The monetary policies of the ECB – Europe’s unelected government

MONETARY POLICY is a key tool for governments to use to benefit citizens, societies and economies. Central banks are empowered to determine interest rates, and to influence the exchange rate of their currency (and others’) by buying and selling reserves of foreign currencies. If a central bank sets a higher interest rate, this makes the return on this currency higher, leading to a higher demand for the currency and a resulting higher exchange rate. By lowering interest rates central banks can stimulate growth by expanding credit. With the creation of the ECB in 1998, members of the common currency transferred their power to set interest rates and other monetary policy powers to the ECB, which would set a centralised monetary policy across the Eurozone. The ECB and national central banks form the European System of Central Banks (ESCB), and the ECB can “exceptionally” provide emergency liquidity assistance (ELA) as a last resort for struggling Eurozone banks. The ECB differs from most of the other major central banks around the world in that it has a more limited mandate, and in its governance structure.

A narrow mandate

The neoliberal ideas, and the German economic ideology of ‘Ordoliberalismus’, that shaped the construction of the Eurozone can also be seen starkly in the nature of the ECB. This ideology has been dominant in Germany since the Second World War and combines a belief in a welfare safety net with the view that one of the government’s key roles is to promote market competition, stressing the importance of constitutional rules, as opposed to the use of discretionary policy. This ideology shaped the nature of the Bundesbank, which was dedicated to tightly controlling the money supply to maintain price stability. The ECB was constructed on this model, with a mandate to focus on price stability – controlling inflation. Despite the total discrediting of this ideology in the wake of the financial crisis, Berlin’s belief that if the government ensures inflation is kept low and stable, then markets will ensure growth and employment of their own accord, persists.

The ECB’s mandate is in contrast to many other major central banks, like the Federal Reserve in the US, which are tasked with the broader role of maintaining full employment and promoting growth, in addition to maintaining price stability. As a result of its narrow mandate the ECB only focuses on controlling inflation, regardless of how high the unemployment rate is. If there is low and stable inflation in the Eurozone as a whole – and in Germany in particular – then the ECB will ignore the growth needs of states experiencing high employment. In the midst of the recession and the sovereign debt crisis in 2011, the ECB actually raised interest rates twice, in April and July, contributing to the cause of the Eurozone’s double-dip recession. This caused major hardship in the crisis countries, particularly for mortgage-holders who were pushed further into arrears.

The other key difference between the ECB and other major central banks is its level of democratic accountability: for example, while the Fed is often described as “independent”, it is ultimately accountable to Congress. The ECB is unaccountable to any elected government or parliament. This feature reflects the drive by elites to “depoliticise” economic policy by outsourcing it to supposedly independent technocrats in order to weaken resistance to highly political decisions that have profound redistributive consequences for society. Bill Mitchell and Thomas Fazi write: “[T]he creation of self-imposed ‘external constraints’ allowed national politicians to reduce the political costs of the neoliberal transition – which clearly involved unpopular policies – by ‘scapegoating’ institutionalised rules and ‘independent’ or international institutions, which in turn were presented as an inevitable outcome of the new, harsh realities of globalisation, thus insulating macroeconomic policies from popular contestation”.

The decisions that the ECB has taken in response to the crisis have been extremely political, such as its decision to raise interest rates in 2008 and 2011, when the real danger to the majority of Eurozone members was deflation. The two most strikingly political acts during the crisis were the ECB’s threat to cut off emergency liquidity assistance to the Irish state unless it agreed to request a bailout, and its decision to cut off emergency liquidity to Greek banks in the middle of 2015 in a threat to Syriza that Greece would be forced out of the Eurozone if it did not submit to the conditions of the Troika that were resoundingly rejected by Greek voters in a referendum. The ability to withhold credit to elected governments gives the unaccountable ECB an enormous degree of power to impose its own policy on countries in need of assistance.

The ECB’s financing operations

In 2011 the ECB began the first of several financing operations in order to assist the economic recovery in the Eurozone. In December 2011 it announced its long-term refinancing operation (LTRO), which provided one trillion euro in credit in secured funding to troubled banks at a rate of one per cent interest. The banks often invested it into government bonds at higher rates, which helped the banks’ balance sheets but cost government budgets in debt servicing payments, and tied the banks and sovereigns even closer together.

As the Eurozone teetered on the brink of fragmenting in July 2012, ECB President Mario Draghi made his famed speech that is widely believed to have “saved” the common currency, which included the statement that, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”. The speech preceded a new financing operation called Outright Monetary Transactions (OMT) in which the ECB offered to purchase sovereign bonds of the most indebted states. In 2014 Paul Krugman described the OMT programme as a “bluff” because “nobody knows what would happen if OMT were actually required”. The OMT programme has not in fact ever been used, because no member state has met all of the requirements needed to activate it. Martin Wolf and others have observed that the bluff was so successful not only due to its announcement, but also due to the tacit acceptance of the announcement by all member states including Germany, as this was perceived by markets as a signal that the risk of the Eurozone disintegrating was eliminated. But he adds that while the spreads between government bonds in crisis and core countries fell sharply in response to the OMT announcement, they remain significant. “For countries caught in a deflationary trap, these spreads might yet prove unmanageable.”

In a telling side note, it was revealed in October 2017 that the Eurosystem had made super-profits of €6.2 billion between 2012 and 2016 from Greek bonds the ECB had purchased at knock-down prices in 2012. While the Greek government and its creditors in 2012 had agreed to “haircut” Greek bonds, those purchased by the Eurosystem were conveniently excluded.

Neither the LTRO nor the OMT programmes did much to actually improve the supply of credit to the productive economy. The next financing operation was announced in 2014 – targeted longer-term refinancing operations (TLTRO) – and it was aimed at providing banks with funds on the condition that they would be used to supply credit to small and medium enterprises as opposed to being directed towards speculation. But the lack of demand in the economy has meant that the TLTRO offer was not widely taken up by firms. Despite the ultra-low and at times negative interest rates, and the billions of euros handed over to banks through its financing operations, the ECB was not able to generate recovery in the real economy and restore growth, and it has persistently missed its target of 2 per cent inflation.

In March 2015, the ECB announced a quantitative easing (QE) programme in which it would create €60 billion each month and use it to purchase corporate sector assets and government bonds. It was originally intended to last for one year but has been extended and remains in place, though economists expect the announcement of “tapering” in the near future, the phased winding-down of the programme. The Corporate Securities Purchasing Programme (CSPP), introduced in March 2016 and now valued at around €125 billion, has been widely criticised by NGOs and MEPs for the lack of transparency on how the bonds are selected, and the fact that the funds are being directed towards multinational corporations and the fossil fuel industry. Corporate Europe Observatory has examined the limited publicly available data on the bonds favoured by the CSPP and found a marked preference for climate-damaging corporations. Another report by Corporate Europe Observatory published in October 2017 found that 98 per cent of all advisors in the ECB’s advisory groups have been assigned to representatives of the finance industry. Just three financial institutions, Deutsche Bank, BNP Paribas and Citigroup, occupied 208 out of 517 total advisory seats.

The QE for People and Positive Money campaigns have developed a detailed critique of the limited impact on real economic recovery of the ECB’s “trickle-down” QE programme and have developed excellent policy alternatives. This campaign is supported by dozens of leading economists. Two examples of alternative monetary policies they propose are for the ECB to transfer newly created money to Eurozone governments directly, who can use it to increase public spending on green infrastructure and services; or for the ECB to create money that can be directly distributed to citizens of the Eurozone, which would increase their purchasing power and directly enter the real economy. The current QE programme is not only unfair and ineffective – it is also increasing financial volatility and encouraging the inflation of new speculative bubbles.

A new banking crisis?

Despite the fact that the European banking sector has received more than €1.6 trillion through taxpayer-funded bailouts since 2008 – and despite the fact that the ECB has pumped in €60-€80 billion each month through its financing operations since March 2015 amounting to an additional €2 trillion in support – another crisis is unfolding in the European banking sector.

Banks in the EU, and particularly in the Eurozone, have been experiencing a chronically low level of profitability since the global financial crisis. While profitability of US and British banks has improved somewhat post-crisis, many Eurozone banks are struggling to keep their heads above water.

ECB Vice President Vítor Constâncio noted in a speech in Brussels in February that the key measure of profitability – return on equity – for euro-area banks “has hovered at around 5 per cent”, a rate which, he pointed out, “does not cover the estimated cost of equity”. By contrast, the return on equity in the US has recovered to above 9 per cent (around the current cost of equity in the euro area banks), and the industry generally considers 10 per cent to be a good rate of return. European banks’ income from interest, which was on average 19 per cent of their equity in June 2016, is less than their operating expenses of 20.9 per cent, according to the European Banking Authority (EBA).

