The austerity orthodoxy is working all too well when it comes to driving down living standards, says Simon McGarr, and European leaders need to stop inducing economic depression.
Remember when Ireland nearly went bust because we couldn’t afford to pay the interest on the loans we were being offered? You remember it happened because the entities who loan money are run by, basically, sociopathic lemmings and they suddenly realised that we’d promised to cough up enough money to pay off the loans of any banks that went bust. (Well, the then government had promised it on our behalf, but apparently it’s one of those one-way decisions you can’t change once you’ve done it, like drunkenly texting your boss what you think of them in the small hours.)
Anyway, these sociopath lemmings all realised that if that bank collapse actually happened (and they collectively suddenly thought that it would) Ireland wouldn’t actually be good for the cash. That meant that the country would go officially bust – or "default" – not paying its debts as they fall due. All of which takes us to the 2010 bailout, which was basically just us turning to the last set of people who’d give us money and dropping to our knees, wailing “Please save us!”
Ironically, they had to save us, because their banks were the ones who’d loaned our banks all the money they couldn’t pay back: if we sank, their banks would sink with us. It is possible that, if we had a better set of representatives, we might have made something of that fact, but it’s hard to negotiate from a position of strength when your negotiating team metaphorically can’t see for weeping and periodically break off to scream at invisible enemies. And are on their knees.
Still, here we are now. But where is this exactly? Well, we’re in a state which is pursuing a policy of internal devaluation. Yes, you know what that is. You told me you did. I believe you. But you might meet someone who hasn’t entirely got their heads around it yet. What harm if we just run through the basics we’ll be effortlessly conveying in a superior tone to our less informed fellow-citizen?
Let’s start with a definition of internal devaluation:
Internal Devaluation – where a country seeks to regain competitiveness through lowering wage costs and increasing productivity and not reducing value of exchange rate. (From economicshelp.org)
Normally, you devalue by decreeing suddenly that your currency is now worth less against all other currencies. Outsiders can suddenly afford more of the stuff you sell, so you get a bit of a boost.
But Ireland can’t decree that the euro is now worth less. So, the alternative is to force everyone in the country to just charge less – for everything: lower wages, less fees, lower prices – the works.
The thing is, our government can’t actually decree that the private companies of Ireland make their stuff cheaper. And they can’t make private workers agree to be paid less.
So, they’ve been doing what they can to depress what they can reach: whipping up media attacks on the people whose incomes they do control – public workers, people subsisting on social welfare and so on – and then cutting the money going to them.
Of course, this makes these people’s lives very difficult, (Irish suicides are up 13 percent since the crisis began, according to the respected medical journal the Lancet) but the government hoped-for result is to reduce domestic demand enough that price and wage deflation will be forced into the private sector.
Regrettably, deflation is seen as the worst possible thing that can happen to a country. Even more regrettably, the experience of Latvia suggests that trying to devalue your own economy through an induced depression is both socially devastating and economically wrongheaded. The Centre for Economic and Policy Research reported that despite a fall in national production in excess of the US Great Depression of the 1930s, Latvia had only managed to achieve a fall in its effective exchange rate of 5.8 percent from peak. That was with 22 percent unemployment. Ireland has only managed to achieve 14 percent unemployment so far.
Shotgun-wedded to this austerity dream, the new government has brought in a new cycle of measures to try to force private sector labour costs down. They even introduced an ‘internship’ scheme where social welfare recipients are supplied for free to employers for 6 months at a time for training in skills such as stacking shelves in Tescos. JobBridge, as it is called, is, in effect if not by design, a method of forcing wages in the private sector down by introducing an alternative subsidised workforce into the labour market.
The orthodoxy of austerity states that Latvia and Ireland will reap the benefits of a collapsing economy and society. And, since the now infamous summit of the damned, all the lucky citizens of Europe can look forward to joining us. Historically, removing political choices by attempting to bake one set of orthodoxies into political structures has not resulted in the perpetual success of those orthodoxies. Instead people have had a tendency to decide they’ll just abandon the compromised structures.
European leaders should worry about the consequences of failure. But they should fear the consequences of their success.