A protester waves the tricolour at a protest against the Troika bailout of Ireland in 2010

Some euros are more equal than others: trade imbalances and debt crises

WHY WERE leaders of European Union countries so determined to establish a monetary union among member states despite the setbacks and shocks experienced in the first decades of such an attempt at creating a common currency? In part it was a response to the collapse of Bretton Woods, and in part it was viewed by committed European federalists as a way to push the pace of political integration. There was a widespread belief stretching back to the Gold Exchange Standard that a common currency would ensure price stability and predictability, eliminate the risk of changes in exchange rates and therefore boost trade. For the European deficit states, the susceptibility of their currencies to repeated devaluations against the Deutschmark was viewed as an economic and political vulnerability, which caused inflation that reduced the purchasing power of both rich and poor. Meanwhile, from the mid-1980s the expanding US deficit had allowed both Germany and the EEC as a whole to generate a trade surplus. For the technocrats that had already set up shop in the limited European community administrative bodies, the creation of the euro would speed up the process of political integration and movement towards a European federation.

A shared currency with different motivations

Successive French governments had repeated the call for a European monetary union since Giscard d’Estaing first proposed it in 1964, with a view to reining in German power – and to make it easier to impose wage restraint on French workers, by comparing their wages with those of German workers. French national expertise in constructing political institutions would also be able to shine in a European administration. Germany had dragged its heels on such a union for decades, largely because of a fear that a fixed exchange rate between the franc and the Deutschmark would require the Bundesbank to print more money to prop up the franc, causing inflation that had been regarded with profound dread by Germans since their experience of the hyper-inflation of the 1920s, a dread that continues to define German monetary policy today.

The typical explanation regarding the creation of the Economic and Monetary Union (EMU) found in history books is that Germany finally agreed to the long-standing French call for a monetary union after the fall of the Berlin Wall in exchange for French acceptance of Germany’s reunification. But it was also created to accommodate Germany’s export-led economic strategy. The Deutschmark’s sky-high value in the wake of the collapse of Bretton Woods was a reminder to Germany that if the Deutschmark’s exchange rate was to float freely its value could rise indefinitely, making its exports too expensive and destroying its trade surplus strategy. Competitive currency devaluations were successfully reducing Germany’s trade surpluses with the countries that used them during the 1980s. Germany needed some way of locking its exchange rate to other currencies after the demise of the dollar zone. The ERM was viewed as a partial solution to these problems by German political leaders and the Bundesbank. But the speculative attacks on the currency fluctuations possible within the ERM that caused its collapse in 1992 led Germany to finally accept the creation of a common currency – on the condition that the deflationary debt and deficit rules of the Maastricht convergence criteria were accepted by its neighbours, of course.

Germany’s biggest export – stagnation

The question of how to deal with chronic, persistent trade imbalances within a common currency area was resolved to a large degree under the Bretton Woods system by the American commitment to spend its surplus internationally – its direct injection of capital into the economies of its capitalist allies during the duration of the system through aid and then investment. In this way, the US exported its goods but it also exported demand. The German model, on the contrary, aims to export its goods and import demand from other countries. In this way, the biggest German export can said to be stagnation. Instead of playing a role of recycling surplus profits, generating growth and stabilising the international economic system, the persistent German surplus plays a destabilising and deflationary role in the monetary union.

China has faced much criticism internationally in recent years for consistently running a large trade (or current account) surplus, but Germany’s trade surpluses have been almost twice as high as China’s in recent years as a percentage of GDP. China has made a conscious effort to reduce its economic dependence on exports, while Germany recorded a record surplus in the first half of 2017. Large and persistent trade surpluses are a problem because the sum of all surpluses has to equal the sum of all deficits. As discussed above, in stable economic periods, the banks in surplus countries can lend to borrowers in deficit countries, maintaining a semblance of balance, but in a crisis this surplus recycling measure comes to a sudden stop. But chronic surpluses also cause an overall decline in demand. The surplus countries are exporting goods but they are spending less than they are making in income.

Keynes called this the paradox of thrift – the phenomenon where when a country’s population saves their money during a downturn this actually causes a fall in aggregate demand, while total savings are not actually increased. Savings must equal investment, so if the level of investment remains the same, the level of savings must also remain the same. People might save a higher proportion of their income, but the only way the level of savings can change is if there is a reduction in the level of income. Stiglitz argues that the global economy today “is in this precise position, with a deficiency of aggregate demand leading to slow growth and 200 million unemployed. This deficiency of demand is the cause of what many call global secular stagnation” (secular meaning long-term stagnation as opposed to cyclical stagnation).

Trade imbalances cause debt crises

Trade imbalances do not only contribute to stagnation. Countries who run deficits must borrow the gap between what they export and what they import, meaning they have to take on more debt and become exposed to the risk of a debt crisis. If the country’s exchange rate can be devalued, then the external imbalance can be gradually reduced as the deficit country’s exports become more competitive on the global market. But inside a currency union, the option of exchange rate adjustment disappears. The main alternative way for a deficit country inside a currency union to regain trade balance is by an ‘internal devaluation’. This is when the nominal exchange rate remains fixed, but the real exchange rate falls as local prices in the deficit country drop, which makes its exports more competitive. (The nominal exchange rate sets the amount of foreign currency that can exchanged for a unit of the domestic currency, while the real exchange rate takes into account local prices and indicates how much goods in the domestic economy can be exchanged for goods in a foreign country.)

In a currency peg system, participating countries are not only prone to experiencing high or long-term unemployment, as they lack the ability to change their exchange rates and interest rates after a shock; they are also very susceptible to debt crises. In the absence of successful internal devaluation, deficit countries with a misaligned exchange rate seeking to finance the gap between their imports and exports rely on capital inflows. If foreign direct investment is not forthcoming then the only option is debt. But if the misalignment in the exchange rate is persistent, then the debt mountain grows until creditors fear it will not be repaid, usually resulting in a sudden stop of credit.

The Irish economy, Spain, Greece and others received huge capital flows after the creation of the euro in 1999, as a result of the elimination of exchange-rate risk. These countries were able to run deficits but also maintain employment and experience growth as a result of the low interest rates they were allowed to borrow at, and the small risk premium on government bonds (the extra amount that was added to the government bonds to compensate for the perceived extra risk associated with lending to that country). Both Ireland and Spain experienced massive housing bubbles based on speculative inflows of capital throughout the 2000s, while neither country imposed any effective measures to cool the heat.

Economist and writer Martin Wolf comments in his book on the financial crisis, The Shifts and the Shocks, that the belief among the Eurozone’s founders was that the problem of trade imbalances would no longer matter in a currency union, “as exchange-rate risks would vanish and payment disequilibria within the area would be smoothly offset by private capital flows”. But “these expectations proved delusional; the sovereign debt crisis in the Eurozone in 2010-12 started as a fully-fledged balance-of-payments crisis… prompted by the accumulation of large payment imbalances between its members and reflecting persistent underlying divergences in prices and costs”. These countries that were running trade deficits based on private and government debt due to the misalignment of their exchange rates then experienced the sudden stop of credit brought about by the global financial crisis, causing creditors to doubt their debts would be repaid. The common currency meant that these countries were forced to turn to the so-called Troika of the European Commission, the ECB and the IMF to be bailed out.

The euro, in this way, is somehow both a domestic and a foreign currency for its members. It is less risky for people, firms and governments to borrow in local currency markets than to borrow in foreign currency. To prevent a debt crisis developing, the government can print more of the local currency to repay creditors. But for Eurozone members, they were borrowing in a supposedly “local” currency that they could not then control. The nature of the Eurozone changed as soon as some members of the monetary union owed other members, Stiglitz argues. “Rather than a partnership of equals striving to adopt policies that benefit each other, the ECB and Eurozone authorities have become credit collection agencies for the lender nations, with Germany particularly influential”. The deficit countries dependent on creditor countries and the ECB are then vulnerable to any and all political and economic demands made by the creditors.

In their study of financial crises over eight centuries, Carmen Reinhart and Kenneth Rogoff identify several key features as having strong correlations with banking crises, all of which applied in the Eurozone. They note that in an analysis of banking crises after 1970, in 18 out of 26 of those studied the financial sector had been liberalised within the previous five years. They also identify a major correlation between removing restrictions on capital mobility and the incidence of banking crises over centuries. “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically”.

A further common feature they identify is that in the lead-up to banking crises there is often what they call a “capital flow bonanza” – a surge of capital inflows of roughly a few per cent of GDP on a multiyear basis, and the tendency to run a large current account deficit. While the liberalisation of the financial sector is by no means limited to the Eurozone, the free movement of capital and persistent trade imbalance problems inherent in the Eurozone, due to its design, make the common currency area prone to crises.

Capital defies gravity

After the signing of the Maastricht Treaty in 1992, the interest rates across the euro area converged towards the low level predominant in Germany. At the same time, in taking steps to lower inflation to the 3 per cent limit required for entry into the common currency, governments implemented deflationary measures that compressed wages. These low interest rates, lower real wages and the removal of all restrictions on capital flows as well as financial deregulation in the euro area combined to cause massive influxes of capital into the peripheral economies, and a massive expansion of both private and government debt in these countries. These trends reached new heights in the years leading up to the crisis, causing worsening trade imbalances and divergence.