The crisis has been demonstrated in the failure (or near-failure) of several banks across the Eurozone this year – including Italy’s Monte dei Paschi di Siena (MPS), Veneto Banca and Banca Popolare di Vicenza, and Spain’s Banco Popular – as well as the serious ill-health of German giant Deutsche Bank. Other banks that have caused concern, largely due to the results of the 2016 banking stress tests carried out on 51 major EU banks under the authority of the EBA, include RBS, which was bailed out by the British government in 2008 in the world’s largest ever bailout, and has since posted nine straight years of losses. Irish banks Allied Irish Bank and Bank of Ireland, British bank Barclays, Switzerland’s Credit Suisse and Austrian bank Raiffeisen are all also subject to concerns about their health and viability.

In an illustration of the seriousness of the systemic risk posed by the profitability crisis, EBA chairperson Andrea Enria said last October: “The problem is European in scale: we have more than €1 trillion of gross non-performing loans in the system; even considering provisions [money set aside to cover losses], the stock of uncovered non-performing loans is at almost €600 billion — more than all the capital banks raised since 2011, more than six times the annual profits of the EU banking sector, more than twice the flow of new loans.

“For supervisors, this casts serious doubts on the long term viability of significant segments of the banking system [my emphasis]. The same concern is shared by investors and is reflected in the low valuations registered in stock markets.”

Most experts and financial commentators point to four key contributing factors to this lack of profitability – the high volume of non-performing loans on the banks’ books (loans that are in default after 90 days of non-repayment); the very low interest rate environment arising from the ECB’s recent monetary policy; the fines for misconduct banks have been required to pay since the crisis; and over-capacity in the sector, including increasing competition from FinTech.

Between 2010 and 2014, EU banks paid out around €50 billion in settlements and fines imposed by regulators for misconduct, largely due to mis-selling the risky financial products that contributed to the global crash. The EU’s largest banks, those classified as global systemically important banks (G-SIBs), were the worst culprits and paid the vast majority of the €50 billion figure. A report by the European Systemic Risk Board in 2015 found that past and looming fines would wipe out erase basically all of the new capital that had been raised by European G-SIBs over the past five years.

While misconduct fines and over-capacity dampen profits, the two most important of the four factors listed above are the NPL problem and the interest rate environment. But a key pressure on profitability that the ECB, EBA and the other EU institutions routinely fail to acknowledge is on the demand side – ie, the general economic stagnation in the Eurozone that has caused the demand for credit to fall and remain low. This stagnation has also contributed to and worsened the NPL problem. Euro-area banks held just over €1 trillion in NPLs last year, the equivalent of around 9 per cent of the Eurozone’s GDP, and amounting to around 6.4 per cent of total loans in the Eurozone. The level of NPLs differs dramatically across the euro area, with almost half bank loans in Greece and Cyprus now classified as NPLs, and Italy, Ireland, Portugal and Slovenia all holding NPLs at rates of 10-20 per cent.

There is a clear overlap between the high level of NPLs and the impact of the financial crisis on the so-called peripheral economies in the Eurozone, and a clear interaction between the austerity measures prescribed for these economies by the Troika and their inability to significantly reduce their NPL ratios. The collapse of the industrial sector in Greece and Italy in particular has been a major contributing factor to the rise of distressed loans as businesses of all sizes failed and their owners were unable to repay loans. The austerity policies enforced by the Troika in the crisis countries in return for bailout funds inevitably exacerbated the NPL problem.

Publicly funded bank bailouts are back with a vengeance

“EU forges bank bailout deal to protect taxpayers” – that was the Associated Press headline in June 2013, describing the agreement reached in Brussels on the EU Banking Union. The Banking Union is an initiative to further integrate the banking and financial sectors in the Eurozone countries, which was promoted as a response to the global financial crisis and subsequent sovereign debt crisis. It is envisioned as having three pillars based on a “single rulebook” – a system of harmonised supervision under the Single Supervisory Mechanism; a single resolution mechanism and associated fund implemented by the Bank Recovery and Resolution Directive (BRRD) at the beginning of 2016; and an as-yet to be developed third pillar of a European Deposit Insurance Scheme.

The Banking Union, European lawmakers assured the public, would call time on the “too-big-to-fail” problem and ensure taxpayer-funded bailouts – which had cost EU governments more than €1.5 trillion since 2008, including €64 billion in the Irish state – were a thing of the past. The BRRD was supposed to make sure that in case of a bank failure, the institution would be wound down in an orderly way by an early intervention by regulators, and that senior bondholders and depositors with more than €100,000 in the bank would be “bailed in”. Creditors would have to incur losses of at least 8 per cent of their liabilities before a bank would be able to receive government aid. Speaking to reporters at the summit where the deal was reached between EU Finance Ministers that day in 2013, then-Irish Finance Minister Michael Noonan said: “Bail-in is now the rule… This is a revolutionary change in the way banks are treated.” But there was an exception clause, as there usually is in EU legislation, and its name was “precautionary recapitalisation”.

Resolution Directive fails miserably in its first test

The Italian banking crisis that deepened throughout 2016 culminated in the December announcement by the Italian government of a €20 billion taxpayer-funded rescue package for the ailing MPS and other Italian banks, indicating its intention to activate the precautionary recapitalisation clause of the BRRD. The clause allows for the bail-in of creditors to be sidestepped if certain conditions are met – namely that the bank is still solvent, and its resolution would threaten financial stability. This exceptional clause is complemented by a similar “safeguard” clause in the EU’s state aid legislation on burden-sharing.

After months of negotiations between the European Central Bank (ECB) and the Commission, about both the extent of the capital shortfall and the terms of the deal, Competition Commissioner Margrethe Vestager reached an agreement in principle with the Italian Finance Minister on June 1, 2017. The Commission, and the ECB in its supervisory role, gave the green light to the precautionary recapitalisation. “State aid in this context can only be granted as a precaution (to prepare for possible capital needs of a bank that would materialise if economic conditions were to worsen) and does not trigger resolution of the bank,” Vestager said in a statement.

Conditions of a precautionary recapitalisation include that broader financial stability must be threatened by the bank’s failure; the state support cannot be used to cover previous or near-term expected losses; and the need for state support must be only temporary. But MPS already received two state-funded bailouts in 2009 and 2012, casting significant doubt on whether it meets these two latter criteria.

Back in December when the Italian government made its rescue package announcement, the ECB suddenly began to say that MPS’s capital shortfall was not €5 billion as previously estimated but actually €8.8 billion. The ECB didn’t bother to explain publicly how it arrived at this figure, but its retroactive and opaque revision of the figures raised serious concerns and questions about the health of MPS. Was the bank actually solvent when it applied for a precautionary recapitalisation? If not, it would not qualify for public assistance. The details of the Commission’s agreement in principle have not yet been made public.

There are many criticisms that can be made of the resolution aspects of the Banking Union legislation. The bail-in of creditors of only 8 per cent is, in many cases, going to raise a totally insufficient proportion of the costs of a resolution. In ordinary insolvency procedures investors would usually lose far more than 8 per cent. Bail-in also poses additional risks to ordinary taxpayers in a number of ways including through increased premiums in pensions and health insurance, and through the mis-selling of risky and inappropriate financial products that are eligible for bail-in to small retail investors.

The precautionary recapitalisation clause, however, is the glaring loophole that makes a joke out of the Banking Union’s promise to end taxpayer-funded bailouts of banks and to resolve the ‘too-big-to-fail’ problem. Under the Bank Recovery and Resolution Directive, a review of the precautionary recapitalisation clause was supposed to have taken place by now. The Commission was required to review whether “there is a continuing need for allowing the support measures” in the clause by December 2015 and report on this to the European Parliament and Council, which it has failed to do.

Now, the European Banking Authority (EBA), supported by many within the European Central Bank (ECB), is making a concerted push for the precautionary recapitalisation loophole to be invoked in order to use public funds to bail out the big bank across the EU more generally, by calling for state funds to be used to reduce the high level of non-performing loans in European banks and to restore them to profitability.

A crisis of abundance

Writing in response to the Great Depression, Keynes said, “This is not a crisis of poverty, but a crisis of abundance,” a description that is perfectly fitting for the current economic crisis. The ongoing tendency towards stagnation in the Eurozone and in the broader economy is not primarily the result of trade imbalances, which in any case, have been reduced as a result of the fall in aggregate demand. There is an unprecedented mass of money not being used in the economy, which has built up over decades of a declining labour share of income and record-high corporate profits. There is at least US$5 trillion in “idle money”, much of it resting in tax havens. Varoufakis writes: “Try to imagine the mountain of cash on which corporations in the United States and Europe are sitting, too terrorized by the prospect of insufficient consumer demand to invest in the production of things that society needs.” He notes that every crisis generates two mountains: “one of debts and losses, another of idle, fearful savings” – the only difference being the scale of this crisis.

Investment continues to stall across the Eurozone, and the Juncker Investment Plan, and its key instrument, the European Fund for Strategic Investment (EFSI), has been a dismal failure. It was announced in late 2014 as an initiative from the Commission in partnership with the European Investment Bank (EIB) in order to address the ‘investment gap’ that the Commission estimates to be 200-300 billion euros per year in the EU. The stated goal of the Juncker Plan was to “mobilise” more than €300 billion in private capital investments – by creating an initial fund of just €21 billion to secure loans for infrastructure projects. The European Trade Union Confederation immediately responded to the Juncker Plan by saying the Commission was “relying on a financial miracle like the loaves and fishes”.

