[UPDATE 2, 23/1/11] The Green party ministers have just announced their resignation from the government bringing the number of remaining cabinet ministers down to the constitutional minimum of 7. They have also called for the general election date to be brought forward and for the Finance Bill to be passed on an accelerated parliamentary schedule with the agreement of the opposition.[End UPDATE 2]
[UPDATE 22/1/11] Brian Cowen has resigned as leader of Fianna Fail, but not as Taoiseach. The government (with only nine cabinet Ministers) thus remains in place at least until a parliamentary vote of confidence next week. [End UPDATE]
The Irish Government is slowly disintegrating as the fall-out from the banking bail-out and the ECB/IMF deal gradually works its way through the body politic.
First there was a failed internal Fianna Fail no confidence motion in the Taoiseach and Fianna Fail Leader Brian Cowen led by the Minister for External affairs, Michael Martin. At the last moment, having seen the way the numbers were going, Finance Minister, Brian Lenihan swung his support in behind Brian Cowen even though he had been agitating behind the scenes against Cowen for the past few months. This angered his own supporters who had been gearing up for the succession battle and who now felt betrayed and exposed by his sudden volte face.
Exit, stage left, Michael Martin from the Government and Brian Lenihan from the affections of his own supporters and the bulk of the party who saw him as trying to be too clever by half.
Then it was Brian Cowen’s turn to shoot himself in the foot. Having consolidated his position by offering ministerial positions to some of the waverers he engineered the immediate resignations of 5 more cabinet ministers (who had planned to retire after the next general election) with the intent of reshuffling his cabinet and presenting a “radically” new team to fight the general election.
Unfortunately he had neglected to listen to the concerns of his coalition partners, the Greens, who viewed such a reshuffle just before a general election as a stunt which would not go down well with the electorate. Their refusal to support the cabinet reshuffle meant that Cowen was left with a cabinet of 9 rather than 15 Ministers and those 9 include two Green Ministers and at least one other minister who had acknowledged she voted against Cowen in the vote of confidence. Apparently the Minister concerned, Mary Hanafin, has confidence in Cowen as Taoiseach, but not as leader of Fianna Fail, a position hardly likely to endear her to all non-Fianna Failers…If he is not good enough to be leader of Fianna Fail, how can be be good enough to lead the country?
Now some Fianna Fail dissidents are threatening to vote against the government in a parliamentary vote of No Confidence tabled by the Labour Party and due to be debated early next week. If Brian Cowen loses that vote he will have no option but to resign immediately and bring forward the general election currently announced for March 11th.
The significance of this is that there may then be no time to pass the Finance Bill which gives effect to the draconian budget agreed as part of the IMF/ECB deal. With Labour and Sinn Fein calling for a renegotiation of that deal there is also no guarantee that this Finance Bill will be passed by any incoming Government. Thus the whole ECB/IMF “rescue” plan for Ireland may be in the process of unravelling.
Fianna Fail is in free-fall in the polls, but the electoral debate between the left (Labour and Sinn Fein) and the right (Fine Gael) is likely to be around how realistic the prospects for a renegotiation of the IMF/ECP plan really are.
The IMF/ECB plan includes the provision of c. €67 Billion in loans to Ireland to cover the cost of the bank bailout and shelter Ireland from very hostile sovereign debt markets. The plan is unpopular in Ireland because the funds are being used, in the main, to bail-out the German, French and British banks who made bad investments in Irish banks, and not to support the Irish economy per se. Worse that that, whereas the ECB/IMF are borrowing the money at c. 2.5%. on international markets, they are lending it on to Ireland at an average interest rate of c. 5.5% thus booking a tidy profit of c. €2 Billion p.a. in interest payments alone.
Labour and Sinn Fein have been very non-specific about what a renegotiation of the ECB/IMF plan might look like, so this diary attempts to predict how such a renegotiation might play out.
Basically the IMF/ECB plan (PDF)involves four successive annual budgets cutting €18 Billion from Irish public expenditure with €6 Billion front loaded into the 2010 Budget (now subject to implementation of the Finance Bill currently before the Dail (Parliament). That €6 Billion in cuts is divided roughly into a €2 Billion increase in taxes, a €2 Billion cut in capital expenditure, and a €2 Billion cut in current expenditure (mainly health, social protection, and education).