From 2003 to 2007, net capital outflows from Germany were on average 45 per cent of its GDP. By comparison, the net capital inflows into Greece over the same period was 37.5 per cent of GDP; in Portugal the net inflow was 36.6 per cent of GDP and in Spain it was 29.1 per cent. A large majority of these inflows came in the form of credit. In the Irish state, house prices doubled in real terms between 1995 and 2005, and then continued to rise. From 2003 until 2007 lending to households in the Irish state expanded at one of the highest rates in the Eurozone, with the exposure by German banks reaching more than US$200 billion.

The once-popular view outlined by Wolf above and expounded by free-market fundamentalists – that trade imbalances would be offset and rectified by private capital flows – proved to be completely false. Instead of playing a balancing and stabilising role in the Eurozone economy, the completely free movement of capital generated massive speculative bubbles, and the abrupt reversal of capital flows from 2008 shows that these capital flows have operated in a pro-cyclical instead of counter-cyclical way. (Pro-cyclical policies exacerbate economic and financial fluctuations, while counter-cyclical policies aim to decrease fluctuations.) If the free movement of capital operated in a counter-cyclical way, as was claimed, then it would flow to weak countries when they were in trouble, instead of doing precisely the opposite.

While there is a single interest rate across the Eurozone, set by the ECB, the risk premium on government bonds and bank debt in different countries means the actual interest rate differs significantly across the common currency area. The perceived risk in lending to a weaker country is reflected in the spread of interest rates. Where economies are viewed as strong (and governments viewed as being capable of bailing out their banks), their banks will benefit from lower interest rates. Weaker countries and their companies have to pay a higher interest rate. During a crisis, capital flees to the ‘safe’ countries’ banks. Since 2008 capital has flowed dramatically from the poorer countries to the rich – not only in the Eurozone but across the global economy – with a large proportion of global capital fleeing to the US as a result of the US government’s perceived ability (and political commitment) to bail out the banks. Inside the Eurozone, the trend has been for capital flight from banks in the periphery to the core, particularly Germany. Stiglitz notes: “Standard economics is based on the gravity principle: money moves from capital-rich countries with low returns to countries with capital shortage. But in Europe under the Euro, capital and labor defy gravity. Money flowed upward”.

The proposed European Deposit Insurance Scheme, the so-called third pillar of the EU’s Banking Union following a single rulebook and single supervision, was dreamt up as a way to reduce this tendency. It is one of the few proposals emanating from the Commission and the leaders of the EU that would could actually effectively reduce divergence in the Eurozone, and reduce the incentive for capital flight from the weak to the strong countries. It could work as a form of institutionalised surplus recycling during a downturn or a period of crisis for the periphery – and for that reason it is being resisted by Germany and has been put on the legislative back-burner. The lack of a common deposit insurance scheme makes the Eurozone “structurally vulnerable” to bank runs according to Wolf.

Betting on default

The so-called sovereign debt crisis saw the global financial crisis shift to inside the euro area, where it still remains, due to the structural flaws in the architecture of the Eurozone. The ‘foreign currency’ nature of the euro – the fact that countries couldn’t create the money they were borrowing in – meant that the belief by investors in the years following the creation of the common currency that all Eurozone government bonds were equal was short-lived. From 2007-2009 the spreads between government bonds in Greece and government bonds in Germany (‘bunds’) increased tenfold up to 2.8 percentage points, with the market giving its ‘verdict’ on the creditworthiness of the Eurozone’s deficit countries. This increased again to a differential of almost 4 percentage points by April 2010, when the Greek government found itself unable to keep funding itself from international money markets. After the Greek default, the markets turned to train their sights on Ireland.

Former Greek Finance Minister Yanis Varoufakis describes this ‘market verdict’ of risk strikingly: “Suddenly [in 2009-2010] hedge funds and banks alike had an epiphany. Why not use some of the public money they had been given [in the mass bank bailouts] to bet that, sooner or later, the strain on public finances (caused by the recession on one hand, which depressed the governments’ tax take, and the huge increase in public debt on the other, for which the banks were themselves responsible) would cause one or more of the Eurozone’s states to default?” The most common way to place these bets was through credit default swaps, which are basically insurance policies that pay out in the case of a default by a third party. As the CDS casino on sovereign debt in the Eurozone grew – instead of this capital being directed towards productive investment or economic recovery – the rising value of CDSs in Greece, Ireland and the other peripheral economies caused the interest rates these countries were forced to pay to rise, pushing them towards the cliff.

Ireland defaulted in December 2010, followed by Portugal and Cyprus. Portugal hadn’t gone through a bubble bursting like Ireland but had experienced a long period of stagnation as a consequence of joining the euro at a very uncompetitive exchange rate that it was then locked into. Cyprus imposed capital controls on euros leaving the country between 2013 and 2015 in fear its partial ‘bail-in’ of deposits would prompt massive capital flight. Iceland had done the same in 2008 but this was the first time capital controls had ever been used in the Eurozone. The Treaty on the Functioning of the EU states that capital controls can only be “justified on grounds of public policy or public security” and that such measures should “not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments” (Articles 63 and 65), prompting threats of legal action.

The existential crisis of the Eurozone began in 2011 when the CDS bets on Spain and Italy defaulting caused the spreads in the government bonds of these two countries to diverge from bunds by between three and six percentage points, yield rates that had pushed Greece, Ireland and Portugal over the edge. Spain received a recapitalisation package for its banks but it was not a fully-fledged bailout. Italy’s public debt was around four times the amount of the Eurozone rescue fund.

The European Financial Stability Fund (EFSF) was created in 2010 as a temporary vehicle to finance bailouts, and was made permanent in 2013, becoming the European Financial Stability Mechanism (EFSM). The EFSF and EFSM were created to bail out banks, not states. Varoufakis likens the Eurobonds issued by the EFSF to the toxic collateralised debt obligations (CDOs) peddled by Wall Street in the lead-up to the crisis. CDOs were instruments that included ‘slices’ of different bank loans, each with a different level of risk and a different interest rate. The rationale behind CDOs was that by pooling together risky loans with less risky assets, the overall risk profile would be lowered – the CDO would be able to gain a higher credit rating – and they would be more profitable for investors. The “mix was toxic because if one slice within a CDO went bad, that increased the risk of a default by the next slice”. Unbelievably, the same structure and rationale that underpinned the disastrous CDO was used by the EFSF when issuing Eurobonds for lending to the Irish state, and later other countries subject to Troika intervention. Each Eurozone state was required to make a guarantee according to the size of their GDP, and these guarantee from states with wildly diverse credit ratings were then bundled together as bonds. Weaker countries were charged higher interest rates, increasing the pressure on the next weakest state to fall. The EFSM is now a permanent body called the European Stability Mechanism (ESM).

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 Three, above.

From Bretton-Woods to Maastricht: the creation of the Eurozone

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 Two, below.

WHEN AN economic downturn affects a country, for whatever reason, a government usually has three key tools to stimulate the economy and restore full employment – lowering interest rates, devaluing the country’s currency (or allowing it to depreciate), or using macroeconomic policy (eg, lowering taxes and boosting public spending). In a currency union, the first two options are dependent on the policy choices imposed by the union’s supranational institutions instead of national bodies.

If all of the economies within the currency union are sufficiently similar in nature, this should theoretically not be a problem. But the economies of the 19 member states of the Eurozone vary widely in their characteristics. At any given moment, the value of the euro vis-à-vis other currencies may be beneficial for some states’ economies but damaging for others. Likewise, the Eurozone-wide interest rates set by the ECB may boost some economies but depress others.

An economic crisis that affects a monetary union comprised of diverse economies will affect different countries in different ways. The designers of the Eurozone were aware of this possibility of “asymmetric shocks” having a different impact on different member states, motivating their development of the so-called convergence criteria. However, for ideological reasons, they chose to focus only on the issue of budgetary divergence, controlling member states’ national debt and deficits. This singular focus on controlling fiscal policy – despite overwhelming evidence that public spending cuts have a contractionary impact during downturns, and with no corresponding focus on the external current account (trade) balance of member states – has caused an increase in inequality and contributed to divergence instead of convergence among the Eurozone’s economies since the introduction of the currency peg.

While left-wing political movements and parties in Europe have focused on campaigning against the policy choices enacted by the EU institutions since the crisis, particularly the imposition of fiscal austerity, there is an urgent need to also examine – and explain – how the very structure of the Eurozone has contributed to inequality and divergence, prolonged and deepened the financial crisis and sovereign debt crisis, and makes future sovereign debt crises inevitable.

The gold standard currency peg

The euro is a currency peg system, which lacks the institutions that have allowed a common currency to work in other parts of the world – ie, in federal states such as the United States, Canada and Australia. Under a peg system, a currency’s value is fixed relative to a commodity, or to another currency.

Before the 20th century the global monetary system was characterised by the gold standard, where the value of different countries’ currencies were pegged to the value of gold, and to each other. The reason there was widespread support for fixing a state’s currency relative to gold was so that governments would not be able to print more money in response to economic conditions to their short-term political benefit. It was intended to deliver price stability. If there was more money pumped into the economy, it would cause prices to rise – causing inflation, reducing the purchasing power of working people, and making it harder for businesses to export their goods. Governments fixed their currencies at a set exchange rate, fixed the rate for exchange of these currencies with gold, and fixed the amount of money they could print with the small and reliable amount of gold entering the economy each year due to new discoveries of the precious metal.

For many decades during the 18th and 19th centuries, the US used a fixed gold standard and at other times relied on fiat money (money backed by a government guarantee instead of being backed by gold) – at times floating, and at times fixed to gold. The scarcity of gold in the late 19th century led to falling prices, deflation and depression in the US; debt became more difficult to repay. During the First World War the Gold Exchange Standard was temporarily suspended. But in spite of these problems and temporary suspensions, the Gold Exchange Standard was still being used by the capitalist countries when the Wall Street stock market crashed in 1929.