There was no new money forming the EFSI – the seed capital was cut from other existing EU budgetary programmes, including the research plan Horizon 2020 and the Connecting Europe transport infrastructure programme. This €21 billion in initial capital was to be used to guarantee €60 billion of EIB borrowing to fund riskier projects than the EIB usually funds. The entire rationale of the Juncker Plan was to ensure that private investment that would otherwise not have happened took place. The investment plan stipulates that the funds must be disbursed across all EU economies according to the size of their GDP levels, meaning most of the projects that have been approved have benefited Germany and Britain instead of the smaller peripheral economies who are in greater need due to the fact that investment has largely ground to a halt. It has largely focused on public-private partnerships, which are being used across the EU to promote privatisation of public goods and services.

The Bruegel think-tank undertook a study of the first 55 EFSI-funded projects that were approved in the first year, and found that 42 would in all likelihood have proceeded anyway in the absence of the Juncker Plan. The only difference is that public money is now being used as a guarantee for private ventures.

The European Parliament admits the results of the Juncker Plan have been disappointing and that it has failed to unleash any discernible surge in investment. The most critical group, the European United Left (GUE/NGL) points out that most of the investments made under the plan would have proceeded regardless, without the EU guarantee, but now private investors can shift the risk of their investments to taxpayers. The group argues, “The EFSI induces rent seeking and asset stripping by private investors at the expense of the Union budget, via public private partnerships, the privatization of profits and the socialization of losses, while only sparely contributing to additional investment”.

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter Six, above.

 

Trade unionists rally against French President Emmanuel Macron's attacks on labour rights with a banner saying "Macron, puppet of the employers" (AFP)

Eurozone’s architects opt for ‘internal devaluation’

What conditions are required for a monetary union to work?

WHAT are the necessary requirements for a common currency to actually work effectively to the benefit of all its members? Why do the dollar-zones in the US, Canada and Australia not experience the same level of crisis, divergence and stagnation as the Eurozone has been plagued with? Simply put, the institutions in place in federal states such as these allow for the smooth, timely and effective recycling of excess profits from surplus states to those experiencing deficits. They also have central banks that have a mandate to ensure full employment, as well as price stability. In comparison, following the Bundesbank model, the ECB’s mandate is solely to maintain price stability and it is not to concern itself with employment.

When a downturn or crisis hits a common currency area, it will cause an asymmetric shock unless there has been sufficient convergence in the economies of the union. Divergent economies would be affected differently by different external and internal developments. This danger was understood by the architects of the euro, but for ideological reasons they focused only on attempting to achieve convergence in government debt and deficit levels at Maastricht and ever since, instead of looking at the more important role of divergence in balance of payments between members.

In 1961, economist Robert Mundell articulated his ‘optimum currency area’ theory on how currency unions could work to overcome asymmetrical shocks. The adjustment mechanisms identified through this theory include price and wage flexibility; mobility of labour and other factors of production; financial market integration; a high degree of economic openness; the diversification of production and consumption; similar inflation rates; fiscal integration; and finally, political integration. Some of these mechanisms can be seen to work effectively in the US. The three most important factors in place in the US economy identified by Stiglitz and others are: (1) the ease of migration across states, (2) federal spending on national programmes, and (3) the fact that the US banking system is a federal and not state-based system.

If one state in the US experiences a shock, workers can easily migrate to another state in a better economic condition in order to look for work. Technically there is freedom of movement of labour in the EU, but in practice migration within the US is far easier due to the fact states share a common language, a common culture and national identity, and the same access to federal welfare programmes. National government programmes such as social security and Medicare are available across all states, which means that if one state is experiencing a downturn, the federal government will automatically recycle surpluses towards the state in trouble in the form of, for example, increased unemployment benefits. Around one-fifth of GDP is spent at the federal level in the US. The federal government can also choose to boost investment or spending in certain federal projects at the state level in order to aid economic recovery. By comparison, in the Eurozone there is very little fiscal capacity to redirect funds towards depressed states because the European budget is around one per cent of member states’ GDP. Almost all spending occurs at the member state level. US banks are also guaranteed at the federal level by the Federal Deposit Insurance Corporation, preventing capital flight from one state to another in times of crisis.

Clearly the EU lacks similar institutions. But with the exception of a common deposit insurance scheme, the creation of such adjustment mechanisms in the Eurozone is either impossible in the short-to-medium term, or completely undesirable from a left standpoint by virtue of the fact that increased economic, fiscal and political integration require unacceptable trade-offs in the ability of people to participate in the decision-making process democratically at the local and national level.

Eurozone’s architects opt for internal devaluation

Of the various adjustment mechanisms identified by optimum currency area theorists, the Eurozone’s founders have clearly focused single-mindedly on attempting to achieve ‘flexibility’ of wages. Countries inside a common currency area cannot engage in competitive devaluations by devaluing their currency to make their exports more competitive. But they can implement policies domestically to bring about an ‘internal devaluation’ – lowering their real exchange rate vis-à-vis their neighbours. The main way this takes place is by compressing or reducing wages, which causes prices to fall. Germany has consciously implemented this policy for several decades, at the expense of German workers, millions of whom are working but living in poverty. This long-term strategy was intensified in 2003 under the then social-democrat/Green coalition government, which carried out a radical and vicious reform of the labour and welfare systems entitled Agenda 2010.

The competitiveness of prices largely determines the performance of a country’s exports, and the key factor determining prices is the nominal unit labour cost (the nominal unit labour cost is the ratio of labour cost per employee to productivity – the value added per worker). Unit labour costs in Germany stopped growing in the mid-1990s. Between 1998 and 2007, the rise in unit labour costs in Germany was zero. But in the rest of the Eurozone over the same period, average wage costs mainly increased with inflation, of around 2 per cent per year. This difference greatly increased the competitiveness of German exports and reduced it for the exports of other Eurozone members. So the success of Germany’s economic model is at the expense of the rights and living standards of its workers. The Agenda 2010 strategy has been deepened under successive governments and by 2015, more than 12.5 million Germans, out of a population of 80 million, were living in poverty in Europe’s “economic powerhouse”.

The EU’s focus on structural reform, particularly labour market reform, with a view to achieving increased “flexibility” has been a constant feature of its agenda since Maastricht. This was a major element of the Jobs Strategy of 1994, and the Lisbon 2010 Agenda adopted in 2000. The Lisbon Agenda originally set out to make the EU “the most competitive and dynamic knowledge-based economy in the world” by 2010. It included an economic pillar, a social pillar and an environmental pillar. In 2005, the Lisbon Agenda was revised by the European Council and Commission. Their verdict was that the agenda was failing to achieve its goal, and so they decided to drop the social and environmental pillars and focus on the economic pillar. In 2010 the Lisbon Agenda was relaunched as a new 10-year plan, the Europe 2020 strategy – “an agenda for new skills and jobs: to modernise labour markets by facilitating labour mobility and the development of skills throughout the lifecycle with a view to increasing labour participation and better matching labour supply and demand”.

The “progress” of member states in implementing structural reforms that will facilitate downward movement on wages is monitored through the European Semester process, a yearly cycle of policy “coordination” between member states and the Commission. In spring each year, Member States submit their plans for managing public finances – including keeping debt and deficits within the Stability and Growth Pact limits – and their National Reform Programmes to achieve “smart, sustainable and inclusive growth”. These plans are then assessed by the Commission, which proposes country-specific recommendations to member states, which are discussed and adopted by the Council. Then each autumn member state governments are graciously permitted to present their draft national budgets to their respective parliaments. The Five Presidents’ Report of EU leaders of 2015 proposed the creation of National Competitiveness Authorities to advance this agenda further.

The Eurozone elites believe (or claim to believe) that if only “wage rigidities” in the member states were overcome, both unemployment and trade imbalances would disappear. If only a country’s population could be forced to work for poverty wages, there would be a job for everyone; and the resulting stagnation in domestic demand would mean prices would fall and this country’s real exchange rate, which had become misaligned and risen too high, could regain its balance. This view underpins the repeated attacks on the rights and wages of French workers, set to intensify fiercely under President Macron, as well as underpinning the EU’s overall agenda and forcing structural reforms in the member states in order to increase productivity and competitiveness – and profit, of course. The austerity imposed by the Troika was not only designed to regain market “confidence” in peripheral governments, but also to facilitate internal devaluations in member states by a form of shock therapy. Of course, this adjustment facilitates not only the reduction of trade imbalances but also a sharp increase in the amount of wealth transferred from labour to capital.

