Ireland – The Star Pupil Of The Euro Fiasco

john weeksIn a recent talk in London Peer Steinbrück, the SPD candidate for the German Chancellorship, in an otherwise progressive talk referred to Ireland as the “star pupil” among the countries struggling to recover from the disastrous Europe crisis.  This comment goes along with frequent reference in the media to Ireland’s “success” compared to the other crisis countries.

If Ireland is a “pupil”, the teacher must be the infamous Triad (Troika?) of the European Commission (EC), International Monetary Fund (IMF) and the German government. I am surprised that a German leader-in-waiting, a social democrat, would endorse this condescending paternalism (maternalism in the case of German Chancellor Merkel).

Inspection of the Irish “success” provides an excellent insight into the economics of the 1% that preaches the austerity gospel in Europe. A bit of guidance from Adam Smith helps in this inspection. Smith set as one of the major purposes of his most famous work to refute the doctrine of the “Mercantilists”, those who argued that countries must sustain trade surpluses in order to be wealthy and powerful (An Inquiry into the Nature and Causes of the Wealth of Nations, 1776).

The refutation of mercantilism does not prove difficult. The resources available to the residents of a country to use for consumption and investment, either through the private sector or the public, depends on the aggregate production of the country. When imports and exports equate, the total income of the country equals its consumption plus investment. When imports exceed exports, residents in the aggregate consume and invest more than their production. This excess of domestic consumption and investment is typically sustained by capital inflow, foreign investment or loans.

Surplus imports can generate problems when it continues for a long time, as in the United Kingdom over the last forty years. These problems are demonstrated with wry humor in a 1967 science fiction short story by Fred Hoyle (one of Britain’s most famous astronomers), in which a solid gold meteor strikes Britain to devastating economic effect. The most obvious problem is declining employment in the domestic companies that compete with the imported goods

When a country runs a trade surplus the consumption and investment of  its residents must be less than national production and income. This surplus can finance capital flows, which explains why German, Japanese and Chinese foreign investments have boomed over the last twenty years. Maintaining a trade surplus as government policy is “mercantilism”.

In a recent issue, The Guardian (UK) newspaper carried a textbook case of  the mercantilist strategy. At the beginning of the article the reader finds out that in the last three months of 2012, the Germany economy showed its second largest trade surplus in almost sixty years, in part because of “an unexpected drop in imports in December”.  Further down in the article the reader discovers that during those three months the economy contracted by 0.5 percent. The article quotes a private German sector economist who sums up that combination, trade surplus up and national income down, as reflecting “Germany’s strong [economic] fundamentals”. When someone tells us that falling incomes for the population as a whole demonstrate an economy’s “strong fundamentals” because the trade surplus increases, we are in Mercantilia.

The extreme form of what Adam Smith called a “folly” occurs when surpluses finance poverty and economic instability. Two infamous twentieth century examples were the German reparation payments after World War One, and the Latin American debt crisis in the 1980s and into the 1990s. In both cases, external powers pressured governments to generate trade surpluses in order make payments to foreign governments (in the case of Germany in the 1920s), or to foreign banks (the Latin American countries in the 1980s). The former led to Hitler and the latter to a generation of impoverishment.

In effect, these externally-imposed, government-generated surpluses take goods and services from residents and transfer them to foreign governments, banks and corporations. This type of trade surplus falls into the category of what Jagdish Bhagwati, the famous Indian economist (now at Columbia University), termed “immiserizing growth”, economic growth that generates poverty not improvement for a population. To put it simply, the country exports and the population grows poorer.

Armed with the ideas of “mercantilism” and “immiserizing growth”, we can have a look at the “Star Pupil”. The chart below shows why the Triad of the EC, IMF and German government (and the German opposition, it would appear) make Ireland the teacher’s pet. While the famous PIGS (Portugal, Italy, Greece and Spain) languish in stagnation or plunge into decline, Irish GDP has increased, by 1.4 percent in 2011 and one percent in 2012. Not great, but looks good compared to decline. More important ideologically, the Triad assures us that this growth shows that “austerity works”. It shows the PIGS the shining path to recovery.