This currency peg worsened the Great Depression for the countries that clung to it because it prevented their governments from printing more money to stop banks and businesses failing, and generally to stop a deflationary spiral developing; those who exited the currency peg earlier recovered quicker. The two central lessons of 1929 and governments’ response to it, almost universally accepted by economists today, are that both inflexible exchange rates and austerity measures in response to a sharp downturn will deepen and prolong the crisis.

When a state’s money is flexible it works as a form of shock absorber, but fixed exchange rates remove a key way that economies can adjust to shocks or trade imbalances. Instead of abandoning the gold standard in response to the Great Depression, US President Hoover raised trade tariffs, contributing to a rise in protectionism and a decline in global trade. Some countries who had walked away from the gold standard retaliated by engaging in competitive devaluations of their currencies, in an example of ‘beggar-thy-neighbour’ economic policies. These ‘currency wars’, as they were known, saw countries cause the exchange rate of their currency to fall in relation to other currencies in order to gain a trade advantage – i.e., in order to boost their exports at the expense of other economies. When Franklin Delano Roosevelt won the US presidential elections in 1932, he promptly took the US out of the gold standard, largely ending the common currency system of the era. But the damage had been done, and the slump in the global economy continued until the massive public investment into the “industrial scale carnage” brought about by the Second World War.

The golden era of Bretton-Woods, 1944-1967

The decision to create the euro in 1992 was based on different motivations among its proponents in different countries. But one of the key goals shared by all of the participants was to create a replacement for the Bretton-Woods system that had underpinned the global economy since the end of the Second World War. Bretton-Woods disintegrated in August 1971 with the ‘Nixon Shock’, the announcement by then-US President Richard Nixon that the US was abandoning its commitment to propping up the global economy with the dollar.

The post-war global financial and monetary system was devised and agreed at a three-week conference attended by representatives of 44 Allied countries in the town of Bretton-Woods, New Hampshire, in the US in July 1944 as the Second World War neared its end. It aimed to bring an end to the inter-war global financial volatility that had led to the Great Depression and the collapse of the gold standard, as well as the post-Depression rise of protectionism and competitive currency devaluations.

Bretton Woods

Delegates Mikhail Stepanovich Stepanov (USSR), John Maynard Keynes (Britain) and Vladimir Rybar (Yugoslavia) at the Bretton Woods conference in 1944

The leading figures formulating the agreement were John Maynard Keynes on behalf of the British Treasury, and his more powerful counterpart from the US, Harry Dexter White, representing President Roosevelt. In addition to creating the International Monetary Fund and the International Bank for Reconstruction and Development (which later became known as the World Bank), the agreement also included a commitment to a global fixed-exchange rate system, underpinned by the American dollar, in turn backed by gold. Restrictions were placed on international capital flows in order to prevent currency speculation. The IBRD was to act as an international investment bank with the goal of promoting economic recovery from the war.

As part of the agreement, the US committed to guaranteeing this fixed exchange rate and the convertibility between the dollar and the gold it held, at the price of $35 per ounce of gold. There was a limited option for a country’s exchange rate to be renegotiated if it was clearly impossible to maintain. Within the fixed exchange rate, governments would be required to keep fluctuations within a band of plus or minus one per cent, by buying or selling their own dollar reserves.

The main reason the pre-war gold standard had collapsed was that it was unsustainable for countries to continue to keep such a high value for their currencies when their current account, or trade account, was in a deep deficit. Then, as now, there are balance-of-payment creditor economies with a trade surplus, meaning they export more than they import, and debtor economies with a trade deficit, meaning they import more than they export. A surplus in one country must equal a deficit in another, and every deficit must be financed, usually by borrowing. Economies with a trade surplus find themselves holding large quantities of money in their banks, who lend it to the deficit countries which need to finance their imports. As money is scarce in deficit countries, the interest rate will be higher, meaning it is more profitable for banks to lend to borrowers in these debtor nations. This lending by banks recycles the surpluses – but during a downturn such lending dries up.

The role of the IMF, according to the Bretton-Woods agreement, was to (partially) address this problem for debtor countries by acting as a lender of last resort. White, representing the world’s largest creditor country, scuttled Keynes’s proposals for measures to be taken to adjust trade imbalances on the part of creditor nations, and for a new global currency, the bancor, to be created to underpin an international balance-of-payments clearing mechanism.

However, White and Roosevelt did understand that such a global fixed exchange rate would remove a shock absorber for the global economy and would have the potential to turn a future downturn in the value of the dollar into a global recession. They aimed to establish a mechanism to avoid this. They believed strong regional currencies, backed by heavy industry, needed to be developed in both Europe and Asia. Very quickly after the war was over the US turned to its former foes to act as these strong regional currencies to support the dollar. In March 1947 then-President Harry Truman made a speech calling on the US Congress to intervene in Greece’s civil war by plugging the gap left by the British in providing financial support to pro-monarchist forces fighting Greek communists. The speech marked the arrival of the Truman Doctrine, opening the Cold War era, and it also marked the beginning of a US-backed industrial revival in its former enemies-turned-protégés, West Germany and Japan.

The Marshall Plan, officially known as the European Recovery Program, was launched shortly after the Truman Doctrine was announced and saw the US pump in more than 2 per cent of its national income in aid to western European economies to assist in recovering from the war, but also to ensure their dollarisation. The final factor that ensured Germany’s revival was the role of the US at the London Debt conference of 1953, in which it pressured other European countries to write down, or even write off, Germany’s pre-war debts.

In his book on the changing role of the US in the global economy throughout the 20th century, former Greek finance minister Yanis Varoufakis writes that Keynes’s proposal for an International Currency Union was overruled by Roosevelt’s New Dealers because they had an alternative plan: “The dollar would effectively become the world currency and the US would export goods and capital to Europe and Japan in return for direct investment and political patronage”. The US would run a massive trade surplus with the rest of the world, but it would also use this surplus to directly finance its protégés through aid and investment – meaning that demand for US products would be sustained in these countries. It would also support its key regional currency partners, West Germany and Japan, in their development of trade surpluses with their neighbours at a regional level.

In other words, the US was committed to ensuring it benefited from its position of a strong trade surplus, but made a simultaneous commitment to recycle a large part of its own surplus – in order to bolster other capitalist countries during the Cold War, and to ensure the stability of the new monetary system. The Bretton Woods structure “plainly recognized the asymmetry of the world as it was”, according to US economist and former Federal Reserve chair Paul Volcker, speaking in 1978. “The US, in effect, held an umbrella over the system.”

Nixon Shock: ‘It’s our currency but it’s your problem’

The Bretton Woods era saw two decades of post-war growth and relative stability. But the US had designed this global architecture in the mistaken belief that it would always be in the position of being a trade surplus country. The growth in the industrial capacity of West Germany and Japan in the following decades, combined with a massive rise in US government debt as a result of the costs to the US Treasury of the Vietnam War, started to shake the system by the mid-to-late 1960s. The global trade balance experienced an inversion and the US entered a deficit. Only the US was allowed to print more dollars under the Bretton Woods system, but the fixed exchange rate meant that other currencies pegged to the dollar started to suffer the consequences of US monetary policies. The rising amount of dollars was causing inflation in Europe and elsewhere, and in order to keep the fixed exchange rate in place, European governments had to increase the volume of their own currencies. Currency speculators predicted that the price of gold could not be maintained at $35, and frenetically purchased stocks of gold, worsening the situation.

Germany, France and Britain in particular began to signal their displeasure at the rising quantity of dollars in global markets. From the early 1960s, the Bundesbank resisted printing more Deutschmarks to defend the currency peg. In 1967, the British government under Labour Prime Minister Harold Wilson made an extreme deviation from the one-per-cent fluctuation limit set by Bretton Woods and devalued the pound sterling by 14 per cent. And most dramatically of all, France sent a warship filled with US dollars to New York harbour in early August 1971 with instructions to claim its gold held in the US Federal Reserve and Fort Knox. Britain immediately followed suit – minus the warship – and requested that $3 billion it held in US dollars be redeemed for gold.

Within days, US President Richard Nixon announced the end of gold convertibility on 15 August 1971, in a move that became known as the Nixon Shock and which marked an abrupt collapse of the Bretton Woods system. The US was cutting the rest of the world loose from the dollar zone. The regions that had benefited most from the system, Europe and Japan, would suffer the most from this unceremonious ejection. The US Treasury Secretary, John Connally, famously told a group of European finance ministers that the dollar “is our currency, but it’s your problem”.

Richard Nixon at a news conference

Former US President Richard Nixon

The idea of suspending gold convertibility was proposed to Nixon by Paul Volcker as a kind of ‘Plan B’ in May 1971; Nixon had appointed him as undersecretary of treasury in 1970. At a speech Volcker made in 1978, he reflected: “In the end, the inherent contradictions in the system were too great. With the benefit of hindsight, it would seem that an erosion of the US competitive position was implicit in the post-war arrangements. Europe and later Japan brought its industrial capacity close to US. It took some twenty years, but eventually the US payments position was irreparably undermined.” In the same speech he also said that US policymakers in 1971 believed that “controlled disintegration” of the global economy was a “legitimate goal”. The price of gold and commodities rose drastically and the 1970s were marked by a period of so-called ‘stagflation’ where high unemployment combined with high levels of inflation.