There has certainly been an internal devaluation process in the Eurozone countries, affecting primarily the peripheral economies. But as Stiglitz points out, “this has not worked – or at least not fast enough to restore the economies to full employment. In some countries such as Finland, low inflation not been enough to even restore exports of goods and services to the levels before the crisis”. An increase in exports in these countries should have boosted growth and employment. But with the exception of the hugely distorted “globalised” data from the Irish economy, this has not been the case. The restoration of trade balance that the Eurozone has experienced since the crisis has largely been due to the fact that imports fall when demand stagnates – “one can achieve a current account balance by strangulating the economy”. For the crisis countries, the reduction in their trade deficits post-crisis largely resulted from a reduction in imports and not an increase in exports.

Crucially, internal devaluations also increase the level of debt of households, firms and governments who have borrowed in euros – as the value of their income is depressed, they owe a higher proportion of their income. High levels of debt were a major factor in causing the recession, because those in debt cut back on spending on both imports and domestic goods, causing a decline in GDP. It has also contributed greatly to the lingering problem of non-performing loans burdening Eurozone banks, particularly in the crisis countries.

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter Five, above.

 

Eurozone’s permanent austerity based on failed ideology

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter One, below.

BACK IN 1929 when the Wall Street crash hit, the response of then-US President Herbert Hoover was to restrict government spending – an action now almost universally acknowledged as having turned the stock market crash into the Great Depression.

The free-market ideology underpinning Hoover’s austerity policies held that an economy with high unemployment could return to full employment through market forces alone. Instead of boosting public spending, the government should do the reverse. By cutting government spending and increasing taxes, the government deficit would be reduced, which would restore market “confidence”. This restoration of confidence would lead to increased private investment, and the market would adjust itself to return to full employment.

The confidence fairy

The confidence theory was demonstrated back in 1929 to be incredibly damaging and to achieve precisely the opposite effect of what it aimed to achieve. The actual effect of implementing austerity in a period of economic downturn was to cause a contraction in the economy, thus weakening the economy further, causing tax revenues and national income to fall, and the deficit to increase. The contractionary impact of austerity policies during a downturn was explained by John Maynard Keynes during the 1930s, and Keynesian models have proved to be a reliable predictor of growth (or lack thereof) in the wake of the 2007-2008 crisis.

Countless books, academic studies and articles have outlined how the programmes imposed by the Troika – the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – on the Eurozone’s “peripheral” economies since 2008 have exacerbated the crisis. In the decades before the global financial crisis, these same policies had caused the exact same devastating contractionary effects when imposed under the guise of “structural adjustment programs” by the IMF across Africa, Asia and Latin America.

But while Keynesianism was experiencing an academic and policy revival internationally following the global financial crisis, Europeans somehow managed to cling to the confidence theory, which persisted in the decades beyond the Great Depression to this day. It is the dominant theory that has shaped both the structure of the Eurozone and European Union (EU), and the EU response to the global financial crisis of 2008.

In 2011 at the height of the Eurozone crisis, Nobel Prize-winning economist Paul Krugman memorably dismissed this theory as the “confidence fairy”. Two years later, commenting on the theory’s persistence in the face of overwhelming evidence to the contrary, he added: “European leaders seem determined to learn nothing, which makes this more than a tragedy; it’s an outrage.” Fellow Nobel Prize-winning economist Joseph Stiglitz has dubbed the free-market fundamentalists’ obsession with reducing deficits as “deficit fetishism”, pointing out that “no serious macroeconomic model, not even those employed by the most neoliberal central banks, embraces this theory in the models they use to predict GDP”.

Europe’s lost decade

It is common for scholars to refer to the results of the IMF structural adjustment programmes from the 1970s-1990s in Latin America, Asia and Africa as having caused these continents “a lost decade” or “lost decades”. Europe has lost a decade but there is a danger that it may lose several more – not only because of the policy responses to the crisis but because of the actual structure of the Eurozone. The results of the European response to the crisis are damning. Three patterns are obvious: the Eurozone countries have in general fared far worse in terms in terms of recovery than countries outside of the common currency; the recovery within the Eurozone has been sharply asymmetrical, with divergence between strong and weak countries increasing; and there has been a significant rise in inequality across Europe.

Growth in the US and Britain has been weak since the crisis but it has far outpaced the Eurozone recovery. It is difficult to even use the word “recovery” to describe the Eurozone experience – only last year did Eurozone GDP reach its pre-crisis level. In June 2016, the Eurozone unemployment rate was still in the double figures at 10.1 per cent; while the EU-28 had unemployment of 7.7 per cent. But the unemployment figures in several of the crisis countries remains double the Eurozone average – in Greece by 2017 the unemployment rate was 21.7 per cent while at the same time in Spain the jobless rate was 17.8 per cent. The figures are masked by the huge levels of emigration that the crisis countries experienced as well as the fact that number of hours worked per worker has declined across the Eurozone.

Stiglitz notes that youth unemployment persists at twice the level of overall unemployment. “The persistence of high unemployment among youth will have long-lasting effects – these young people will never achieve the incomes they would have if job prospects had been better upon graduation from school.”

While the Eurozone stagnated for a full decade following 2007, countries within the EU but outside the Eurozone had a GDP 8.1 per cent higher than in 2007 by 2015. The United States had a GDP almost 10 per cent higher in 2015 than in 2007. Over the same period, the Eurozone’s GDP grew by just 0.6 per cent.

When measuring living standards it is more accurate to examine GDP per capita than GDP overall, and while in the US GDP per capita increased by more than 3 per cent from 2007-2015, while over the same period in the Eurozone it actually declined by 1.8 per cent. As living standards have declined – devastatingly in crisis countries, and especially in Greece – income inequality has also risen drastically. In its Economic Forecast last autumn, the European Commission warned of a potential “vicious circle” as expectations of long-term low growth affect investment decisions, and that “the projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent”.

The declining level of growth in the British economy since the Brexit vote means a “strong downward revision of euro area foreign demand”, while the “sizeable depreciation of sterling vis-à-vis the euro is expected to have an adverse direct impact on euro area exports to the UK”. Eurozone exports were forecast to decrease slightly this year and stagnate in 2018, while possible financial crashes in China or the US and the ongoing non-performing loan banking crisis in the Eurozone pose serious risks.

Despite these sober warnings, European leaders and the financial press have raucously celebrated the anemic growth in the Eurozone’s GDP in the first two quarters of this year, of 0.5 per cent and 0.6 per cent respectively – crucially, driven by a slow increase in domestic demand as opposed to export-led growth. But this celebration ignores the fact that in normal circumstances, these figures would be viewed as abysmal, and that global economic forces pose serious threats to this fragile recovery.

Fairies and leprechauns

Predictably, these feeble shoots of growth are described as being the result of austerity policies by those who have claimed for the past 10 years that austerity will start to work any day now. A slightly recalibrated confidence theory has been proposed by a small number of economists associated with the neoliberal school of thought since the 2008 crisis – that of an “expansionary fiscal contraction”, with Harvard’s Alberto Alesina and Goldman Sachs’s Silvia Ardagna leading the charge with their joint paper in 2009. What they are actually recommending largely amounts to recovery through beggar-thy-neighbour competitive devaluations (or in the common currency, internal devaluation).

Stiglitz points out that these instances of economic recovery are actually cases where certain countries had “extraordinarily good luck” in that “just as they cut back on government spending, their neighbours started going through a boom, so increased exports to their neighbours more than filled the vacuum left by reduced government spending”. Several papers from the IMF itself have backed up this analysis.

This is largely what happened in the Irish economic recovery, which has become the EU’s poster child for austerity policies. The narrative goes that the Irish state followed the German model – it followed all of the EU rules and implemented the Troika’s structural reforms, slashed government spending to reduce the deficit, cut wages to increase competitiveness, and as a result restored market confidence, depressed domestic consumption and experienced a corresponding rise in exports.

The reality is more complex, and is based on a combination of growth in jobs in the indigenous sector, including the services sector, arising from favourable exchange rates for the Irish state; and on the illusory “growth” of GDP caused by the industrial-scale corporate tax avoidance strategies undertaken by US multinationals in the technology, pharmaceutical and aircraft-leasing sectors.

There has also been a certain level of export-led growth since 2009 but it has been hugely exaggerated and difficult to reliably quantify. But this export-led growth did not in any way fit into the German model and “expansionary austerity” narrative of an internal devaluation based on lowering wages and domestic demand. Rather than being based on manufactured exports with a competitive edge because of wage cuts, export growth took place among firms in high-wage service sectors such as technology and finance during a period in which wages in these sectors were going up.

Of course, last year’s ludicrous announcement that Irish GDP had grown by more than 26 per cent in 2015 raised an enormous red flag that all may not be what it seems in Ireland’s economic recovery. Krugman, coiner of the “confidence fairy” term, found another apt folkloric description for the occasion: “leprechaun economics”.

These figures were so detached from reality that they were cause for serious alarm but, incredibly, the Irish government welcomed them. According to the figures, per capita income apparently rose to 130,000 in 2015, and the state’s industrial base doubled in just one year. But the Net National Income grew by 6.5 per cent in 2015 while consumer spending rose by 4.5 per cent. These income and consumption figures are a far more accurate reflection of real economic activity and growth. Official GDP figures have a major and serious role to play in fiscal planning, spending and borrowing. They need to be credible and a measurement of real economic activity.