In case we missed it, the path to recovery runs along the following road. Austerity forces down wages, lowering production costs. Lower costs result in export competitiveness, and the growth of exports rejuvenates the economy as a whole. The rejuvenated growth reduces the fiscal deficit by raising tax revenue that can be used to pay foreign creditors. If the residents in the PIGS would show the discipline of the Irish, the euro crisis would soon end.

To describe this sequence as “nonsense” is a compliment. It is vulgar ideology. Imagine for a moment that Greece, Italy, Portugal and Spain all shifted from trade deficits to trade surpluses. What countries would provide over US$200 billion in imports to realize this shift? Certainly not Germany with its notoriously effective export-led (mercantilist) growth policy, nor France which is going down the same policy road. And certainly not the United Kingdom, which had a trade deficit in 2012 over $160 billion and a right wing government pledged to reduce it. The exposé of this ideological story would not be complete without pointing to the recipients of the Irish export surplus, the major banks in Europe that hold the debt of the Emerald Isle.

Ireland, the Star Student of Austerity, 2001-2012 (percentages)

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All statistics from www.oecd.org, which reports values in US dollars

Even if by some miracle a mega-importer appeared on the world horizon (think China), the Irish path would still represent a road to misery. The chart below shows three economic trends since 2001. Unemployment rose continuously after 2007 in the land of the star pupil, with economic growth brining no reversal (measured in percentage of the labor force on the left). This rising unemployment rate went along with increasing exports per capita, from less than six thousand dollars per head in 2007 to over eleven thousand in 2011-2012 (measured on the right hand vertical axis).

While exports per head increased, domestic national income per person, total national income minus the trade surplus, declined, from $35,000 in 2007 to 25,000 in 2012, a drop of one-third. Domestic income per head declined in both the years of positive GDP growth. This appalling redistribution from the Irish to the European 1%, aka a trade surplus, was not the result of austerity reducing labor costs. For over twenty years Ireland ran a continuous annual trade surplus with no austerity to “lower costs” Under austerity imports contracted in Ireland because of falling incomes of the 99%.

Ireland, the Star Pupil of Immiserizing Growth, 2001-2012

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Export balance PC is the export balance (surplus) per capita, in constant dollars of 2012. Net PC Income is is per capita income minus the export surplus, constant dollars.

This is Bhagwati’s “immiserizing growth” in real time, unrequited transfer abroad of almost a third of national income. The star pupil fails the test of a decent society, to protect the welfare of its people. And if the cause does not jump off the page, have a look at the final diagram. The vertical axis measures Ireland’s export surplus per capita, and the horizontal one measures domestic income per capita (GDP minus the export surplus). From 2001 through 2004, more exports per person went along with more domestic income per person. Then came the bad news, more exports, less left over for the Irish population to consume and invest.

Ireland may be the star pupil, but for the sake of the 99% its government needs to find different teachers and perhaps drop out of school.

Ireland, Star Student of Export-led Impoverishment, 2011-2012 (thousands of dollars)

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  • Aileen Cheetham

    Oh this was hard to followe but I would have liked a forward thinking/Actioning Conclusion

  • Chris

    “Inspection of the Irish “success” provides an excellent insight into the economics of the 1% that preaches the austerity gospel in Europe.”…this is very well put.The damage from the crisis is enormous….6,000 committed suicide in my homeland (England).And yet they (the Authorities) persist with this austerity.Its like a jumbo jet fell from the sky and all the cattle were shot in the surrounding fields.What I cannot get over is the fact that ‘the Banks’ caused this crisis and yet some how ordinary people are faced with suffering and picking up their bill.It is really sick and absurd.

  • John

    What a shame that the Irish 99% won’t get to hear this affront to neoliberal economics on which they are fed daily by banker economists preaching that ‘there is no alternative’. Are you listening Morning Ireland, Irish Times and Sunday Times?