Varoufakis offers a convincing analysis and description of the reversal in global capital flows that followed the Nixon Shock. The US now had both a government deficit and a trade deficit, which policymakers resolved to find ways of making the rest of the world finance. The surpluses generated by the former US beneficiaries, Germany and Japan, needed to be redistributed towards the US somehow. Varoufakis argues that there were “two prerequisites for the reversal of global capital flows, which would see the world’s capital stream into Wall Street for the purpose of financing the expanding US twin deficits” – a rise in the competitiveness of US firms against their competitors in Europe and Japan, and a steep rise in interest rates in the US that would attract capital flows to the US by increasing profitability, but damage other countries’ economies and its own population.

This motivation underpinned the tight constraint of average real wages in the US since the 1970s – which to this day have not regained the real purchasing power they had in 1973 – and unleashed the wave of financial deregulation that was then implemented with enthusiasm by President Ronald Reagan. Capital gravitated towards the dollar in the aftermath of the Nixon Shock, purchasing US Treasury bills and investing in Wall Street. As net capital flows reversed – flowing into the US rather than out of it – the surplus capital of other countries was recycled as the US government and consumers then bought the exports of these same countries. The US played the complete reverse role it had during Bretton Woods but its leading role in recycling trade surpluses in order to maintain a semblance of balance continued. An expansion in the access to credit as a result of capital flows into Wall Street meant working people in the US increasingly went into debt to compensate for their stagnating wages, a pattern that was soon to be replicated in Europe.

The Union is born – as a price-fixing cartel

Understanding the Bretton Woods system, and the reversal in global capital flows that followed its collapse, is crucial to understanding the structures and beliefs underpinning the Eurozone – because the creation of the Eurozone was largely an attempt to recreate the Bretton Woods system.

The European Coal and Steel Community (ECSC), created in 1951, was the first step towards a European Union (EU). In 1950, French foreign minister Robert Schuman proposed that “Franco-German production of coal and steel as a whole be placed under a common High Authority, within the framework of an organisation open to the participation of the other countries of Europe”, which later became the ECSC with the Treaty of Paris in 1951, signed by West Germany, France, Italy, Belgium, the Netherlands and Luxembourg. This “High Authority” of 1951 became known as the European Commission.

Although the leaders of the ECSC participant countries of 1951, and the EU leaders of today, would express horror at such a characterisation, the reality is that the EU began life as a US-devised price-fixing cartel, which “openly and legally controlled prices and output by means of a multinational bureaucracy vested with legal and political powers superseding national parliaments and democratic processes”, according to Varoufakis in his book on the history of the Eurozone and the crisis. France and other countries also aimed to ensure the post-war scarcity of coal and steel did not work to Germany’s advantage. The ECSC fixed the price of coal and steel, and later moved to remove tariffs on coal and steel between members, and then on all goods.

The Treaty of Rome created the European Economic Community (EEC) in 1957. The objections of farmers, particularly in France, to the lowering or elimination of tariffs led to the creation of the Common Agricultural Policy from 1962 onwards, where part of the profits made by the heavy industry cartel were distributed to farmers as subsidies in order to gain their compliance with further economic integration and a customs union. A monetary union was first raised in the Marjolin Memorandum in 1962, authored by the European Commission. This memorandum initiated the first discussion on monetary integration in the EEC and proposed that the customs union should lead to fixed exchange rates between the currencies of its members. But as the Bretton Woods system was working reasonably well at the time to ensure exchange rate stability, there was little follow-up on the proposal in the short term. The first call for a common currency from a political leader came in 1964 – from then-French finance minister (and later President) Valéry Giscard d’Estaing.

A defining moment in the development of a common currency was the publication in 1970 of the Werner Report (to the Council and Commission of the European Communities) “on the realization by stages of economic and monetary union in the Community”. This report, produced against the backdrop of an increasingly strained, and soon to be destroyed, Bretton Woods system, proposed the main elements necessary for monetary union: full and irreversible convertibility of the currencies of the union; elimination of fluctuations in exchange rates; complete freedom of movement of capital; and the centralisation of monetary policy. National currencies could be maintained under the system, the report stated, or a single Community currency could be created, “but psychological and political factors weigh the scale in favour of adopting a single currency that would demonstrate the irreversible nature of the undertaking” (my emphasis).

A snake in a tunnel

The first practical attempt at creating a European currency peg, known as the ‘snake in the tunnel’, began in 1972. The metaphor was grim but apt – the snake was a currency’s exchange rate, and the tunnel was the narrow band in which the rate could fluctuate. Several members of the EEC, plus Britain, Ireland, Denmark and Norway, agreed to limit the margin of fluctuation between their currencies to a difference of no more than 2.25 per cent. It was a clear and open attempt to replicate the Bretton Woods fixed exchange rate regime in order to regain price stability between the European currencies after the collapse of the dollar-backed system the year before.

The Nixon Shock had caused the value of the dollar to fall but the Deutschmark to rise significantly, meaning the price of West Germany’s exports were becoming increasingly expensive. The Deutschmark’s soaring value strained the attempts to manage (or fix) the prices of Europe’s heavy industry and agricultural sectors, the raison dêtre of the EEC. The oil shock – a huge and sudden rise in energy costs – of 1973 forced the deficit countries to emerge from the tunnel. France, Italy, Britain and Ireland could not maintain these fixed exchange rates with the Deutschmark. The only way these deficit countries could maintain such an exchange rate was to increase their interest rates to attract foreign capital and to cut public spending to increase ‘confidence’ that government debt could be repaid, both of which would have significant negative effects on their own populations. By the late 1970s, only the Deutschmark, the Danish Krona and the Benelux countries’ currencies – Belgium, Luxembourg and the Netherlands – were still members of the snake in the tunnel system.

The road to Maastricht

As is the case with all major developments in the history of the EU, the creation of the European Monetary System (EMS) enacted in 1979 was the product of a political compromise between Germany and France. The German and French leaders had announced the creation of the EMS in September 1978. The EMS set a European Currency Unit (ECU) as a “basket” of currencies, and it established an Exchange Rate Mechanism (ERM), which was based on fixed exchange rate margins – but with a degree of variation possible within those margins. There was no official “anchor” currency of the EMS, which lasted for two decades until 1999. But indisputably the Deutschmark was the anchor, and the policies and approach of the system were heavily influenced by the Bundesbank’s phobia of inflation.

There were four key phases of the EMS according to an expert report carried out for the European Commission. The first phase, 1979-1985, included the retention of capital controls by several member countries. The inflation differentials, combined with fixed nominal exchange rates, required “frequent adjustment of the official parities”. The Irish state joined the EMS in 1979, and was required to break the punt’s parity with sterling in order to do so, as sterling – not in the ERM – was appreciating against the ERM currencies. Parity with sterling would have taken the punt outside of the agreed band, so it had to be broken as a condition for Irish entry into the ERM.

During the second phase, 1986-1992, the EMS was referred to by many as the “Deutschmark Area” because members of the system were forced to give up their own monetary policies in order to implement the anti-inflation policies of the Bundesbank and reduce their inflation levels to “German” levels. The so-called Mundell–Fleming trilemma (developed by Robert Mundell and Marcus Fleming, also referred to as the “impossible trinity”) holds that it is impossible for an economy to simultaneously maintain a fixed exchange rate, free movement of capital, and an independent monetary policy. The Commission report agrees: “Owing to the impossible trinity all central banks participating in the ERM had de facto renounced an independent monetary policy”.

Maastricht Treaty draft

Prime Minister Aníbal Cavaco Silva of Portugal; Prime Minister Ruud Lubbers of the Netherlands; Foreign Minister Hans-Dietrich Genscher of Germany; and Jacques Delors, the president of the European Commission toast a draft of the Maastricht Treaty in February 1992 (Jerry Lampen/Reuters)

During this second phase, the Single European Act was passed in 1986, moving towards a single market in the EEC. The then-Commission President, Jacques Delors, established a committee to examine a possible future monetary union, which produced the ‘Delors Report’ in 1989 – the document that led to the Maastricht Treaty of 1992 (endorsed by EEC governments in 1991 but ratified in referenda in Denmark and France in 1992). The Delors Report promoted the view that there was a need for national budget deficit rules, which became the Maastricht convergence criteria, and proposed a new institution, independent of member states, with responsibility for monetary policy – the European Central Bank. In 1990, following the Delors Report’s roadmap, capital controls among members of the EMS were abolished. These developments occurred against the backdrop of the disintegration of the Soviet Union and of German reunification.

From September 1992 until March 1993 the EMS experienced a severe crisis. Some of the members of the EMS were experiencing rising inflation which they were unable to reduce. Currency speculators targeted the over-valued currencies. Fears that voters would reject the Maastricht Treaty on a monetary union, proposed in 1991, contributed to the speculative currency attacks. In June 1992 the Treaty was rejected by 50.7 per cent of Danish voters in a referendum. A similar referendum was held in France, which narrowly endorsed the Maastricht Treaty in September 1992, with 51 per cent of voters supporting it. But massive speculative pressure in the lead-up to the French referendum contributed to the worst crisis in the history of the EMS, which led to the forced ejection of the pound sterling and Italian lira from the ERM, the devaluation of Spain’s peseta, and threats of forced devaluation of other currencies. The fluctuation margin of the EMS was widened to an enormous plus or minus 15 per cent in 1993 in a bid to stop other currencies, particularly the franc, from having to exit. Italy later rejoined the ERM in 1996.