Most alarmingly, the figures reveal a glimpse at the level of dubious accountancy tricks being played by multinationals in Ireland during a period in which the Irish government claimed it was committed to playing its part in the global crackdown on tax avoidance. The Irish Central Statistics Office (CSO) identified relocations and inversions by multinational enterprises as the major contributing factors to the so-called growth. It seems as though there was a rush by multinationals to ‘turn Irish’ in 2015 in the context of global action on tax avoidance and tax havens, through inversions – where a multinational corporation changes tax domicile after it buys up a smaller Irish-registered company. The transfer of financial assets and intellectual property patents into Ireland does nothing to actually create jobs or contribute to growth in the real economy.

In response to the fantasy figures for 2015, the Central Bank of Ireland published a study stating that to measure growth or activity without the reality being skewed by the activities of multinationals, GNI* (Gross National Income, modified) should be used instead. GDP and Gross National Income differ as a result of the “net factor income from abroad” (eg, repatriated profits and dividends of multinationals). While GDP is a measurement of the income generated by the economy, GNI measures the income actually available to its residents. Irish GDP is more than 20 per cent greater than GNI, one of the largest differences among all economies globally (the two figures can usually be used interchangeably).

But even using GNI is not sufficient to get an accurate picture of real economic activity according to the CSO, which developed a measure of “modified gross national income” or GNI*. GNI* is Gross National Income “adjusted for retained earnings of re-domiciled firms and depreciation on foreign-owned domestic capital assets” – ie, modified to account for depreciation on intellectual property owned by technology and pharmaceutical firms. When GNI* is used to measure the Irish economic recovery, the picture is not so rosy. “The Irish economy is about a third smaller than expected. The country’s current account surplus is actually a deficit. And its debt level is at least a quarter higher than taxpayers have been led to believe,” the Financial Times reported on the first set of “de-globalised” data on the Irish economy in July this year.

For 2016, the value of the Irish economy according to its GDP was €275 billion, but according to its GNI* its value was €190 billion – a huge difference that indicates that not only is the Irish economy not nearly as strong as the official narrative portrays, but also that the Irish state may have facilitated multinationals in avoiding up to €85 billion in tax in one year alone. The CSO reported that in 2015, government debt was 79 per cent of GDP but 100 per cent of GNI*; and that while the state’s fiscal deficit was 1.9 per cent of GDP, it was 3.4 per cent of GNI*, well above the 3 per cent limit imposed by the EU’s fiscal rules.

There has also been growth in employment over the past three years in the Irish indigenous sector. For example, job growth took place in the agriculture and food sectors, and in accommodation and tourism. This growth was based on two related factors. The first was the depreciation of the euro against the dollar and sterling as a result of the crisis, and the second was the relatively higher economic growth in Britain and the US, the Irish state’s two largest trading partners. The (temporary) lower value of the euro was critical to the recovery experienced in the Irish indigenous sector. The relative growth in the US and Britain was also influenced by the fact that these two states are not constrained by the Fiscal Compact rules – borrowing in the US and Britain did not fall below 3 per cent since 2008.

But the specific circumstances of the Irish state’s trading patterns mean that this “recovery” cannot be transposed or replicated in other member states of the EU. It also poses significant risks, especially the risk of a significant fall in the value of sterling as a consequence of Brexit. A sharp depreciation of sterling against the euro – something we are already beginning to see – would likely jettison this recovery. Worrying signs of a technology bubble, a new Irish housing bubble and a massive shadow banking sector are all factors that may also influence this recovery. Crucially, the structure of the Eurozone itself, and the austerity ideology it has enshrined, make another economic slump inevitable.

The evidence shows that the Irish recovery happened in spite of, not because of, the EU austerity recipe – and it would have happened sooner, and with far less pain to the Irish people, had ideologically driven deficit fetishism been rejected.

A fiscal straitjacket

In 1992 the member states of the European Economic Community (EEC) signed up to the Maastricht Treaty, which laid the foundation for the common currency. The Maastricht Treaty enshrined the so-called convergence criteria – a set of rules members and potential members of the common currency were obliged to follow. To join the Economic and Monetary Union (EMU), states had to pledge to control inflation, and government debt and deficits, and commit to exchange rate stability and the convergence of interest rates. The blanket, one-size-fits-all fiscal rules in the criteria – that member states must keep public debt limited to 60 per cent of GDP and annual deficits to below 3 per cent of GDP – were proposed by Germany, based on its national Stability and Growth Pact.

The convergence criteria, as the term suggests, were aimed at achieving convergence among the diverse economies that were to form the Eurozone. The founders of the euro acknowledged the tendency for economic shocks to hit diverse economies asymmetrically in a monetary union. Without convergence, a common currency won’t work – for example, with diverse economies the interest rate set by the ECB for the entire Eurozone may impact positively on one country but negatively on another country with different economic characteristics. Without convergence, it would be difficult if not impossible to ensure full employment and current account (external) balance among different economies at the same time.

There are many spillover effects that one economy can have on another in a monetary union – for example trade imbalances and internal devaluations – but the only one that the Maastricht Treaty focused on was members’ fiscal policy. “Somehow they seemed to believe that, in the absence of excessive government deficits and debts, these disparities would miraculously not arise and there would be growth and stability throughout the Eurozone; somehow they believed that trade imbalances would not be a problem so long as there were not government imbalances,” Stiglitz comments.

Governments facing an economic downturn have three main ways they can aim to restore the economy to full employment: to stimulate exports by devaluing their currency; to stimulate private investment and consumption by lowering interest rates; or to use tax-and-spending policies – increase spending or lower taxes. Membership of the Eurozone automatically rules out using the first two mechanisms, and the fiscal rules largely remove the third option from governments.

(The confidence fairy is almost always accompanied by a fervent belief in “monetarism” among neoliberals – ie, that only monetary policy by an independent central bank should play any role in economic adjustment, and anything else would amount to dreaded government intervention in the economy.)

When a Eurozone member state experienced a downturn, its deficit would inevitably rise as a result of lower tax revenue and higher expenditure on social security. But when the convergence criteria kicked in, causing governments to cut spending or raise taxes, it would invariably worsen the downturn by dampening demand. Moreover, debt and deficits did not, and do not, cause economic crises. Ireland and Spain were running surpluses when they experienced a crisis, and both had low public debt.

The convergence criteria are purely ideological and economically unsound. But as the European Central Bank (ECB) was preparing to begin operating to control inflation and interest rates, Germany pushed for the adoption of an EU-wide Stability and Growth Pact in 1997, including non-Eurozone members, to enshrine the fiscal control aspects of Maastricht, and more generally to increase EU surveillance and control over member states’ national budgets.

The Stability and Growth Pact has been called a lot of names in its day – the “Stupidity Pact”, a “Suicide Pact”, the “Instability Pact”, and more. And it is deserving of each one. In 2002, then-President of the European Commission Romano Prodi told reporters the pact was “stupid”, while French Commissioner Pascal Lamy called it “crude and medieval”. In practice, the Stability and Growth Pact has proved to achieve the opposite effects it claims to aim for. Cuts to government spending have a contractionary effect and cause the economy to shrink; when the national income shrinks, spending on unemployment benefits have to rise, and the situation gets worse. This is exactly what happened in the aftermath of the recessions in Ireland, Spain, Greece and Portugal.

Early in the 2000s, both Germany and France repeatedly breached the fiscal rules. But they were not penalised, and were always provided with an extension to try to meet the targets. Almost all EU member states have breached the rules at some point – during the recession only Luxembourg did not go over the 3 per cent deficit target. Fiscal contraction will exacerbate unemployment, but it may eventually restore a current external account balance – when demand for imports becomes so low as a result of the recession that exports catch up.

University of London Professor George Irvin has described German Chancellor Angela Merkel’s insistence that government profligacy is at the root of the Eurozone crisis as betraying “near-total ignorance of how economies work”. “Budget balance for a national economy is fundamentally different from that of the household or the firm. Why? Because budgetary (or fiscal) balance is one of three interconnected savings balances for the national economy. The other two fundamental economic balances are the current external account balance… and the private sector savings-investment balance. If any one account is out of balance, an equal and opposite imbalance must exist for one or both of the remaining accounts,” he wrote.

But despite the vast evidence that the Stability and Growth Pact was counterproductive and unenforceable, Germany pushed for the fiscal rules to be tightened yet again in 2012 through the Fiscal Compact Treaty, which created the obligation for the convergence criteria targets to be inserted into the national law of the ratifying states.

The Fiscal Compact

In 2010, Germany proposed the reform of the Stability and Growth Pact to make it stricter, and “in return” pledged to support the creation of a Eurozone bailout fund that member states could draw upon if they were in dire straits – with strict fiscal conditions attached, of course. The reforms aimed at enforcing compliance of the Stability and Growth Pact known as the “Six-Pack” and “Two-Pack” of additional regulations and directives were adopted at EU level.

