU financial administration mean an end to draconian bailout repayment terms? Ireland’s Union leader thinks so…

David Begg says the cost of cutting Ireland's deficit is too great - both in terms of human suffering and in the interest being paid on the 85 billion euro bailout from the European Union (EU).

Begg, General Secretary of the Irish Congress of Trade Unions, objects to lending rates he sees as unfair in comparison with other nations in the EU: interest payments on the rescue package for Ireland negotiated last year with the International Monetary Fund (IMF) and the EU are likely to exceed 500 million euros in 2011.

"Where the EU is charging around six percent that money is available at around three percent,” said Begg in an interview with INSEAD Knowledge. “These are harsh conditions which have been imposed as part of the Irish austerity package and it's crippling the country's citizens." he adds.

Ireland has pushed for a lower rate of interest but France and Germany have opposed the idea. France additionally wants Ireland to raise its low corporate tax rate, a key element of Irish economic policy, which the government refuses to change.

"If the viewpoint were more realistic, it would be possible to manage the problem in a sort of strategic way," says Begg. "The deflationary effect of the country's austerity programme is very damaging." Under the terms of the bailout agreement, Ireland should slash its debt back to the Euro zone limit of three percent of GDP by 2015. These sorts of proposals being put forward by the EU and the IMF risk "driving the economy into the ground", he claims. Unemployment in Ireland today hovers around 15 percent; domestic demand is moribund, having collapsed in the wake of the government's austerity programme and subsequent cutbacks in social spending.

As a consequence, Begg believes that Ireland has become a supplicant whose voice is not being properly heard in the EU or the IMF. "We are being bullied a little bit at the moment," he says. But he still believes that deeper European integration is the way forward. "I think it has now been realised that without economic and fiscal coordination, the European single currency project will not work. The dilemma is that although we need that very badly, the mood music in so many countries is hostile to deeper integration," Begg concludes.

A consolidated financial administration approach

Despite this current antipathy towards integration, Begg believes Europe would benefit from a consolidated EU financial administration (an entity called for by outgoing European Central Bank President Jean-Claude Trichet) and backs a proposal put forward by Paul de Grauwe, Professor of International Economics at Leuven University in Belgium, for a unified Euro zone sovereign debt market.

Begg says De Grauwe's plan builds on an earlier suggestion by the Brussels-based think-tank Bruegel. De Grauwe set out his plan in a recent paper entitled "the Governance of a Fragile Euro zone". His idea is to create two classes of sovereign debt. On the one hand, he suggests, governments would issue so-called "blue bonds" under the umbrella of a jointly guaranteed Eurobond covering debt up to the equivalent of 60 percent of their gross domestic product. In parallel, countries would finance debt in excess of 60 percent of GDP through so-called "red bonds" issued outside this umbrella, at higher interest rates reflecting the increased risk of potential default. These higher interest rates, says Begg, would act as an incentive to governments to reduce their overall debt burden.

Trichet's vision is an EU finance ministry with sweeping powers of economic governance over sovereign states in the Euro zone, which the ECB chief believes would restore confidence in the EU's ability to self-manage. While plans for taking the Euro zone forward may differ, the ideas of more centralised and equitable methods of dealing with the debt crisis, and closer EU integration, are gathering momentum in some quarters.

Will Ireland quit the Euro?

There is no question that Ireland did benefit from being part of the Euro zone. Direct foreign investment arrived more freely, and systemic shocks of inflation were mitigated by being part of the Euro. While a so-called "social partnership" between the government, employers and unions kept wage demands low in exchange for welfare and employment protection provisions, a major factor during the boom years was Ireland's geopolitical positioning as an intermediary through which the United States could access the single European market.

So where is this "social partnership" now? At the moment it's dead, says Begg. The system "collapsed during the reign of the previous government and this [present] government has made no efforts to reinstate it". But, Begg continues, "It seems to me that it won't be possible to properly govern the country in the longer term unless we have some agreement on what we should do and that should come to some form of social partnership. It's essentially the democratic corporatist model which was perfected by so many of the smaller countries of Europe, basically since the 1930s."

Will Ireland be leaving the Euro? Not according to Begg. "This would be a crazy idea in terms of the level of our foreign debt. Let's say a currency was recreated for Ireland - the Irish pound - its value will be much less than the Euro and immediately the magnitude of the external debt will mushroom."

Begg points out that although the Irish economy is facing many difficulties, there are still some positive signs. "This year for the first time in quite a number of years we will have a balance of trade surplus, so that is a significant thing which differentiates us from some of the other peripheral countries who are in difficulties."
 

The article was based on an interview with INSEAD Knowledge.

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