Before the financial crisis, Portugal, Italy, Ireland, Greece, and Spain had been able to finance their deficits at artificially low interest rates. They all assumed that their governments would be bailed out by other countries of the eurozone in order to preserve the holy European Union. FULL ARTICLE by Philipp Bagus
Source link: http://archive.mises.org/14806/the-irish-subjugation/
The Irish Subjugation
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I think there is little chance of this happening, unless Germany gets the “Euro Rapid Reaction Force” which they made some noise about a year or so ago. You need an army to force people to accept fiat money. Probably the Germans were thinking that a small, highly trained corps of commandos trained in crowd control and urban fighting would be sufficient to quell individual, small countries like Greece or Ireland. But this is highly dubious given the British experience in the tiny province of Northern Ireland. For one thing, such a force could only handle one country at a time, and you can see that already five or more EMU members are fiscal train wrecks. Could anything less than the entire massed armies of the European NATO members force all of the PIIGS to drain the bitter cup of German-imposed fiscal reform?
It is probably no coincidence that except for Iceland, none of the PIIGS have had what you would call a peaceful history for the last 100 years. Greece – fascist occupation, civil war, US-imposed puppet democracy. Portugal – fascist dictatorship, democratic only since 1974. Ireland – colonial occupation (ongoing), civil war, (partially) independent and democratic since 1922. Italy – fascist dictatorship, partisan guerilla war, US-imposed puppet democracy. Spain – civil war, fascist dictatorship, democratic only since 1975. Germany itself, needless to say, is not exactly a longstanding example peace and freedom.
And who knows what the fiscal problems are in the newer, Eastern European members of the EU? A year or two ago it was pointed out that the bad loans made in those countries were enough to wreck the largest banks of some of the smaller Western European countries, IIRC Austria, Belgium and Switzerland were mentioned. They are also a proportionately smaller, but still gigantic problem for Germany’s banks.
Wehrmacht Lite cannot impose made-in-Germany economic policies on both Eastern and Western Europe any more than Wehrmacht Heavy could, back in the day. Evidently the Germans have still not learned their lesson – that they should stop trying.
Philipp Bagus gives us outstanding analysis with a totally erroneous conclusion.
In his second paragraph he states correctly, “…the euro came with an implicit bailout guarantee permitting governments to overindulge in debt.” But this was not explicit and actually had nothing to do with the actual institution of the euro, a single currency for the EEU block. His analysis clearly demonstrates that it is the bailouts and the guarantee of loans that have caused the problem not the euro.
Articles in the Wall Street Journal have clearly demonstrated that after the bailouts were announced for Ireland both the borrowing rate for the Irish government and the rate to insure Irish government loans (CDS) increased. It is the bailouts that are making it more difficult for Ireland to weather the financial storm. It seems clear that the bailouts are also making the situation worse for Portugal and Spain, as Bagus’ article points out.
So the conclusion seems clear. No bailout would be better for the whole EEU than forcing Ireland to take a bailout. Clearly it is mercantilism at work as EEU members attempt to protect their banks at the expense of sound banking policies.
So what is Bagus conclusion? “The turmoil produced by the euro will then have served as an instrument for the development of a centralized state in Europe.” But none of Bagus’ analysis supports in any way a condemnation of the euro. The euro is simply the medium of exchange in the EEU countries, nothing more. It did not create the social spending problems of Greece, Portugal, or Spain, nor did it create the bailout of Irish banks. If anything, the euro forced these countries to deal with their financial intransigence sooner rather than later. Had these countries had independent currencies they could have each inflated their economies to hide their problems allowing the situation to become worse.
It is important to place the blame in the right place. It is the mercantilist ideas of the EEU governments that created the problems not a common currency for the EEU. Most do not realize it but the essence of Bagus’ argument is that the blame should be on a common currency, and that is a direct attack on an international gold standard, a one-world commodity based currency.
“Most do not realize it but the essence of Bagus’ argument is that the blame should be on a common currency, and that is a direct attack on an international gold standard, a one-world commodity based currency.”
An international gold standard or one-world commodity based currency would also prove to be disasterous, if forced by a central government. If it is forced and not implemented through voluntary trade in the free market, it doesn’t matter what the currency is; it simply won’t work.
