Dashed across to Dublin this week-end, to address the Irish Green Party Conference, and met up with Richard Douthwaite of FEASTA – the excellent Irish think tank. I was shocked by what is happening to our neighbours. One newspaper headline declared yesterday that in this country of just 5 million people, 5,000 are being laid off every week. According to the Economist Intelligence Unit, “in October there were 260,300 claimants on a seasonally adjusted basis, up by a mammoth 57.1% on a year earlier, and by 6 .5% on the previous month (the largest ever monthly jump in claimant numbers.)”
Readers will have heard about Dell Computers laying off 1,900 workers last week; but you may not know that the venerable Waterford Glass company – part of Anthony Reilly’s Wedgewood empire – is threatened with closure too, if a buyer cannot be found. That’s an awful lot of pain, anguish and suffering – for men and women and their families. It does not bear thinking about. And it is severely damaging the banks that lent money to these men and women during the housing boom.
Like all the Anglo-American economies, the cause lies in the bursting of a massive and costly credit bubble used to finance and inflate Ireland’s property and other asset markets. And I am convinced that Ireland’s crisis has been exacerbated by the actions and policies of the European Central Bank. Indeed in my view, there is a direct link between high levels of unemployment in Ireland in October, and the decision of the governors of the European Central Bank, led by Jean-Claude Trichet, to raise the official base rate (known as the marginal lending rate) in July, 2008 to a whopping 5.25% – at the very height of the financial crisis. Since then Trichet and ECB governors have lowered the base rate to 2.5%, but it remains higher than that of the UK and the US. And I remind you again, that the base rate is not the rate that determines the borrowing costs of most companies and households; those are determined by much higher private bank rates – who would have passed on the ECB rate to their customers in the months following the July announcement.
The Economist Intelligence Unit had hoped that Ireland would compensate for the loss in domestic demand and activity, by increasing exports. However as the crisis in Ireland deepened, so the Irish currency – the Euro – rose in value, making Irish exports less competitive than say, British exports.
At the same time the steep rise in unemployment claimants rapidly helped empty the Irish government’s coffers. As recently as 2006 that government had made prudent provision with a fiscal surplus of 3% of GDP. But by 2008 the deficit had risen dramatically – and unsurprisingly – to 6.5% of GDP. The Economist Intelligence Unit (EIU) expects it to rise to almost 9% of GDP in 2009. The EIU describes Ireland’s “public finances” as in a “state of crisis unparalleled in any other developed economy….In early November the European Commission launched the excessive-deficit procedure against Ireland for its breaches of the Stability and Growth Pact……..given the magnitude of the deficits…Ireland may become the first country to be threatened with the imposition of fines.”
So: a small country faced by the massive debtonation of a privately-financed credit bubble and by dramatically rising debt, unemployment and economic failure at home, lacks all the major levers to deal with, and stabilise the crisis. Unlike Britain and the United States, Ireland has no control over the key rate of interest, which is set far away in Frankfurt. It has no control over the value of the currency in which its citizens trade. And far from emulatiung the US and UK by stimulating the economy through government spending, Ireland’s government is now obliged, by the European Commission, to cut back government spending steeply – and faces costly financial penalties for incurring the deficit.
The Irish Times believes that the people of Ireland must do what the Irish have always done to avoid crisis: they must emigrate. So the Times provided a useful guide in yesterday’s edition to immigration procedures around the world. With unemployment rising globally, its going to be harder for the huddled masses to find a welcome in a foreign country.
But it may not all be doom and gloom. This crisis may just give the Irish an opportunity to take back control over their own economy;. And the Green Party is hoping that the new austerity will help lower consumer expectations, and encourage the Irish as a whole to live more simply and more sustainably. For, as Green Party speakers emphasised yesterday – living more simply and sustainably could improve everyone’s quality of life too. A tough message in tough times, but its the only hopeful one to emerge from the encircling gloom.