The combination of tax increases and expenditure reductions are proving catastrophic for many families where the bread earners are losing their jobs, which are in negative equity (houses have lost 50% in value since 2007), and who are now being hit by swingeing increases in taxes, health insurance (+45%) and mortgage interest rates.
However just as damaging, in the short term, is the deflationary impact of the reduction in capital expenditure which is undermining any prospect of a broader economic recovery otherwise being led by very healthy exports. Ireland currently has a massive trade surplus with exports double imports…
Irish trade surplus among top in EU – The Irish Times – Fri, Jan 14, 2011
Ireland recorded the second highest trade surplus in the EU in the first nine months of 2010, new data showed today.
According to the statistical office of the European Union Eurostat, only Germany ranked higher for the period, recording a €127.6 billion surplus. Coming in behind Ireland was the Netherlands, with a €34 billion surplus and Belgium, at €15.8 billion.
Over the nine months, Irish exports rose by 4 per cent to €73.3 billion, and imports fell by 1 per cent to €37.1 billion, resulting in a €36.2 billion surplus. That was a rise of €3.2 billion compared to the same period in 2009.
Thus even though the famed export led German economy is 16 times bigger than Ireland’s, its export surplus is only 3.5 times larger. But Ireland’s export sector is heavily dominated by very capital intensive foreign multinationals who provide only limited employment opportunities, and cannot compensate for the massive redundancies being created in every other sector of the economy.
The solution, therefore, to the Irish economic free-fall in other sectors has to involve some measure of reflation not permitted under the ECB/IMF plan. Merkel seems determined that the IMF/ECB plan must remain punitive to discourage other “profligate” nations from going down the bail-out road. But if the Irish electorate rejects the bail-out as currently constituted, the stability of the entire Eurozone could once again be threatened.
One solution might be to permit the €2 Billion”profit” made by the IMF/ECB on the loans to Ireland to be used to restore the cuts in capital expenditure in the budget – focused on green energy and infrastructural projects receiving specific EU approval – which would have the side benefit of facilitating an least a partial recovery in the domestic sector and labour market.
Merkel could be reassured that the money isn’t going toward “excessive” social expenditures, and the EU’s objectives for green energy and economic infrastructure could be supported. When Irish MEP suggested that the EU was complicit in the impoverishment of working class Irish families, Barroso was not best pleased:
Barroso rounds on Higgins – The Irish Times – Wed, Jan 19, 2011
European Commission president Jose Manuel Barroso reacted with fury today as Irish Socialist MEP Joe Higgins accused Brussels of destroying Irish services and living standards.
During a debate at the European Parliament in Strasbourg, Mr Higgins described the European Financial Stability Facility, as the euro zone rescue fund is known, as “nothing more than another tool to cushion major European banks from the consequences of their reckless speculation on the financial markets”.
Mr Higgins claimed the EFSF was a “mechanism to make working class people throughout Europe pay for the crisis of a broken financial system and a crisis-ridden European capitalism”.
He accused Mr Barroso and European Council president Herman Van Rompuy of effectively transferring tens of billions of euros of private bad debts “on to the shoulders of the Irish people”.
Mr Higgins claimed the EU was destroying services and the living standards of Irish people. “Far from being a bailout, your International Monetary Fund-EU intervention in Ireland is a mechanism to make vassals of Irish taxpayers to the European banks,” he said. “We on the left in Ireland will insist that it goes to a referendum of the Irish people before it is passed.”
A furious Mr Barroso rejected the claims, instead blaming Irish banks and lax regulation for Ireland’s problems.
“To the distinguished member of this Parliament who comes from Ireland, who asked a question suggesting that the problems of Ireland were created by Europe, let me tell you: the problems of Ireland were created by the irresponsible financial behaviour of some Irish institutions, and by the lack of supervision in the Irish market.
“Europe is now part of the solution, it is trying to support Ireland. But it was not Europe that created this fiscally irresponsible situation, and this financially irresponsible behaviour,” he said.
However no one, Joe Higgins included, is disputing that the banks and lax financial regulation in Ireland caused a large part of the problem. The problem lies in the deflationary solution currently being proposed by the IMF/ECB. The EU has it in its power to resolve at least part of that problem, and at no net cost to the EU. Unless there is at least some flexibility on that IMF/ECB plan, the Irish economy and polity will continue to implode, and any new Government could well suffer the same fate as Fianna Fail. Debts which cannot be paid will not be paid… so why wait until both Ireland and the Eurozone are fatally destabilised?