The final phase of the EMS lasted from 1993 until 1999 when the Eurozone was launched by its original 11 member states – Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Greece joined the Eurozone in 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014, and finally Lithuania in 2015. An ERM II is in place, supposedly to draw non-Eurozone members of the EU into an alignment of exchange rates, but only the Danish Krona is a member currently. The single market was completed in 1993, allowing the free movement of capital, labour, goods and services, becoming formalised in 1994 by the European Economic Area (EEA) agreement.

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.”

Gernika: The beginning of aerial terror

Gernika Belfast

A mural of Pablo Picasso’s Guernica in Belfast

The following excerpt on the 1937 attack on the Basque village of Gernika is taken from an incomplete history piece on the Basque Country, from a chapter on the Second Republic and civil war. Tomorrow (April 26) is the 80th anniversary of the bombardment.

In early 1937, with Madrid still putting up a stiff resistance, Franco set his sights upon Bilbo with the aim of capturing the city’s iron ore and heavy industry to support his war effort. The Francoists quickly planned a northern offensive to be led by General Emilio Mola, who issued an ultimatum on 31 March in broadcast and printed leaflets dropped on Bizkaian towns saying: “If submission is not immediate, I will raze Vizcaya to the ground, beginning with the industries of war. I have the means to do so.” Most of the infantry on Franco’s side were raised from Nafarroa. The 50,000 heavily armed troops in four Nafarroan brigades were backed up by two Italian divisions, the Spanish Air Force, the Italian Aviazione Legionaria and the Condor Legion of the German Luftwaffe. Mola had 120 aircraft and 45 pieces of artillery at his disposal. The Republican Army in the North had almost as many troops but far less firepower, half the artillery and just 25 ineffective aircraft. The offensive began with an act of brutality when the village of Durango – not on the front line and undefended – was bombarded for four days by the Luftwaffe, with 248 civilians killed. Republican positions were falling fast and on 20 April 1937 a new Francoist offensive began in Bizkaia.

Gernika has long had a sacred status among Basques as the site of the ancient Basque parliament of Bizkaia, the Casa de Juntas, and of the legendary Gernikako Arbola (Tree of Gernika), an oak tree that has been a symbol of Basque sovereignty and the rights of the Basque people for close to a thousand years. In 1937 the town had a population of around 7,000 people, and Monday 26 April was a busy market day in the town centre. At 4.40pm the Luftwaffe’s Condor Legion and the Italian Aviazione Legionaria launched an aerial bombardment of the town that lasted for three hours, with waves of planes hitting the town centre every 20 minutes with high explosives and incendiary bombs of up to 1000lbs. each. Those who tried to run from the town or hide in the fields were machine-gunned. At 7.45pm, after the last planes had dropped their bombs, the centre of the town was destroyed. The assault killed 1,654 of the town’s 7,000 inhabitants. Gernika was 30 kilometres from the front. The Casa de Juntas and the Tree of Gernika had incredibly survived untouched.

A report by British journalist George Steer, war correspondent for the London Times, was published in the Times and the New York Times on 28 April. Steer had rushed to the town the evening of the attack to interview survivors and witness the devastation firsthand, and reported: “The most ancient town of the Basques and the centre of their cultural tradition, was completely destroyed yesterday afternoon by insurgent air raiders.”  His report from Gernika was all the more significant because Franco’s forces claimed the Basques had burned the town themselves as a propaganda stunt; then they claimed the Communists had bombed it. Franco denied that German forces were even participating in Spain’s Civil War. In response to the Nationalist propaganda, Basque lehendakari (president) José Antonio Aguirre made a public declaration : “I maintain firmly before God and History, who will judge us, that during three and a half hours German planes have bombarded the defenceless civilian population of the historic town of Gernika, pursuing women and children with machine-guns, and reducing the town itself to ashes. I ask the civilized world whether it can permit the extermination of a people who have always deemed it their duty to defend their liberty as well as the ideal of self-government which Gernika, with its thousand-year-old Tree, has symbolized throughout the centuries.” Franco replied: “Aguirre lies. We have respected Gernika, just as we respect all that is Spanish.” Mola was more forthright, saying: “It is necessary to destroy the capital of a perverted people who dare to oppose the irresistible cause of the national idea.”

Basque priest Father Alberto Onaindia witnessed the carnage in Gernika and wrote in desperation to the Primate of Spain, Cardinal Gomá: “I have just arrived from Bilbao with my soul destroyed after having witnessed the horrific crime that has been perpetrated against the peaceful town of Guernica… Senor Cardinal, for dignity, for the honour of the gospel, for Christ’s infinite pity, such a horrendous, unprecedented, apocalyptic, Dantesque crime cannot be committed.” He begged the Cardinal to intervene to sure the Francoists’ threat – that Bilbo was next – was not implemented. Gomá responded by insisting that Bilbo must surrender. Referring to the Basque Nationalist Party’s (PNV) loyalty to the Republic, he added: “Peoples pay for their pacts with evil and for their perverse wickedness in sticking to them.” Francoist forces viewed the scene a few days later, and a Carlist soldier reportedly asked a senior officer in Mola’s staff: “Was it necessary to do this?” The lieutenant colonel replied that it had to be done in all of Bizkaia and Catalunya. In 1970  PNV member Joseba Elosegi, one of the Basque soldiers from the Battalion Saseta which had withdrawn to Gernika for a period of recuperation and was present on the day of the bombing, carried out an act of self-immolation in a protest against Franco in Donostia, shouting “Gora Euskadi Askatuta!” (Long live the free Basque country!). Elosegi was badly burned but survived and described his protest as the desperate act of a man who had “obsessively remembered” for more than three decades the scenes he witnessed at Gernika.

Steer immediately understood the significance of the attack on Gernika, and in his Times article he wrote:  “In the form of its execution and the scale of the destruction it wrought, no less than in the selection of its objective, the raid on Guernica is unparalleled in military history. Guernica was not a military objective. A factory producing war material lay outside the town and was untouched. So were two barracks some distance from the town. The town lay far behind the lines. The object of the bombardment was seemingly the demoralization of the civil population and the destruction of the cradle of the Basque race.” His report was reprinted in the French communist newspaper L’Humanité on 29 April, where Pablo Picasso read it. The artist captured the international outrage over the attack in his world-renowned painting. He had been commissioned earlier that year by the Spanish Republican government to paint a mural for the Spanish government building at the World Fair in Paris. On 1 May 1937, he dropped his original plan and produced his most famous work, Guernica, instead.

Dublin Lockout: The Risen People

Bloody Sunday baton charge

Bloody Sunday baton charge

Published in the CFMEU WA Branch Journal in September 2013

Irish trade unionists are marking the centenary of the 1913 Dublin Lockout, the most significant labour dispute in Irish history. Led by ‘Big Jim’ Larkin, the people of Dublin’s slums fought a five-month battle with the city’s major employers over the right to union recognition. It was a fight that affected 20,000 workers and their 80,000 family members, and included deadly street battles with police.

The Lockout, which began in August 1913, was no spontaneous dispute. It was a conscious attempt by businessman and media magnate William Martin Murphy to nip the growing power of the newly formed ITGWU in the bud. The Irish Transport and General Workers Union was formed by Larkin in 1909 and by 1913 it had won several improvements for members across Ireland.

Ireland in the first two decades of the 20th century was experiencing major political upheaval, with suffragettes, radical nationalists and republicans organising powerful movements for change. With brutal working and living conditions, the radicalisation among working people that took place in Dublin during this period – led by Larkin and fellow socialist and trade unionist James Connolly – was little wonder.

Slum city

Dublin in 1913 was a city of slums – of impoverished people living in squalor in over-crowded tenement housing. Shortly after the Lockout began in August 1913, two overcrowded four-storey tenements on Church Street collapsed, killing seven people.

An inquiry into the disaster reported on housing conditions in the city the following year, stating that of the 400,000 residents of Dublin, almost 90,000 lived in tenements in the city centre, with 80% of these families living in a single room. The Church St disaster inquiry reported that: “We have visited one house that we found to be occupied by 98 persons, another by 74 and a third by 73.”

Overcrowding, malnutrition and poor sanitation meant disease thrived, with the most dreaded being the deadly tuberculosis. A Census in 1911 found that Dublin had a mortality rate as high as Calcutta’s, and that one in five deaths that year was of a child under the age of one.

Larkin forms ‘One Big Union’

Dublin lacked an industrial base and its workers were mainly unskilled and employed on a casual basis. Around 50,000 people depended on work on the docks, in transport, the building trade and a limited number of factories and workshops.

Labourers could be replaced at a moment’s notice from a pool of thousands, many from the countryside, who carried with them the recent memory of the Famine. There was a readiness to work for any wage and in any conditions. Unemployment was 20%, and workers were often paid their wages in pubs.

This was the city into which Larkin arrived in 1909. Born in Liverpool, Larkin joined the National Union of Dock Labourers (NUDL) in England. He led the successful dockers’ and carters’ strike in Belfast in 1907 – during which the display of Protestant and Catholic working-class unity shook the Belfast establishment. Larkin fell out with the NUDL leadership in 1908 and set up the ITGWU in 1909. By 1913, the ITGWU operated out of Liberty Hall in Dublin with a membership of around 10,000, and The Irish Worker, launched in 1911, had a circulation of 90,000.