“An international gold standard or one-world commodity based currency would also prove to be disasterous, if forced by a central government.” No. The root cause of the financial crisis has always been the implicit belief that the ECB would expand the supply of Euros to support the profligate spending of its members. There is no such implicit belief if nations were to adopt the gold standard. The gold standard cannot be inflated, so governments would be forced to live within their means. In other words, they would have no choice in the matter. If they could not raise enough money by taxing or borrowing honestly, they simply cannot spend the money, no matter what the reason, whether it be for welfare payments or bailouts of banks. As Mises said, the most important reform is returning the gold standard. All else falls into place.
Patrick, the United States saw what would happen if a “gold standard” were left in the hands of a central government during the 1800s. If enforced by a central government again, we would witness the same results. A gold standard can only work voluntarily by a free market or it won’t work at all.
I agree with jmorris
The gold standard prevents inflation in the long term. But, if coupled with central banking it allows it in the short term because the central bank can do things like declaring it’s own notes to be legal tender within the country. That brings great instability.
“In his second paragraph he states correctly, “…the euro came with an implicit bailout guarantee permitting governments to overindulge in debt.” But this was not explicit and actually had nothing to do with the actual institution of the euro, a single currency for the EEU block. ”
I don’t understand your objection here. Are you saying that unless the instituting of the euro came with an explicit bailout guarantee, it cannot be held accountable for any moral hazzard?
“The euro is simply the medium of exchange in the EEU countries, nothing more. ”
This is obviously not true as the euro is part of an overall political process. You’ve said nothing here to counter Bagus’ claim that this political process entailed an operating assumption that should a member country get into trouble, the organization will come to the rescue. I.e., an *implicit* guarantee. Freddie and Fannie did not have explicit guarantees either, but virtually every market participant believed that the US govt would intervene should a crisis hit (and they were right).
Freddie and Fannie did not have explicit guarantees either, but virtually every market participant believed that the US govt would intervene should a crisis hit (and they were right).
Beefcake,
So according to your logic Fannie and Freddie were caused by the government control of the dollar. I am not sure you have cause and effect right.
Fannie and Freddy couldn’t have expanded in such a way without a government controlled currency. They’d have been limited just like a private mortgage entity in a sound money environment. If anything, Fannie and Freddy would have likely collapsed due to inherent bureaucratic inefficiencies in such an environment. No government control of the dollar, no excessive expansion fueled by inflation.
The issue isn’t about “cause” as such, that’s why Bagus speaks of an *implicit* guarantee. J Murray’s response here is entirely correct: government currencies (of which the euro surely is one) entail moral hazzard where certain players (up to the level of national govts in the case of the EU) are enabled in their expansionary activities.
J. and Beefcake,
You are missing it. The government could create Fannie and Freddie under any monetary regime. In this instance it is not the currency that is the problem but the centrally planned economy.
Now don’t misunderstand, a currency that is crashing in value is a problem, but this problem in Ireland is not being caused by the euro.
Understand that those in the EEU that want to gain power will use the excuse of “protecting” the euro to accumulate power. We must not allow them to distort reality. The currency has nothing to do with their mistakes in this case.
It really is a problem with the common currency. A currency’s strength is dependent on two things:
1. The raw quantity in circulation.
2. The relative values of the goods and services produced by the nations that accept the currency.
During good times, the PIIGS were able to obtain favorable financing for government debt due to the value of the Euro as propped up by healthy nations like Germany. When times go bad, the excessive debt of the PIIGS kills the currency value as it indicates a larger volume of the existing currency base is now being devoted to paying non-value added activities – government debt interest falls solidly in this category. To avoid a total destruction of their own economies, stronger nations wrongly believe they need to get those debts paid down to avoid a currency collapse, thus the bailouts.
The PIIGS have all the incentives in the world to go heavily into debt and finance generous public benefits. In good times they get good rates and willing investors, and in bad times someone else comes in and picks up the tab. None of the PIIGS could pull this off if they were issuing their own currency or relying on a gold-based currency.
It really is a problem with the common currency. A currency’s strength is dependent on two things:
1. The raw quantity in circulation.
2. The relative values of the goods and services produced by the nations that accept the currency.
J.,
You need to read Mises “The Theory of Money and Credit.” Neither of these two lead to a currencies strength. If money were an honest free market medium of exchange, the quantity would change as monetary demand dictated. We would not even have to concern ourselves with the quantity of money, only its exchange value relative to gold.
And concerning goods and services, they grow from a healthy economy. The economy does not grow from goods and services. This is a mercantilist attitude that the if government can confiscate more goods and services and stimulate business to produce more goods and services all will be right with the economy. Mercantilists get the cart before the horse.