In 2012, an intergovernmental treaty – the Treaty on Stability, Coordination and Growth – was signed by all EU Member States with the exception of Britain and the Czech Republic. (When Croatia joined the EU in 2013, it declined to sign.) The Treaty, known as the Fiscal Compact, incorporated the Stability and Growth Pact, the Six-Pack and Two-Pack requirements, and more. Its central principle is that member states’ budgets must be in balance or in surplus, which the Treaty defines as not exceeding 3 per cent of GDP.

Critics of the Stability and Growth Pact had called on the EU to focus not on the general deficit but rather the structural deficit – what the deficit would be if the economy were at full employment. But instead of dropping the general deficit limit, the Fiscal Compact has adopted rules on both the general deficit and the structural deficit. The structural deficit limits are set by the Commission on a country-by-country basis and must not exceed 0.5 per cent of GDP for states with debt-to-GDP ratios of more than the 60 per cent limit, and must not exceed one per cent of GDP for states within the debt levels.

The “debt-brake” rule is the convergence criteria rule that government debt cannot exceed 60 per cent of GDP. The Fiscal Compact enshrines the rule that members in excess of this limit are obliged to reduce their debt level above 60 per cent at an average of at least 5 per cent per year. The structural deficit rule – called the “balanced budget rule” – must be incorporated into the national law of signatory states under the Fiscal Compact. An “automatic correction mechanism”, which is to be established at member state level and kicks in when “significant deviation” from the balanced budget rule is observed, must also be incorporated into national law.

Of all the member states who signed the intergovernmental treaty, only the Irish state put the Fiscal Compact to a referendum. The Fiscal Compact Treaty was adopted by just over 60 per cent of the voting electorate, with around 50 per cent turnout. The Fine Gael/Labour government’s decision to hold a referendum was not based on a belief in the right of the Irish people to have their say on their economic future, but rather their desire to go one step beyond simply incorporating the permanent austerity rules into legislation, and to insert them into the Constitution – despite the fact that the government’s Fiscal Advisory Council recommended the legislation option. Fine Gael, Fianna Fáil and Labour representatives urged the people to vote yes, dangling the carrot of access to the new bailout fund. The vote in favour was hailed by the government as an endorsement of its austerity policies.

The reality is that the Irish electorate was blackmailed into voting in favour of a proposal that endorsed a damaging austerity framework based on free-market fundamentalism as a result of the threat of crisis funds being withheld in future, and by the promise of the debt burden being relieved through the direct recapitalisation of the failed Irish banks by the future European Stability Mechanism. And after the approval of the Fiscal Compact Treaty and the constitutionalisation of austerity in Ireland, the Fine Gael-led government quietly dropped its call for the EU to recapitalise the Irish banks. Unbelievably, by 2015, the same Irish government representatives who had urged voters to approve the Fiscal Compact Treaty were pleading with EU authorities for more flexibility for Ireland’s implementation of the rules.

Irvin points out that Germany’s debt-brake cannot be good for other Eurozone countries, or even possible, for three reasons – that Germany’s exports to the Eurozone are by definition another member state’s imports; that there is insufficient global demand to sustain all Eurozone economies becoming net exporters like Germany; and that the public debt-brake completely ignores the problem of private debt, especially in the over-leveraged banking sector.

In a scathing critique of the Fiscal Compact, Francesco Saraceno and Gustavo Piga highlight that “no other country in the world has ever considered [such a rule], and with good reason” and say that the adoption of the Fiscal Compact has been “untimely, unfortunate and unequivocally wrong”. “Its uniquely negative effects, as the experience of Italy clearly shows, lie in the perverse features whereby, even if a government is allowed to renege year after year on the promised path toward a balanced budget, it is still required, every year, to recommit to a medium term (3-4 years) adjustment toward that balance. In so doing, business expectations are negatively affected, private investment plans are postponed, and stagnation becomes a permanent feature of the economy,” they write.

Return fiscal powers to member states

There have been repeated efforts, led by Germany, to exercise control over the budgets of member states. For several decades now, France’s demand for a European monetary union was always met with the German response that it must be accompanied by fiscal union, or German-led surveillance and control over national budgets. The same argument continues today, based on the same flawed ideology.

There have been several important proposals to reform the Fiscal Compact – for example, to focus only on the structural deficit; or to exclude capital investment from the rules. But while these proposals may loosen the straitjacket a little, it would be better to just take it off. As part of the Fiscal Compact treaty, the Council is required to adopt a formal decision on the Fiscal Compact by 1 January 2018 on whether or not to insert it into the EU Treaty. Saraceno and Piga argue: “If a number of important countries were to veto that move, this could set in motion a profound rethink of the appropriate fiscal policy infrastructure supporting the euro zone in future, one consistent with recent developments in macroeconomics.”

The Fiscal Compact has already been proven to be unworkable. The European Council voted last year to adopt the Commission’s recommendation to impose no fines for excessive deficits on Spain and Portugal in a clearly politically motivated decision. The austerity lie is losing its power, with even the IMF and the Commission questioning its benefits after a decade of stagnation. Barry Eichengreen and Charles Wyplosz argue that the attempt to centralise fiscal policy at the EU level is “doomed” and should be abandoned. In a paper on minimum conditions for the survival of the Eurozone, they write: “The fiction that fiscal policy can be centralised should be abandoned, and the Eurozone should acknowledge that, having forsaken national monetary policies, national control of fiscal policy is all the more important for stabilisation.”

Uniting Ireland campaign promoted in Australia

From left: Sinn Féin MP Francie Molloy, Australian Congress of Trade Unions President Ged Kearney and Sinn Féin deputy leader Mary Lou McDonald TD in Melbourne in September 2014

From left: Sinn Féin MP Francie Molloy, Australian Congress of Trade Unions President Ged Kearney and Sinn Féin deputy leader Mary Lou McDonald TD in Melbourne in September 2014

Published in An Phoblacht, October 1, 2014

Sinn Féin Vice President Mary Lou McDonald TD and MP for Mid-Ulster Francie Molloy carried out a national speaking tour of Australia from August 30 – September 9 2014 to promote the Australian Uniting Ireland Campaign. The two Sinn Féin representatives were accompanied on the tour by Cairde Sinn Féin’s Emma Clancy, and they visited Perth, Sydney, Canberra, Melbourne and Brisbane to meet with the Irish community, labour movement activists and leaders, and academics.

At a series of public events they addressed more than 1,000 members of the Irish community in Australia. They also met with dozens of Australian political representatives from the Australian Labor Party, the Greens, the Nationals, and the Liberal Party from across the country.

The Sinn Féin representatives outlined the role of the diaspora and Australian labour and political forces in supporting the international campaign for a referendum on Irish reunification.

Molloy and McDonald also raised issues faced by the local Irish emigrant community with political representatives, including the campaign against unaffordable school fees for the children of skilled migrants working in Australia on the 457 visa (which affects Western Australia, New South Wales and the Australian Capital Territory). Another goal of the tour was to raise awareness among Irish workers in Australia of their workplace rights and entitlements.

Australian MPs support ‘Irish Unity Motion’

During the tour, the Sinn Féin representatives spoke with several Australian MPs and senators in the state and federal parliaments, including federal Shadow Minister for Workplace Relations Brendan O’Connor and Education Minister in the Australian Capital Territory government Joy Burch. A political briefing was held in the Federal, New South Wales and Victorian parliaments. In New South Wales, they met with Labor leader in the NSW Parliament John Robertson as well as Shadow Attorney General and long-time Irish solidarity supporter Paul Lynch, and several MPs. In Western Australia they met with Parliamentary Secretary Vince Catania, while in Victoria they met with a group of MPs including the President of the state Legislative Council Bruce Atkinson at a briefing hosted by MP Bronwyn Halfpenny. The federal parliamentary briefing was hosted by Senator Gavin Marshall.

Altogether they met with 38 MPs and senators across Australia, many of whom had already signed up to the Australian Irish Unity Motion or did so during the tour.

Other highlights of the speaking tour included meeting with Aboriginal activists in Perth and Sydney; visiting the Global Irish Studies Centre at the University of New South Wales; a meeting of women trade unionists with McDonald in Sydney; Molloy meeting with the Australian Tamil Congress; and McDonald addressing a rally against austerity in Perth.

Supporting workplace rights for Irish workers

The tour was warmly received by the Australian trade union movement, whice supported and hosted several of the events. McDonald and Molloy met with Australian Congress of Trade Unions President Ged Kearney in Melbourne, as well as Construction, Forestry, Mining and Energy Union (CFMEU) national leaders Dave Noonan and Tony Maher and Maritime Union of Australia assistant national secretary Mick Doleman at a union-hosted event in Sydney on September 2. They also met with several state leaders of the CFMEU including Brian Parker and Mick Buchan, as well as leaders and activists from many other unions throughout the tour.