Larkin was a charismatic and powerful orator who was fiercely loved by Dublin’s working people. A syndicalist, Larkin was especially adept at using the ‘sympathetic strike’ to win better conditions for workers. The sympathetic strike was when workers acted in solidarity with striking workers by refusing to deal with companies whose employees were on strike, and the tactic was effectively used by the ITGWU between 1909 and 1913 in Cork, Derry and Wexford.

One major employer who was paying close attention to the ITGWU’s success was businessman William Martin Murphy. Murphy owned the Irish Independent newspaper, Clery’s Department Store, the Imperial Hotel and the Dublin United Tramways Company, among other interests. In 1911, Murphy formed the Dublin Employers’ Federation which drew together more than 400 bosses into a powerful organisation intent on smashing the ITGWU.

‘Your union or your job’

Murphy fired the first shot in the dispute in 1913 by sacking around 40 workers in the Irish Independent after literally offering them the choice: “Your union or your job”. In July he forbade transport workers in the Tramways Company from being ITGWU members. He warned his staff a strike would fail, saying company leaders would have three meals a day regardless of the outcome, but “I don’t know if the men who go out can count on this”.

In a planned challenge to the ITGWU, on 21 August more than 100 workers at the Tramways Company received a dismissal notice. As large numbers travelled to the Dublin Horse Show on 26 August, drivers and conductors stopped the city’s trams and walked off. Larkin called on workers in other companies owned by Murphy or dealing with him to join the strike in solidarity. James Connolly, then ITGWU secretary in Belfast, was brought to Dublin to help run the strike.

On 31 August, Larkin addressed a banned demonstration on Sackville St – now O’Connell St – from the balcony of Murphy’s Imperial Hotel. Connolly and other leaders had already been arrested, and Larkin too was immediately. The Dublin Metropolitan Police baton-charged the crowd so violently that the day became known as Bloody Sunday – the first of three ‘Bloody Sundays’ in Ireland in the 20th century.

Two men – James Nolan and John Byrne – had their skulls fractured by police batons and later died. An ITGWU representative from Dun Laoghaire, James Byrne, died in November following a hunger strike in Mountjoy jail. Another striker, 16-year-old Alice Brady, was shot dead by a scab as she returned to her home with a donated food box.

Tension between the police and workers rose, with police smashing up the tenements by night. Rioting and street battles with police took place across the city throughout the Lockout, leading Connolly to found the Irish Citizen Army (ICA) as a workers’ self-defence organisation. At a time when women in Ireland were still fighting for the vote, the ICA accepted women as full and equal members.

As thousands of workers were attending the funeral of James Nolan on September 3, the Dublin Employers Federation met and issued the “pledge” document – which employees would be forced to sign or face immediate dismissal – and the strike became a lockout.

The pledge read:

I hereby undertake to carry out all instructions given to me by or on behalf of my employers, and further, I agree to immediately resign my membership of the ITGWU (if a member) and I further undertake that I will not join or in any way support this union.

Thousands of workers refused to sign – including many who were not ITGWU members. Rosie Hackett, a co-founder of the Irish Women Workers Union in 1911 with Delia Larkin, Constance Markievicz and others, organised women in Jacobs’ factory in support of the strike. Other major bosses joined the Lockout and by the end of September, 20,000 workers were locked out for refusing to sign the pledge.

Hunger sets in

The ITGWU paid strike wages but it wasn’t enough and hunger and desperation set in. Soup kitchens were run from Liberty Hall, union headquarters. The British Trade Union Congress voted in September to provide food and material assistance, with more than £150,000 donated from unions in Britain, the US and Australia. On 28 September a ship arrived from Britain with 60,000 ‘family boxes’ of food for the striking workers, which provided a vital morale boost.

James Larkin

James Larkin

Larkin spent several brief periods in jail for sedition and incitement, and between these periods he spent time in England in September and November trying to organise support. Connolly continued the organisation of the strike at home. While sympathetic strikes took place in several English cities, the British trade union leadership failed to call a general strike as advocated by Larkin and Connolly.

Conferences took place between workers, bosses and a union delegation to try to resolve the dispute, but failed as a result of the employers’ refusal to recognise the ITGWU. The workers faced the full force of the police, backed up by the military, as well as a fierce campaign of vilification of “Larkinism” by the clergy and media.

A hollow victory

Hunger spread as winter deepened, and there was simply not enough resources to sustain so many workers and their families, who were beginning to starve. By January the striking workers had lost all hope and began to file back to work, with the ITGWU deciding on 18 January to end the strike. The union advised workers to return to work without signing the document if possible, but in most cases it wasn’t.

But Murphy’s victory was hollow. He believed he had smashed the ITGWU but within a short period workers who had signed the pledge never to join the ITGWU did just that. The union did not have official recognition but employers were not willing to risk another lockout of union members and by 1920 the ITGWU had 100,000 members, 10 times more than in 1913. The attempt to destroy trade unionism in Ireland had clearly failed.

The Lockout was a defining point in Irish history and is rightly commemorated as such 100 years later. Poet Austin Clarke wrote that Larkin’s name endures, “scrawled in rage by Dublin’s poor”. This roar of the city’s impoverished workers meant the brutal conditions they endured could no longer be ignored and began to change.

Crucially, the fight put up by these workers meant that at this turbulent point in Irish history, the working class had a political voice – a voice that influenced middle-class nationalists such as Pádraig Pearse, who together with Connolly led the Easter Rising against British rule in Ireland in 1916. Both were executed within weeks of the Rising.

Unfinished business

In O’Connell St today stands a monument to Larkin with his famous phrase from the Lockout period engraved in the stone: “The great appear great because we are on our knees. Let us rise.”

The question of union recognition remains unresolved in Ireland today, which is one of only three EU states that lacks a legislated right to collective bargaining. Poverty, unemployment and emigration have soared after five years of austerity, and the injustice of the massive public debt undertaken by the government’s bailout of corrupt banks is bitterly felt. Austerity is not working for workers and their families right across Europe, and the Murphys of today should take note.

The centenary commemorations of the Lockout during the current crisis are helping a new generation understand the meaning of the central slogan used by the striking workers in 1913 – that ‘an injury to one is an injury to all’ – as they organise to defend hard-won working and social conditions.

‘Bobby dreamed of a better future’

Séanna Walsh

Séanna Walsh

Friend and former cellmate of Bobby Sands speaks

Published in the West Belfast News & An Phoblacht in May 2011

On the 30th anniversary of the May 5, 1981 death on hunger strike of Irish republican prisoner Bobby Sands MP, the West Belfast News’ Emma Clancy spoke to Sands’ close friend, former prisoner in the Long Kesh H-Blocks along with Sands and leading Belfast Sinn Féin activist Séanna Walsh about the man who has become a revolutionary icon around the world.

Discussing the impact of the 1981 Hunger Strike on the course of recent Irish history, Walsh said: “I believe that people who went through this period and had these experiences have an obligation to tell a new generation about it – to ensure that this crucial period in Irish history isn’t left to be rewritten by the ‘experts’ and academics but is actually recounted by the people who lived it.”

Walsh first met Sands on remand in Cage 8 of Long Kesh before being moved to Crumlin Road jail in January 1973.

“Although I was 16 and should have been sent to a juvenile institution, I was sent to a standard remand jail,” he said.

“Bobby wasn’t in the same hut but he sought me out when I arrived, I suppose because I was so young. Bobby was 18 and had been on remand for around four months.

“He took me for a dander around the yard explaining the daily routine of the jail, the dos and don’ts, filling me in on how to arrange visits from family and generally what was what in the jail.

“He was very much one of ‘us’, an ordinary guy who loved a bit of craic, kicked a football, had a sleg and a laugh.

“Within a week or two I was moved to Long Kesh with the other Crumlin road prisoners on remand or awaiting trial.”

While he was in Crumlin Road jail Bobby got married and his son Gerard was born.

“Bobby was sentenced to five years and sent to Long Kesh in March or April of 1973, while I was soon to follow in May”, Walsh said.

“We met up again in autumn of that year, around September, when I was moved from Cage 18 to Cage 17 in Long Kesh.

“The warders had done away with the open layout of the Nissen huts and had partitioned them on the inside into cell-like structures. We called them cubicles or cubes. I was put into Bobby’s cubicle for around a year until we prisoners burnt the camp in October 1974.

“I was from the Short Strand and there were a lot of Short Strand guys in Cage 17. Bobby was from Rathcoole originally, and then moved to Twinbrook after the summer of 1972. He became part of our circle, those of us who were mainly from the Strand.

“We were all learning Irish together. I would have had around GCSE-level Irish before I was caught. I don’t think Bobby had any Irish when he went in but he very quickly caught up.

“A fellow prisoner was great guitarist and blues musician Rab McCullogh. He taught Bobby how to play guitar around that time. He was always down at our cubicle or else Bobby would be up in his learning how to play different tunes.

“Bobby would sing a lot of Bob Dylan, Kris Kristofferson and early Rod Stewart stuff during this period, as well as a lot of songs in Irish.

“He read and absorbed books hungrily – political and historical books about British involvement in our country and the resulting resistance to that involvement, as well as the struggles of other oppressed peoples throughout the world, throughout history. But he also read novels.

“When Bobby was released in early 1976 he was coming out determined to reorganise the republican base in his area, Twinbrook.

“He reorganised the army, the auxies [auxiliaries], na Fianna [republican youth group] and Sinn Féin, but then he took things a step further.

“He organised republican involvement in the tenants’ associations and pushed republicans to become involved in the everyday battles with the British Direct Rule administration and unionists on Lisburn Council.

“After six short months, however, he was back inside and I was already there too, waiting on him coming back.