Dick Fox – I post the following in reply to your comments, as I think we are thinking along similar lines:
From the article: “…these governments would be bailed out by other countries of the eurozone in order to forestall a breakup of the euro.”
“The euro might be saved, but at the cost of building a strong, central European state…”
This article, like most, seems to lump together the idea of the Euro, bonds denominated in Euros, and the EU all into one mish-mash. I believe this is not correct, but it serves the interests of those who want to further the centralization of Europe at the expense of the more relatively decentralized states. Centralization and further removing government from the people governed, of course, being the objective of the EU experiment.
Why does the failure of a bond denominated in Euros pose a risk to the currency itself? One would not say the same thing about the dollar if Alabama defaulted on a bond denominated in USD. Or, better yet, would gold become worthless if a bond backed by gold went into default? Yet, most commentators say this about the Euro, it seems almost without thought.
In the case of the Euro, I believe the currency would have been much stronger if the first defaults were allowed to take place. The outcome would have been that bond prices would have taken the hit, as the risks would have been bond specific. The banks would not have liked this, and Brussels would not have liked this. It serves the bidding of these institutions when the ideas of the currency and bonds are confused, as seems to be the case in this article.
bionic,
Bingo! Yes, we are thinking alike. Blaming the euro is a dodge of the real problem and that is an unrestrained European Central Bank. They proved the value of the euro right after it was first put into play because they maintained euro stability with gold. The result was that the euro became stronger and actually competed with the dollar for reserve currency status. But the EEU was seduced by mercantilism and failed to stand strong on the euro.
‘Ireland has the lowest corporate tax rate in the Economic and Monetary Union (at 12.5 percent). The tax rate attracted banks from all over the world to expand their businesses on the island. As a consequence, Ireland’s banking sector expanded substantially. During the boom years, banks earned immense profits through their privilege of credit expansion and their implicit government backing. As a result of the credit expansion, an Irish housing bubble developed. And its burst caused substantial losses and even insolvency for Irish banks.’ So would this mean that the low corporate tax in Ireland is to blame for the housing bubble and the burst? If this is the suggestion, wouldn’t this constitute a case for having high levels of corporation tax or having no tax competition in Europe or elsewhere? You also underline the danger of developing a strong European State when Brussels acquires more powers regarding the Member State’s budget. However, and in line with the provisions of the Growth and Stability Pact, this would actually mean that EU countries would be force to decrease public spending, the size of the public sector, etc. Experience in Europe has shown that if those competences rest at national level then the outcome is a big public sector, increased government intervention, less freedom. Thats why we have a socialist Europe. If ECFIN assumes more powers i believe that the result will be the opposite.
Constantinos,An excellent observation. The problem was not low corporate taxes. While Bagus seems to imply this I am not sure it is what he means.
What really happened is that low corporate taxes made Ireland the most attractive country for investment. European banks from other countries rushed into Ireland to gain from their good economic policies, but these banks over-expanded. The other EEU countries are actually bailing out their own banks not Irelando.
As Bagus pointed out the Irish people would not allow these banks to be bailed out if they had a choice, but that choice has been taken away from them. Granted it is the EEU that is providing the bailouts but the Irish politicians are the ones screwing the Irish people. But none of this is because of the euro. The central planners are using misinformation about the euro as a tool to gain power. We should not mix up cause and effect as the centarl planners trick us into doing sometimes.
I live in Ireland so I know a bit about it. I think Bagus’ analysis is very good.
This part is very important:
It’s important to understand that the Irish government didn’t just take on insuring private depositors. They took on all depositors and savers with any amount loaned to an Irish bank, on-demand liabilities and most types timed liabilities, foreign and native savers.
See my article on this too:
http://www.cobdencentre.org/2010/11/learning-the-wrong-lessons-from-ireland/
O k for the right analysis,but shame to the author for using the acronym “PIIGS” Do not add insult to injury.Very soon norhern countries will experience similar problems.Competition for adequates acronyms is open.
OMG! Pity my dear Irish cousins. After nearly a millennium of subjugation to the bloody English, they are now to be subjugated to a bloody European superstate.
Was it for this the wild geese spread
The grey wing upon every tide;
For this that all that blood was shed,
For this Edward Fitzgerald died,
And Robert Emmet and Wolfe Tone,
All that delirium of the brave?
Romantic Ireland’s dead and gone,
It’s with O’Leary in the grave.–WB Yeats, September 1913, excerpt
(http://classiclit.about.com/library/bl-etexts/wbyeats/bl-wbye-sept.htm)
Ahhh, if only Mick Collins (http://en.wikipedia.org/wiki/Michael_Collins_(Irish_leader)) were with us today there’d be none of this subjugation reprise business.