As well as building links of solidarity between progressive forces in Ireland and Australia with the trade unionists, the Sinn Féin representatives also discussed developing joint efforts to combat the exploitation of Irish workers in Australia on temporary visas and to promote union membership among Irish workers as part of this. Following the speaking tour of Australia by Pearse Doherty TD in 2012, Cairde Sinn Féin worked with Australian and Irish unions to produce a ‘Know Your Rights at Work Down Under’ pamphlet which McDonald and Molloy continued to promote among Irish workers during this tour.

The speaking tour was organised by Cairde Sinn Féin Australia and supported by the Casement Group Melbourne, the Brehon Law Society and the Irish National Association.

For full details of the tour, and to download the ‘Know Your Rights at Work Down Under’ pamphlet, visit cairdesinnfein.com.

For a full list of signatories to the Australian Irish Unity Motion visit irishunity.org.

Easter Rising remembered in Sydney, 2014

Emma Clancy addresses the 1916 Commemoration at Waverly on April 20, 2014

Emma Clancy addresses the 1916 Commemoration at Waverly on April 20, 2014

Below is a speech delivered by Emma Clancy on behalf of Cairde Sinn Féin Australia on April 20, 2014, at Waverly Cemetery, Sydney

I’d like to begin by acknowledging the traditional owners of the land we’re meeting on today, the Gadigal people of the Eora nation, and pay my respects to their elders past and present. It’s only fitting as we meet to commemorate a rising against injustices perpetrated by British colonial power that we remember the devastating consequences of this same power on the Aboriginal peoples of Australia.

I want to thank the Irish National Association for inviting me to speak today. I want to thank them too for the enormous amount of effort they have put in over many decades to maintain this monument in honour of Michael Dwyer, and all those who fought for full independence and equality in the 1798 rebellion. 1798 marked the birth of the modern Irish republican movement.

Michael Dwyer, who remains were brought here in 1898, was a leader of the United Irishmen during the 1798 rebellion. He was 26 when the rebellion began, and after fighting in Wexford, he led a guerrilla campaign against British forces from the Wicklow mountains for more than five years before being transported to Australia with his wife in 1806.

Sydney’s Irish community built this remarkable monument in 1898, on the centenary of the United Irish rebellion.

Now we are fast approaching another centenary – that of the Easter Rising, which we commemorate today.

Easter Rising

Republicans across Ireland and around the world are gathering this weekend to remember those who gave their lives in pursuit of Irish freedom in 1916. This year is the 98th anniversary of the Rising.

In 1916, Dublin was the city that fought an empire. On Easter Monday, 1200 men and women set out to bring an end to British rule in Ireland during the First World War – in their words, to “strike a blow for freedom”. The leaders, including the seven signatories to the Proclamation, were all executed by the British in the weeks that followed.

The nationalist women’s organisation Cumann na mBan, founded 100 years ago this year, created the Easter lily in 1925 as a tribute to all those who died in the struggle for independence from British rule.

Wearing Easter lilies to honour Ireland’s patriot dead today, we make no distinction between those who died in 1916 and those who died in 1981. We honour equally the Republican men and women who fell in the years of struggle from 1916 to 1923 and those who gave their lives in the recent conflict that broke out in 1969.

And we remember not only the individuals who led the Easter Rising, but also their vision and the ideals they died for. These ideals were best articulated by James Connolly, Pádaric Pearse and the other signatories of the Proclamation of the Irish Republic – of national sovereignty, equality, social justice, and democratic rights for all.

The fact that almost 100 years later we are meeting here today to remember the Rising, halfway across the world in Sydney, is testament to the impact that the vision and action of the men and women of 1916 has had.

Decade of centenaries

Last year marked the beginning of a decade of centenaries of pivotal events in Ireland’s struggle for independence.

Last year we marked the Centenary of the Great Lockout of 1913 when the bosses of Dublin declared war on the workers and their families.

The choice presented to the workers was stark. They could obey the bosses, resign from their union and go back to their tenement slums and their poverty with their heads down. Or they could resist. Thousands chose resistance.

Through the summer and autumn and winter of 1913 and 1914 they faced police brutality, press vilification, Church condemnation and starvation. They seemed defeated but out of their struggle arose a revived trade union movement and a proud working class.

Again and again, in the decades since the Lockout, those whom Wolfe Tone called the people of no property were offered that same choice – resign or resist.

They were told to resign themselves to their fate when Ireland was partitioned and a sectarian Orange state established in the Six Counties. But the followers of Tone and Connolly refused again resisted, and stood by the Proclamation of the Republic.

Half a century after the Proclamation, the Civil Rights movement stepped forward and was met with the same choice – resign yourselves to the reality of this one-party sectarian state or resist.

They chose resistance. RUC brutality was resisted. Internment was resisted. The British Army was resisted. Criminalisation in the H-Blocks and Armagh was resisted. Collusion and censorship and the demonization of whole communities were resisted.

They could not defeat a risen people.

But as we know, the struggle isn’t over. Republicans had always made clear that if a peaceful and democratic path of struggle towards our objectives was opened up then we were morally and politically obliged to take that path.

The peace process opened that new way forward and the IRA, with the same courage they showed during every phase of the struggle, endorsed that new strategy, that new road to our objectives, and set aside armed actions for good.

The peace process must be built upon and this is a work in progress. While the North in particular has been transformed for the better in recent years, the scourge of sectarianism remains. The past threatens to trip up the future.

Dealing with the past

Overcoming sectarianism and taking steps towards reconciliation involves reaching out to the unionist community. A real reconciliation process is essential in order to create trust between unionists and nationalists and between both parts of Ireland.

Those of you who follow Irish politics closely would know it is over three months now since Dr Richard Haass and Professor Meghan O’Sullivan presented compromise proposals to deal with the outstanding issues of flags, parades and the past.

Political unionism has either rejected the Haass proposals or prevaricated. The negative approach of the British government has facilitated this. The British have walked away from their commitments under the Good Friday and subsequent Agreements and this is having the effect of emboldening intransigent unionism.

The Irish Government has already agreed that Haass represents the best way forward. But to achieve progress on implementation of the Haass proposals requires the British Government to take up a clear and unambiguous position in support of Haass.

There is currently an effort on the part of political unionism to roll back on the progress that has been made since the Good Friday Agreement was achieved 16 years ago. This cannot be allowed to happen.

There remain many outstanding justice and legacy issues in the North that need to be addressed. These include ongoing struggles over truth recovery, and ensuring there is transparency, accountability and a rights-based approach to policing and justice. Republicans in Ireland are engaged in political struggles over these issues every day. We here in Australia can play our part in bringing pressure to bear on the British and Irish governments to fulfil their obligations under the Good Friday and other Agreements.

Irish republicans in Australia have added to international pressure to defend the rights of republican communities in the North in the past. During the 1981 hunger strike, the Diaspora mobilised around the world in support of the prisoners’ rights, including here in Australia. Thousands marched through the streets of Australian cities. After Bobby Sands died on hunger strike, shipworkers in Wollongong refused to handle British ships coming through the port in protest. Support like this is very much appreciated from those in Ireland.

Austerity

The Proclamation of 1916 continues to enthuse and motivate Irish republicans struggling for reunification, and for equality. Its message of freedom, and of cherishing all the children of the nation equally, is as relevant today as it was then.

Before his execution in 1916, James Connolly predicted that the Partition of Ireland would lead to a carnival of reaction. And so it did. Partition created two reactionary states in Ireland, which the conservative political, church and business elites shaped to protect their self-interests.

The southern Irish state of today is not a place where the principles of the Proclamation have been lived up to. Far from it.

It is, on the contrary, a state in which a corrupt political elite has brought the economy to its knees in order to prop up and pay their equally corrupt allies in the Irish banking sector. It is not a state of equal opportunities for all citizens; it is instead a state of brown envelopes and golden circles.

Irish people North and South have faced a considerable period of economic hardship. Hundreds of thousands are unemployed. Many more are struggling to survive. Highly educated, intelligent young people are leaving the country as emigration continues to be used by the Irish Government as a safety valve. Many of them are arriving here in Australia.

The Irish people have been forced to witness the spectacle of an Irish government acting as a mere agent for the EU and IMF in Ireland.

The enforced austerity by the Fine Gael/Labour coalition in Dublin and the Tory-led coalition in London is the antithesis of everything the Rising and Proclamation envisaged.  To stand for the ideals of 1916, must mean standing against austerity; and standing up for the vulnerable, those unable to care for themselves, and the working poor, north and south.

There is no middle way between the inequality driven by British and Irish conservatives, and the egalitarian values of our Proclamation.

The Irish people have once again been faced with the choice of resigning to vicious austerity or resisting.

We can take heart in the fact that people are standing up and fighting back. Republican ideas and politics have more popular support today than they have for almost 100 years. More and more people are getting involved in a new political struggle for the Irish people to be able to determine their own affairs and have ownership of the country’s resources.

Young people are increasingly getting involved in the struggle for this New Republic, including taking up challenging leadership roles across Ireland and making republican politics relevant to a new generation.

They are guided by the principles of the 1916 Proclamation of the Irish Republic and putting forward realistic alternative policies based on that vision.