Bobby Sands in Long Kesh before the withdrawal of political status

Bobby Sands in Long Kesh before the withdrawal of political status

“The rules were different this time though, with the denial of political status after March 1976 the prison warders were attempting to impose a punitive regime of criminal status on us.”

Resisting criminalisation

“Bobby was at the forefront of resistance to Britain’s criminalisation policies on remand in Crumlin Road jail and then once sentenced, in the H-Blocks,” Walsh said.

“He had been involved in writing a local weekly news-sheet before recapture and he decided to continue writing for it in jail. After a while he started writing for Republican News, soon to become An Phoblacht/Republican News.

“He was now like a man possessed; it was his job to tell the story of every brutal assault, every sadistic attack on the naked prisoners in the H-Blocks.

“The horrendous conditions in which we suffered meant nothing if the world outside of our immediate families knew nothing about them. Bobby was central to getting the word out, first of all to the republican base and then to the wider community.

“As the crisis in the H-Blocks dragged on from 1979 into 1980 and we went through different avenues to move the British on the political status issue, it became clear that we would be left with one last option – the hunger strike.

“The hunger strike of 1980 ended with British doublespeak and bad faith and it quickly became apparent to a number of us that a second hunger strike was inevitable.

“With Bobby leading the charge in the face of justified concerns and worries from the army leadership outside, we pressed our case. We were successful.

“Bobby organised for himself to be the first man on the strike, the first then to die, the two-week gap before Francie Hughes joined him giving the British space to move, to make concessions once Thatcher had her pound of flesh.”

Election campaign

Walsh recounted the events that led to Bobby Sands being elected as MP for Fermanagh/South Tyrone while on hunger strike.

“When it was announced in 1979 that Bernadette McAliskey was to stand on an Anti H Block/Armagh Platform in the European elections, we discussed the decision in jail and put out a public statement voicing concerns that the election campaign a distraction from the task of mobilising people in the street campaign in support of political status for republican prisoners.

“We viewed it as a distraction from the armed struggle.

“However, when Bobby’s name was put forward for the 1981 by-election in Fermanagh/South Tyrone, we vigorously seized on that notion and weighed in behind it, not as an alternative to the armed struggle at the time, but as a way of mobilising people around the issue of political status.

“It was a means of allowing people to publicly claim their support for the prisoners.

“The media was ignoring or downplaying the street campaign in support of status, so in that context the election campaign seemed like a good way to put it on public record that there was a high level of support for the prisoners and for our demand for political status.

“Once the idea was raised to put Bobby’s name forward for the Fermanagh/South Tyrone by-election, there wasn’t universal support for the move in the jail.

“Some prisoners were concerned that the election campaign would be a distraction from the street campaign in support of political status, or that participating in the electoral system would somehow contaminate our republican credentials.

An Phoblacht/Republican News in 1981

An Phoblacht/Republican News in 1981

“Others were concerned not about the question of participating in the election, but of the prospect that Bobby might not win the seat, which would allow the British to present the outcome as a rejection of our decision to embark on the hunger strike, a rejection of the legitimacy of the protest and the five demands, and a rejection of the wider republican struggle.

“We were very clear about the dangers of the tactic of putting Bobby forward. Overall however, the majority verdict was ‘Yes, let’s go’.

“During the first hunger strike in 1980, and in the lead-up to it, we wrote to everybody we could think of – schools, credit unions, GAA clubs [Gaelic Athletic Association, which organizes tradition Irish sports], residents’ associations, celebrities and sports personalities.

“When the second hunger strike started we began the letter-writing campaign again. Once Bobby allowed his name to go forward for the Fermanagh/South Tyrone by-election, we went into overdrive. There was a huge effort by the prisoners.

“Despite initial reservations about the tactic among some prisoners, there was rapid acceptance and understanding of the value of using this tactic once we had made the decision.

“When Bobby began his hunger strike, I was certain that he was going to die. He was certain of this too.

“But when he was elected as MP, I started to hope the situation had changed – that the British could not allow him to die.

“I don’t believe Bobby was in that frame of mind though. Despite his election, he didn’t allow himself to have heightened expectations about the outcome of the hunger strike.”

Political machine

“We hoped that Bobby’s election, and the clear signal this sent that republicans had significant public support, would put pressure on the British to meet the prisoners’ demands,” Walsh said.

“It’s hard to put yourself back in that mind-frame without viewing events through the prism of the past 30 years. But undoubtedly a major lesson for republicans at the time from Bobby’s election in April 1981 was that the nationalist people in the North were willing to support and vote for republicans.

“That didn’t mean people were at that stage voting to support the armed campaign, or even a United Ireland. But given the right set of circumstances, the nationalist people would vote for republicans and our politics.

“It was, as I said, a major lesson. It indisputably opened up that arena to a generation of republicans who previously had no regard, no expectations, and no aspirations to do anything around electoral politics.

“It hadn’t entered our world, but after Bobby’s election our world had changed.

“During the long, dark days of the blanket protest, we kept up morale by learning Irish and sing-songs and some of the guys even ingeniously fashioned a game of bingo out the door to keep the wing entertained.

“Our other main preoccupation was with politics – discussing, arguing, and debating the politics of the world, and the politics and history of republicanism,” Walsh said.

“It was apparent for us during these discussions in the jail that in 1972, when the IRA had forced the British through force of arms to the negotiating table, we didn’t know what to do when we got there.

“In 1974 and 1975 when the IRA had again forced the British to the negotiating table, we didn’t have the political machine nor the political operation in place that would allow us to move into that space once the IRA had created it.

“There was an acknowledgement of these limitations in the mid to late 1970s, not right throughout the movement but certainly within a section of it.

“Among a section of prisoners in Long Kesh there was an understanding that regardless of what the IRA did in the armed struggle, in the short, medium and long term there was a need to build a political vehicle, an effective political machine, and to build up an alternative political infrastructure in our communities.”

Determination

Walsh described the “blanket protest” that developed after the removal of political status as being “like a political crucible, or a pressure cooker in which all of the politics, the mayhem of that period of the late 1970s and early 1980s was concentrated”.

He said: “This experience created a very strong comradeship and a bond among the prisoners. It created a determination among many of us to see this struggle through to the end – throughout the twists and turns of the struggle, a sense that you would never walk away from it.

“It produced a caucus of politicised, committed, determined lifelong activists.

Bobby Sands' mural on the gable wall of Sinn Féin's Belfast office on the Falls Road

Bobby Sands’ mural on the gable wall of Sinn Féin’s Belfast office on the Falls Road

“The prison protests, and what men and women went through during those days, also caused immense damage to a lot of people in Long Kesh and Armagh jail.

“I believe that the brutality and indignities of that experience left deep scars across the entire republican and nationalist communities. It was not only the prisoners who were suffering but visiting relatives including children who endured the indignities of searches, the taunts of the warders and the sectarianism and petty-mindedness of the whole prison system.

“There is a reservoir of trauma under the surface and this is an aspect of the conflict that is still not recognised and rarely talked about. This needs to change if we are to cope with these problems individually and as a community.”

Bobby’s vision

“I was speaking earlier about Bobby’s love for music. When we were on the blanket protest after political status was removed, of course we had no musical instruments.

“Bobby was one of a couple of guys – him, Bik [Brendan McFarlane] and couple of others – who would get up and sing. They’d have a repertoire of around 30 songs or so and could sing away for an hour easily.

“The rest of the wing would be very quiet during those sing-songs, you’d close your eyes and listen and it’d take you away for awhile.

“Bobby used to sing a lot of Simon and Garfunkel and Leonard Cohen songs during that period, and a guy called Loudon Wainwright III.

“I was talking to Tom Hartley recently about that period – about the period of the hunger strike, Bobby’s election campaign and where we are today – and I was remembering the lines of one of those Loudon Wainwright songs that Bobby sang.

We’ve come a long way since we last shook hands
Still got a long way to go
We couldn’t see the flowers when we last shook hands
Couldn’t see the flowers on account of the snow.

“For me these lines are a metaphor about the distance we’ve come. From where we were when Bobby used to sing those words, to where we are today – it’s just a world of difference,” Séanna said.

“It’s also a reminder of how, despite the fact that things can be so bleak at a given time, they can change, change utterly, for the better.

“That oft-quoted line from Bobby’s writings – ‘Our revenge will be the laughter of our children’ – is in the same spirit as this song, and I think it really does sum up Bobby’s vision – of daring to dream of a better future and of struggling for it with every ounce of his being.

“Building on Bobby’s example, his courage and single-mindedness, how can we fail to create a better Ireland? A better future?”

30 years on – the Armagh women’s hunger strike

A poster of Mary Doyle when she was on hunger strike in Armagh

A poster of Mary Doyle when she was on hunger strike in Armagh

Interview with former hunger striker Mary Doyle: ‘When your back is against the wall, you get the strength from somewhere’

Published in the West Belfast News in December, 2010

North Belfast republican Mary Doyle was first sent to Armagh women’s jail for republican activities in May 1974 when she was 18 years old.

“At that stage we had political status,” she told the West Belfast News.

In 1975, while Doyle was in jail, her mother was murdered by the UVF. She was allowed out for 24 hours on compassionate parole to attend her mother’s funeral, then returned to the jail.

“That was a very dark period for me, but the comradeship of the women got me through,” she said.

“I was released in September 1976 and political status for prisoners had been withdrawn in March that year. I was sent back to jail in September 1977 and the prison screws and governor took great pleasure in telling me that status was gone and that I was an ‘ordinary criminal’. I was on remand and then sentenced in December 1978.”