More like just under half a millennium. The period from about 1100 and something to 1300 and something was at the hands of the Normans, and then there was a phase of occupier decline until the Tudors as the Normans’ descendants gradually went more native, during which really only the Pale of Dublin and a few strategic locations were occupied.
Perhaps, but you must understand, I’m a liberal when it comes to “nearly.” Besides, I was more interested in sharing Yeats’ lament, which is one of my favorite poems. I do know enough of Irish history not to argue with your analysis.
Since the Irish do not have the right to vote on on the bailout now is as good a time as any to declare bankruptcy and institute free market policies.
Now there’s an idea worthy of reprising. Perhaps the Irish people could bypass their government, as it bypassed them on the matter of the bailout, in order to accomplish that objective. Since they invented the boycott, maybe by boycotting the banks and boycotting the payment of taxes they could turn the trick.
Someone will be able to refresh my memory, but didn’t the Irish people initially reject joining the EU, only to have their leaders put the issue to another referendum after cajoling, bribing and threatening some groups to win approval?
I just had to write a 30 page paper on the Greek debt crisis. Making the presentation on it tonight. This was pretty much the gist of my talk. Moral hazard. Reckless fiscal policy.
The banks, pension funds and others who made worthless loans to Irish banks should take their losses. The bankrupt Irish banks should be liquidated. Instead, the Euro will be depreciated as the result of the bailout. The German taxpayer is subsidizing bad investments in Ireland and Greece. The German standard of living will fall over the next ten years. If the economy remains stagnant the Euro may crack up anyway. Trillions of Euros will be wasted propping up malinvestments.
I tend to think that the Euro will crack up anyway. The Irish have a great history of emigrating in bad times. Rather than stay at home and pay higher taxes they’ll move away for a few years, then Ireland will be force to default. But, I expect that before that either Portugal or Spain will get into big trouble.
The euro will not disappear. The euro is a fiat currency just like the dollar and the EEU can operate the same as out FED. Read Bob Murphy’s article here http://mises.org/daily/4869
to understand the concept.
Ha HA! (Why is this “confidential?” Stupid overclassification, that’s what.)
http://www.guardian.co.uk/world/us-embassy-cables-documents/23274
“US embassy cables: Top US official travelled to Dublin looking for ‘secret’ of Celtic Tiger’s success”
C O N F I D E N T I A L SECTION 01 OF 04 DUBLIN 001719 SIPDIS
1. (C) Summary: The November 14-15 visit of U.S. Treasury Secretary John W. Snow was an opportunity for discussion on the “secrets” of Ireland’s success with policy-makers and businessmen who were the architects of Ireland’s Celtic Tiger economy. These key figures noted that while the concepts behind Ireland’s reforms had been simple, the political will to carry out the reforms had only come in the context of an economic meltdown in the mid-1980s. They said that good-faith relations with labor, investment in education, and a “dictatorial” leadership that exposed industries to the full discipline of the market had been key to success. Ireland’s skill in securing substantial EU support funds and in exploiting U.S. policy on corporate tax deferral was another important factor in Ireland’s economic turnaround. Looking ahead, the policy-makers cited both the need to ensure Ireland’s continued competitiveness as a magnet for foreign direct investment and also the role of education in shaping Ireland as an innovation-based, higher-value economy. Secretary Snow’s classroom discussion at Dublin City University (DCU) highlighted the role of higher education in promoting innovation and entrepreneurship. End summary.
Also:
7. (C) EU tools, primarily structural support funds, were another factor in the emergence of Ireland’s Celtic Tiger economy, explained former Prime Minister (1992-95) Albert Reynolds and Ray McSharry, former EU Commissioner and Irish Finance Minister. Reynolds said that the Irish Government did not shy from viewing such tools as entitlements, since Ireland, as an island nation, faced additional challenges trading within the European Community. He and McSharry recalled that Ireland had negotiated well to maximize the level of EU support. For example, Reynolds claimed that he had obtained over euro one billion from Brussels as a result of a discussion with Chancellor Kohl in which Reynolds agreed to support Germany,s push for rapid EU enlargement. EU Commissioner-designate McCreevy separately echoed Reynolds, points, saying that French Finance Minister Sarkozy,s proposal to reduce EU support for new Member States that applied low corporate tax rates was shortsighted. McCreevy said that any EU measures to increase growth in the new Member States would redound to the benefit of the entire EU.
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