It’s worth noting a major difference in the narrative regarding Ireland’s crisis that is being told inside and outside the country.Â Consider for example the recent speech of the European Commissioner for Economic and Monetary Affairs, Olli Rehn, in Dublin —
In the case of Ireland in particular, we need to recall that sovereign debt has not been at the origin of the crisis. Rather, private debt has become public debt. The financial sector has misallocated resources in the economy and then stopped working. It needs reform.
Similarly, the Wall Street Journal — for whom Ireland was always a low-tax favourite, is anxious to distinguish Ireland from Greece —
Ireland, by contrast, went into the crisis with a budget surplus, a debt-to-GDP ratio of some 27% and a strong record of recent growth that has left it one of the richest countries in the world. Ireland does have a serious problem with its banks, which are the source of its current and recent woes. A property boom and bust have left Ireland’s biggest lenders with billions in bad loans on their books.
At home though, the people are being told that that budget gap between ongoing expenditures and revenues is the key to the problem.
For instance, here’s the Irish Times reporting on remarks of Prime Minister Brian Cowen –
Remarking that there are some who regard the banking crisis as â€œthe sole source of our problemsâ€, Mr Cowen added: â€œIf we never had that crisis, we have a problem in relation to our public finance position that doesnâ€™t go away.â€Â He further said that, â€œif you put a hole in the revenues of any country to the tune of almost a third of your tax revenues, then you have to take remedial action, which is what we have been doingâ€.
And here’s the thinking of finance minister Brian Lenihan, who —
told Fianna FÃ¡il TDs and Senators yesterday that while the cost of winding down the bank added to fiscal difficulties, the large gap between State spending on public services and revenues was the more serious problem.Â â€œSo, for example, if â‚¬30 billion of capital is required, then the annual cost of resolving the banks would be â‚¬1.5 billion. This is a significant amount, but has to be compared with a budget deficit in 2010 of â‚¬18.5 billion,â€ read a handout from the Minister distributed at a Fianna FÃ¡il parliamentary party meeting.
Now, some of this is political packaging.Â An infuriated public doesn’t want to contemplate the amount of money they have committed to dead banks, so telling them that our collective profligacy is the core problem moves the austerity into the “tough but necessary” category.Â And it’s certainly true that a 12 percent of GDP deficit — which is around what the deficit is excluding the bondholder bailouts — can’t be sustained for very long, so of course it’s a matter of getting expenditure and revenue into line.
In any event, an either/or debate is not likely to be productive.Â It’s possible to see both diagnoses as reflecting syndromes of the late Celtic Tiger era, of which the following are some notable features.Â First, there were massive explicit and implicit subsidies to the banking and property sectors, the implicit subsidies now becoming explicit during the clean-up phase.Â Second, there was a distortion in the perceived cost of public services, as the revenue windfall from the property boom made it seem that more resources could be poured into public services without having to raise taxes.
Third, there was (and is) a political economy that emphasizes pie-sharing and co-option rather than questions of efficiency and distribution, which in turn led to a don’t-rock-the-boat reaction to critics.Â And fourth, there was a naive trade union sector (referring in particular to unions for lower-paid workers) that didn’t see how their demands for closer alignment of public and private sector pay, national wage bargaining, and final salary pension schemes would interact with each other to produce massive pay and benefit differentials.
The result was a banking sector that got too big and a public sector that got bigger at an underestimated cost and with adverse distributional consequences — whether it’s actually “too big” is a separate question.
As for the way forward, does the either banking versus budget question matter?Â Perhaps in the way it affects government thinking, which moves quickly from viewing the bank debt as akin to sovereign debt, to believing that it has the broad outlines of bank sector restructuring on the right track, to claiming that the new only game in town is to cut public spending to make up the increased obligations of the state.
This results in a series of blind spots and unasked questions: why the fixations with having an Irish-owned banking sector and avoidance of restructuring of insolvent banks; why the assumption that the 2007 total level of tax revenue is gone forever, and most of all, why the assumption that an unreformed political economy (i.e. the constellation of institutions and interest groups) is still somehow fit for purpose in getting the economy out of its current mess?Â Against that backdrop, the banks or bloat question is a distraction.