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€75 bn cut could ease our burden

The following extract was published in the Sunday Times on 10th June 2012
The post-bubble extraordinarily high household and business debt levels in Ireland are a massive debt overhang on the Irish economy. Together with the very high and increasing sovereign debt levels, they place a limit on the amount of austerity that is bearable by the Irish people.
It is often commented that Irish public sector wages and social welfare rates are too generous. Between them, they account for €2 in every €3 the government spends. If we are to balance our budget through austerity alone, it is most likely that spending will have to be slashed in both these areas.
To analyse the impact this will have on the economy, take the example of a family comprising a Garda and a teacher with two children who bought a modest house in recent years. They are receiving wages that, by international comparisons, are high. They are receiving child benefit that, by internal comparisons, is generous. The austerity approach is to slash public-sector wages and social-welfare spending, perhaps down to the Western European average. Out of context, this seems reasonable. Why should European taxpayers provide us with cheap loans to pay social welfare benefits and wages at levels they cannot afford?
However, the impact that this would have on our family must be considered. Their take-home pay will be drastically reduced along with their child benefit. This is likely to mean they will be unable to meet the repayments on their mortgage. When you consider a similar effect in every similar household in the country it is clear to see the economic collapse that would occur. The number of bad loans in the banks would increase. The amount of spending in the economy would dry up to a trickle, forcing businesses to lay off staff.
These consequences would cost the government money. More mortgages in default mean pumping more money into the banks. More unemployment means tax revenue will fall and social-welfare expenditure will increase. This makes it impossible to balance the budget.
This is the dilemma Ireland is in. We need to balance our budget, but implementing austerity measures in the absence of economic growth damages our economy to the extent that it is impossible to balance the budget.
The high private debt levels in Ireland place a definite limit on the amount of austerity that can be introduced. Once this point is passed, further austerity simply causes more mortgages to become bad loans. This will force the government to provide further recapitalisation to the banks. This will put the country into a hopeless downward spiral.
So there is a limit to the amount of austerity that an economy can take. We need to ask ourselves whether we have passed this point. Ireland’s budget deficit peaked at €23 billion in 2009. Some €21 billion of austerity measures have already been implemented. Despite this, our budget deficit is stuck at €15 billion, excluding the cost of the bank bailout. Clearly, austerity isn’t working.
Exports are remarkably strong, but our export partners are now facing economic problems of their own. If their demand for our goods dries up, we are unlikely to experience any significant economic growth.
Austerity will not work unless it is accompanied by a huge stimulus, to keep money circulating. The most obvious source for this was the National Pension Reserve Fund. However, it has now been almost entirely emptied into dead banks. The only possible alternative is to write down bank debts to the European Central Bank (ECB) and the Central Bank of Ireland and, in turn, pass these write-downs onto Irish households and businesses.
At 494% of national income, Irish combined debt levels are the most crushing in the world. We must resist being forced to bear impossible levels of debt overhang which expert economists have shown to be the main cause of contraction and stagnation. We must insist on write-downs totalling around €75 billion on amounts due to the ECB, the Central Bank of Ireland and remaining bondholders in the Irish banks. These write-downs must in turn be passed onto households and businesses.
Write-downs of €75 billion may suggest Ireland is being let off the hook. This is far from the case. After such a write-down, Ireland’s total debt burden would still be the second highest in the world. We would still be carrying a huge load but at least it would be somewhat more manageable. We must insist on putting this case forward to the ECB, managers of the euro currency, and unilateral action must not be ruled out if a sensible agreement cannot be reached.
Peter Mathews is a Fine Gael TD. This is an edited extract from his chapter in What If Ireland Defaults edited by Brian Lucey, Charles Larkin and Constantin Gurdgiev; published by Orpen Press

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