Saturday, 20 November 2010

European economic woes

The men in suits from the European Commission and the IMF have descended on Dublin. Ireland is in serious economic trouble. Its banks are virtually bust and its budget deficit (32%) is the worst in Europe. The Irish public are already enduring severe austerity measures including raised taxes and reduced salaries. The days when Ireland’s economy was known as the “Celtic Tiger” are truly over.

Ireland experienced a classic property boom from 2000 to 2006. During this time banks became reckless with their lending. Then when the bubble finally burst the loans turned bad, and the banks and the economy suffered. This has happened in other countries too. The problem for Ireland is that, being part of the single European currency (Euro), it doesn’t have the necessary tools, like devaluing its currency and lowering interest rates, to stimulate growth.

There are fears that the crisis in Ireland could spread to other European countries like Portugal and Spain. Hence the urgency to deal with the Irish crisis and avert a contagion that might result in another economic downturn. Unemployment within many European countries has increased and economic growth remains sluggish. Added to this are measures taken by governments to cut public spending in order to reduce their deficits. This is likely to slow economic growth further and result in more unemployment.


When the IMF gets involved, you know there are serious problems. This is an organisation which emerged at the end of World War II to assist the reconstruction of a devastated Europe. It was founded on the belief that markets often worked badly, and there is a need to put international pressure on countries to stop their economies going into a slump. Although the ideas and intentions behind it were good, the IMF has evolved into something very different today. It is now part of a new “Washington Consensus” – a consensus composed of itself, the World Bank and the US Treasury – that believes in market fundamentalism. It has made mistakes in all areas it has been involved: development, crisis management, and countries making the transition from communism to capitalism.

Nobel Prize winning economist Joseph Stiglitz says about the IMF in his book “Globalization and its discontents”:
“The Fund believes it is fulfilling the tasks assigned to it: promoting global stability, helping developing countries in transition achieve not only stability but also growth. Until recently it debated whether it should be concerned with poverty – that was the responsibility of the World Bank – but today it has even taken that on board as well, at least rhetorically. I believe, however, that it has failed in its mission, that the failures are not just accidental but the consequences of how it has understood its mission.”

Social contexts

The problem with many of the technocrats in institutions like the IMF is that they are short-sighted about the effects of their policies. They’re driven by a blind faith in markets. They often do not know a country well, yet propose solutions for that country as though they know everything about it. Globalization can be beneficial for many people, but it can cause a lot of misery too. One has to be mindful of the social contexts within countries before implementing policies; if not, policies can be counterproductive.

Cuts in government spending will inevitably increase unemployment. This has the potential of increasing social tension. It is important that governments are wary of this as they pursue deficit reductions. In Europe, far right nationalist parties have made gains in recent elections. The rise of the Third Reich before World War II occurred under very depressed economic conditions. Such conditions, as well as wounded national pride, provided a perfect platform for the Nazis to take control of Germany. While Europe is still a long way from the levels of fascism that led to World War II, history has shown far right parties are capable of exploiting economic downturns for their political advantage.

It’s likely the whole of Europe will experience low growth as a result of cuts in many countries. Severe austerity measures could even push the region back into recession, which will have global implications. The people likely to suffer the most are the poor. It’s important governments do not destroy basic safety nets. It remains to be seen if contagion is avoided and the single European currency will survive. Many economists predict a new “normal” of higher unemployment rates, lower growth and lower levels of public services. For countries like Ireland, their economic woes are just beginning.


Joseph Pulikotil said...

Hi Jl,

I think that the policies of the IMF are controlled by the US which contributes a lions share to its funds. If the US is favorable to a country then more money will be given and otherwise IMF can become very stingy.

India's socialistic pattern of society prompted the government to set up several public sector banks which are generally very cautious in their lending policies.Recently one or two banks failed but they were easily taken over by bigger nationalised banks thus averting a crisis to depositors.

India did not really feel the world economic depression although many advanced countries suffered.We have an independent rupee which normally fluctuates on India's economic performance especially in imports and exports.

Since Ireland is part of ECC,the other European countries should come forward to help Ireland otherwise what is the point in being in the ECC.

I also believe in times of Economic depression the government should come forward to pump in money in crucial sectors to generate productivity and ensure employment to people. But Irish government has done the opposite.Cutting down investment only means reducing productive activities and thus reducing jobs creating hardships to public.The government should help in times of trouble like this instead of introducing oppressive measures causing hardships to people.

I really don't know what IMF and World Bank were doing when Ireland was plunging into a crisis.They are supposed to be watch dogs and advise the errant governments with suitable guidelines.

You know the communist government in Kerala was taking loans from World bank for development purposes and diverting the funds to pay the salaries of the government staff. It took many many years for the WB to find out this misappropriation.In other words WB has no proper monitoring systems.

I believe all these international financial institutions generally toe the line of US policies because US contribute major portion of the funds.

This comment has become too long and I don't know whether it will be published.Any way let me try.

Best wishes,

JI said...

Hi Joseph,

You are absolutely right. The policies of the IMF largely reflect the views of the US financial community. Washington also has considerable political influence over its policies too.

European countries, including UK, have now come forward to help Ireland. Whatever bailout Ireland gets, the Irish people are going to suffer. There's still a risk of contagion. If that happens, we could have an even bigger crisis. I think the Euro is a fundamentally flawed currency.

Yes, India has not been too affected much by the recession. You have more stable and cautious banks. India should resist pressures from the likes of the IMF to liberalise its banking sector. It is excessive liberalization and reckless bank lending that has caused the problems in Europe.

Best wishes,

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Toyin O. said...

Thanks for sharing this informative piece about Ireland.