In 1977 the republican women POWs in Armagh refused to do mandatory prison work in protest at the withdrawal of political status. In response to the no-work protest, the women were kept in their cells all day during work hours and were allowed out between 5.30pm and 8pm in the evening to eat, wash and exercise.

Punishment for the work strike also included the loss of educational opportunities and remission. One visit a week was reduced to one visit a month.

Strip searches were a key weapon used by the prison authorities throughout this period in an attempt to intimidate and humiliate the republican women. This process, condemned as a form of sexual assault by the state, involved women being thrown to the ground and beaten if they resisted.

While the men in the H Blocks of Long Kesh prison had begun the blanket protest in protest at the British government’s criminalisation policy, refusing to wear the prison uniform, Armagh prisoners were allowed to wear their own clothes.

The women wore IRA uniform items such as black polo neck shirts, black skirts and tights as a form of protest against criminalisation.

“We would organise commemorations in the yard wearing our uniforms if a Volunteer was killed,” Doyle said.

“In February 1980 a major raid was carried out on our cells by male and female screws. They moved us into two association rooms while they ransacked our cells. We didn’t have much but what we had – photographs, letters and personal items – they destroyed.

“We then had to walk back to our cells through lines of male screws on either side who came out with all sorts of abuse.

“We were locked up for 24 hours a day and denied access to toilet facilities. This went on for a few days and a small amount of cold food was thrown in now and then. We had a chamber pot in the cell and tried to empty it out under the door when it was full, but the screws brushed the waste back in.

“Mairéad Farrell, who was our OC, was protesting strongly to the prison administration, demanding that we be allowed out of our cells for an hour a day, which was our human and legal right.

“After a few days we were allowed out for an hour’s exercise, four at a time – but the toilet facilities remained locked.

“The no-wash protest was forced on the women in Armagh through the actions of the prison authorities.”

The republican prisoners were moved from B Wing to A Wing where they spent the summer of 1980. The men in the H Blocks had at this point been on the blanket and no wash protest for several years.

“There was great communication between the H Blocks, Armagh and the republican movement outside,” Mary explained.

“There were 30 republican women prisoners and we only got one visit each per month, so we made sure that a woman had a visit from the outside each day to keep up the communication.

“The question of beginning a hunger strike began to be discussed, and was firmly opposed by the leadership on the outside. But for us and for the men in the H Blocks, we felt our situation was intolerable and we needed to try to force a change in our conditions.

“The H Block leadership were opposed to women participating in the hunger strike. This wasn’t for any macho reason – their opposition was based on logistical issues. But the women were determined to participate as we felt we had an equal stake in achieving the five demands.”

p16-main

Doyle explained the process of deciding to volunteer for the hunger strike.

“I thought long and hard about volunteering for the strike before I put my name forward. My main consideration was my family. My mother had been murdered, my father was unwell and I had two younger brothers. I was approaching my 25th birthday.

“After a lot of consideration I took the decision to put my name forward. Seven men in the H Blocks began the hunger strike on October 27. On December 1, Mairéad Farrell, Mairéad Nugent and myself joined the hunger strike.

“Telling my family was very difficult emotionally.

“When there had been talk on the outside of a hunger strike, my father had said to friends and family: ‘Oh, our Mary will definitely put her name forward.’ They supported me – that was amazing, to have the support of family, friends and comrades.

“On the day we started the hunger strike, the three of us were moved to a double cell together, which was great for us in terms of morale. We would spend the days writing letters to anyone and everyone around the world about the plight of the prisoners.”

Doyle noted that “prison food is notoriously bad” and said that Armagh was no exception.

“The food was usually served cold and in small portions. But when we started the hunger strike, the screws would pass in plates overflowing with piping hot food,” she said.

“The cell would never be without food – the uneaten suppers would remain in the cell overnight and be removed only when breakfast was passed in. That was something really petty, really childish and vindictive, on the part of the prison authorities that I remember being disgusted with.”

As the three women entered their second week on hunger strike, they were moved to the so-called hospital wing – a double cell in another part of the prison. They were allowed use the bath facilities, which was a requirement for everyone entering the hospital wing.

“We had been on the no-wash protest since February that year and having a bath had been something we had been looking forward to so much, and talking about eagerly,” Doyle recalled.

“But by that stage we were actually too weak to really appreciate it.

“Communication with the other prisoners remained good as we were still allowed an hour’s exercise in the prison yard. But it was December and we were very conscious of the threat to our health from the cold, with our weakened immune systems. We wrapped up in extra blankets to try to keep warm.

“Despite the physical hardship, our morale was brilliant. Our only concern was the health of our comrades in the H Blocks who had been on hunger strike longer than us. Then we heard that Sean McKenna’s health was rapidly deteriorating.

“We had a small radio that we’d smuggled in to the cell that we listened to only at news time. On December 18 we heard an item on the nine o’clock news that said the hunger strike had ended. We thought we had misheard it but the same news was repeated the following hour.

“Danny Morrison had tried to get in to visit us that evening to inform us of the decision to end the hunger strike but the prison authorities and NIO officials refused to allow him in.

“The Armagh prison governor, George Scott, came in to us saying, ‘So, the hunger strike is over’. But we hadn’t had confirmation, so Mairéad said: ‘No. We’re still on it until we hear directly that it’s over.’

“After a visit by a republican to acting OC Síle Darragh the following day, December 19, we ended the hunger strike. Our immediate reaction was relief that Sean McKenna would live and a sense of happiness or satisfaction that our demands, as we believed, would be met.”

Mary recalled the rapid disillusionment in Armagh and the H Blocks as shortly after Christmas it became clear that the British had reneged on the agreement and had no intention of addressing the five demands.

“In January we began discussing a second hunger strike. I was all for it. I put my name down again as did a few others,” she said.

“My father had visited me after the hunger strike ended, and I will never forget the look of relief in his eyes.

“I thought about what it would mean to put him and the rest of my family through that again. It was a very difficult decision, and something that I felt and still feel truly terrible about, but I felt I had to remove my name.

“There were only 30 prisoners in our wing in Armagh jail, including some women who were not even part of the republican movement but who had been forced into signing confessions in Castlereagh. We made the assessment that we would not have the capacity to sustain a second hunger strike in Armagh.

“When Bobby Sands started the second hunger strike in 1981, the no-wash protest was called off in the H Blocks and Armagh so the POWs could focus on the hunger strike. We were still on the no-work protest so we were still locked in our cells all day but managed to keep up communication in our time out of the cells in the evenings.

“There was a huge buzz among us when Bobby was elected as MP in the Fermanagh/South Tyrone by-election. We were convinced – certain – that there was no way Thatcher could let him die after that.”

She described the morning the Armagh women heard that Bobby had died.

“There aren’t any words to properly describe the way I felt. It was every emotion at once – heartbreak, shock, fury and frustration – and all the time you were locked in a cell all day, not able to take any sort of action like protesting on the streets.

“My heart ached for each of the families – the loss didn’t lessen as each of the 10 men died. The pain just grew and grew.

“But the comradeship sustained us. When we had nothing else, we had each other.

 

Former republican prisoners return to Armagh Women's Jail in December 2010 to mark 30 years since the women's hunger strike

Former republican prisoners return to Armagh Women’s Jail in December 2010 to mark 30 years since the women’s hunger strike

“Armagh jail was an old Victorian building. It was freezing. It wasn’t pleasant. The conditions when we were slopping out were grim and not something you thought you could ever get used to.

“But when your back is against the wall, you get the strength from somewhere. And republicans, we just get on with it. We always have.”

Mary was released from jail in 1983 and has been involved in republican activism since then. She is currently standing as a candidate for Sinn Féin in the upcoming Belfast City Council elections, and works for the party in the Teach Carney constituency centre in North Belfast.

She outlined the historic and current vital role of women in the republican struggle and the importance of acknowledging this contribution.

“I’m very proud of my past and my actions as a Volunteer. I have no regrets – my only regret, if you can call it that, is that I was born into a sectarian Orange state. I’m proud of the progress that has been in dismantling the Orange state and the role that republicans have played in this.

“The role that women have played, and continue to play, in the republican struggle is often not fully acknowledged. And it is not just women Volunteers, POWs or political activists that must be acknowledged, though of course these women have made enormous contributions.

“It is women who have been the backbone of the republican struggle. They kept up the strength and morale of the community in the face of fierce repression. When husbands, fathers and children were arrested, women were left to run homes, to bring up children, to put food on the table, to organise visits to jail and to organise the protest movement in defence of the prisoners’ rights.

“Women opened their homes to Volunteers to rest and eat. It was women, too, who drove the formation of the relatives’ action committees and the H Block/Armagh committees. I have absolute admiration for all of them.

“We need to acknowledge this massive contribution in all its forms not only because it deserves to be acknowledged, but also because it helps to show women today that they have a full and active role to play in building the republican movement.

“Sinn Féin believes there is a vital need for women to be fully involved in public and political life and the decision-making process in order to advance towards a society of equals.”

Urging young people to participate in the series of commemorative events being held over the next year to mark the 30th anniversary of the hunger strikes, Mary said: “It is important that new generations learn about and understand this period in our history.

“We need to keep alive the memory of our comrades who made the ultimate sacrifice for Irish freedom. We also need to reflect on the role of this struggle in advancing our republican goals through ensuring our message was heard, and that our community could not be criminalised, isolated or broken.”