Role of diaspora

Today, the mobilisation of the diaspora in support of Irish unity is a central part of Sinn Féin’s strategy for reunification.

In recent years we launched the Uniting Ireland campaign – a broad national and international campaign to build political support for Irish reunification through a border poll. Large and successful conferences have been held on this theme in the US, Canada and Britain. This year this important campaign is being launched in Australia, and we urge all republicans in Australia to support it.

We’re delighted to be able to announce that Sinn Féin Vp MLM will be visiting Australia to support this campaign in September this year.

In the lead-up to the Centenary events to commemorate the Easter Rising in 2016, we also urge republicans in Australia and around the world to ensure a renewed focus is placed on Easter events in the coming years. The INA, Cairde Sinn Féin Australia, together with others, are now initiating planning for nationally coordinated Easter commemorations across the country in 2016.

The launch of the Uniting Ireland campaign in Australia, and the momentum that will gather in the lead-up to 2016, provide an important opportunity for republicans in Australia to play their part in the struggle for Irish unity.

Bobby Sands once said: “Everyone, republican or otherwise, has their own particular role to play.” Each of us can contribute to achieving the historic task set by the men and women of 1916 – a united Ireland and a New Republic.

Irish workers facing exploitation in Australia

Pearse Doherty, Sinn Féin TD, visited Australia in 2012 and addressed the issue of Irish workers' rights

Pearse Doherty, Sinn Féin TD, visited Australia in 2012 and addressed the issue of Irish workers’ rights

Published in An Phoblacht in August 2012

The economic crisis in Ireland is of such magnitude that it dominates everybody’s lives.

In the 26 Counties, there are now more than 450,000 people out of work and the unemployment rate has reached 14.6%. The collapse of the building industry has left more than 100,000 construction workers jobless. Youth unemployment has trebled since 2008. The Irish Congress of Trade Unions recently stated that one in three men under the age of 25 is unable to find work.

These figures are actually masked by the soaring level of emigration from this state, with 70,000 Irish citizens now emigrating each year. Rural Ireland and the west of the country have been hardest hit. An entire generation of young people have been driven overseas in scenes reminiscent of the 1950s and 1980s. In County Leitrim, half of those between the ages of 22 and 26 have left.

Earlier this year, Fine Gael Government Minister Michael Noonan added insult to injury by claiming that emigration from Ireland was a “lifestyle choice”. Forced emigration is not a lifestyle choice. It is an indictment of the failure of this government, and the previous Fianna Fáil-led government, to implement a growth agenda that can create and retain jobs.

The fact is that the Fine Gael//Labour Party Coalition Government is happy to see emigration soar because it acts as a pressure valve for them in a situation where they have utterly failed to introduce an effective job-creation strategy.

Destination Australia 

Together with Britain and Canada, one of the main destinations for Irish citizens is Australia. The Australian economy is performing better than any other in the developed world – due in part to a resources boom but also because the Australian Government responded to the global financial crisis of 2008 with an effective stimulus programme instead of austerity.

In the past four years, tens of thousands of Irish citizens have emigrated to Australia in search of work. Most Irish workers are employed in the construction, mining, healthcare and hospitality industries. They are in Australia on two main types of visas: Working Holiday visas and Temporary Skilled Worker visas (‘457 visas’).

Working Holiday visas are granted to people aged between 18 and 30 for one year, and can be extended for a second year if the person meets certain requirements. 457 visas are granted to a skilled worker and his or her dependents for up to four years by employer sponsorship, and may be converted to permanent residency if the employer supports the visa-holder’s application.

Australian Government figures show that in the past year there was a 70% rise in the number of 457 visas granted to Irish citizens on the previous year. Between July 2011 and April this year, more than 8,000 457 visas were granted to Irish nationals, with about a quarter of these in the construction and mining sectors. Ireland is now the third-largest source of temporary skilled migrants through the 457 programme.

More than 22,000 Working Holiday visas were also granted to Irish citizens in 2011, almost double the number granted the previous year.

Migrant workers vulnerable

There is evidence that some Irish workers are being exploited in the workplace in Australia as they are dependent on their employer for their visa to be maintained, extended and possibly converted to permanent residency. Any workers beholden to their employer for their residency rights are naturally going to be vulnerable to exploitation and reluctant to speak up if their rights are being abused.

Australian trade unions have dubbed 457 workers ‘bonded labour’.

There are parallels between the way migrant workers are used in Australia with the way agency workers and posted workers have been abused in Ireland and across the EU. As we know from our own experience, the creation of a group of second-class workers can be used by unscrupulous employers to lower wages, conditions and rights across the board.

In Ireland, Sinn Féin has called for a Government-led job creation strategy and outlined our plan for a 13billion euro stimulus programme that could create 130,000 jobs over three years, based on existing sources of funds available to the Government.

We want to see a fundamental shift from an austerity agenda to a growth agenda so that young Irish citizens have a future in their own country. And the last thing we want to see is Irish workers being underpaid and exploited in a country they have been forced to emigrate to.

Examples of exploitation

Issues facing Irish workers in Australia include underpayment; the denial of entitlements such as leave and workers’ compensation; and diminished safety standards on sites where migrant workers are concentrated.

1) Underpayment

In the past, workers employed under the 457 visa programme were only entitled to be paid a minimum salary. The Australian trade union movement campaigned for guest workers to be paid at the market rate, and in 2008 the Australian Government legislated for this right. Now employers are legally bound to ensure that 457 workers receive the same pay and conditions as Australian workers or permanent residents in the same workplace.

There is mounting evidence gathered by the trade unions that employers continue to pay 457 visa workers less – in some cases dramatically less – than the going rate.

The reasons why temporary workers are vulnerable to exploitation and underpayment were investigated and documented in the 2008 Government-commissioned Deegan Review of the 457 visa system, which pointed to the high degree of power employers wield over guest workers in relation to their residency rights.

2) Sham contracting

‘Sham contracting’ occurs when a company tells a worker to obtain an Australian Business Number (ABN) and then signs them up as an ‘independent contractor’ instead of as an employee. Companies use this practice to evade their responsibilities to their employees and deny them their proper rights and entitlements.

While in reality the worker is an employee of a company, the ABN system allows the employer to avoid paying leave, overtime and redundancy payments, and workers’ compensation insurance.

This is another way of driving down pay and conditions across the board, and temporary workers are especially vulnerable to this practice, which in addition to underpaying these workers provides them with no recourse whatsoever if injured in the work place.

Trade unions have noted that there are a large number of Irish workers on both types of visa in this situation, even though 457 visa-holders are not actually legally entitled to work under the ABN system. The threat of withdrawing sponsorship forces many Irish workers into sham contracting arrangements in which they are being denied their basic entitlements.

3) Unsafe sites

Construction and mining, together with road transport, are the most dangerous industries in Australia.

In the construction industry, on average one worker a week loses their life on site. Figures have shown that restrictions on the right of unions to enter sites for safety reasons between 2004 and 2009 resulted in a corresponding rise in workplace accidents, injuries and deaths in the industry.

The fact is that union sites are safer sites.

Irish workers and other migrant workers in the construction sector are concentrated in non-union sites and have low rates of union membership. Trade unions have pointed out that this low level of union membership among migrant workers is at least partially related to the nature of the visa system and the power relationship between the employer and worker.

Benefits of union membership 

The economic crisis in Ireland is set to continue, and emigration is likely to continue to rise over the next number of years.

There are also moves in Australia to expand mass temporary migration schemes, called Enterprise Migration Agreements, using 457 visa workers, as well as moves to reduce the skill level required to gain a 457 visa under these schemes. As the temporary worker programmes expand they will attract more Irish citizens to Australia.

Sinn Féin TD Pearse Doherty, due to visit Australia in September 2012, told An Phoblacht: “Sinn Féin encourages every Irish worker in Australia, and all those planning to emigrate here, to make sure their rights at work are protected. The best way to do this is to join the union as soon as they arrive in the country.

“Trade unions can provide protection against underpayment, denial of entitlements, unsafe conditions, and threats of deportation by an employer.

“Australian trade unions are campaigning against the abuse of the migrant worker system by employers, and in favour of equal rights, conditions and protections for migrant workers. They are right to do so.

“Sinn Féin has consistently defended the rights of agency workers in Ireland and Europe and demanded equal rights for all workers in order to stop the ‘race to the bottom’ on wages and conditions. Just as we, together with the Irish trade union movement, have campaigned for legislation to combat the exploitation of agency workers in Ireland, Australian trade unionists are trying to prevent the creation of a group of second-class workers.

“The existing protections for temporary workers have only been achieved by union campaigns for equality.

“The trade union movement has made an enormous contribution to improving the lives and wellbeing of working people in Australia, and the Irish community has played a vital role in building and leading that movement.

“We urge Irish workers in Australia to join their union not only to continue this tradition but to ensure that their rights at work are protected.”

Know Your Rights: Download a pamphlet prepared for Irish workers in Australia here.