Wednesday, December 01, 2010

Ireland: The Irish Model Crumbles Like A House of Cards

By Julio Godoy

Courtesy IDN-InDepth NewsViewpoint


BERLIN (IDN) - Already two years ago, it was conventional wisdom among European economists that the Irish economy was at the brink of a collapse and that the solutions the government in Dublin had chosen to halt the expected failure of the country's economic model following the international financial meltdown, were far from appropriate.

Prime Minister Brian Cowen had then decided to unconditionally bail out practically all Irish banks, regardless of the sheer endless amounts of junk papers stacking in their depots.

Those among the European economic and political analysts who remained resistant to the siren songs of neoliberalism had known even earlier, that the much touted Irish model in practice since the late 1980s -- of very low corporate taxes, extreme "flexibility" of the labour market, and undisputed hegemony of enterprises over labour unions -- was not at all a model, at least that it could not work forever.

But the short-term results of the so-called Irish miracle were for a while dazzling argument to thwart any criticism. During almost 20 years, the "Irish miracle", especially the rising real estate prices and the banks' uncontrolled wheelings and dealings, produced the illusion of wealth, and the illusion appeared so real, that ever more people believed in it.

Warnings that such an economy was similar to a casino were dismissed as ideological prejudices of incorrigible protagonists of class struggle and of anachronistic leftists. Add to that the boom of tourism and the traditional charm of Irish popular culture -- and you could easily believe that the old Irish rainy days were forever gone. The Irish cat, once believed to be ill and dying, was now growing to become a Celtic tiger.

Now everybody knows better. The low corporate taxes attracted only low added value industries. The deregulation of financial markets and the tacit state bailout guarantee tempted banks and investment funds to embark on highly risky transactions -- what financial theorists for more than 150 years have acknowledged as moral hazards.

The boom of real estate was the cherry on the top of this illusory Irish cake -- house prices went up and up, making their owners, otherwise poor, believe that they actually were very rich. When the crisis came, the allegedly immune Irish economic system proved to be rotten.

Ireland is now in its third year of recession. Since 2007, income per capita has declined by more than 20 percent, und unemployment more than tripled to 14 percent. Do you remember those Irish rainy days of a not-so-distant past? Well, they are back again. And they are here to stay.

VAT FOOTS THE BILL

But who is going to foot the bill? Not the banks -- mainly responsible for the mess -- in Ireland or in the rest of the European Union, which is now hurrying to rescue the once envied Celtic tiger. As in Ireland, during the last 30 years the European tax structure has changed to the benefit of corporations, and is being fed mostly by indirect taxes -- such as the valued added tax (VAT) -- and the taxes on salaries. That is, the state's bailout for banks and investment funds is actually being paid for by the lower and middle classes.

A recent survey by the Swiss auditing company KPMG finds, this general downward trend in corporate taxes continues unabated this year: "In the current economic environment, authorities around the world are focusing on adjusting their tax systems, whereby indirect taxes are playing an increasingly important role."

The survey concludes that many governments are using the economic crisis triggered by unregulated financial markets as a pretext to restructure their tax systems. "While maximum corporate income tax rates around the world have fallen … to 24.99 percent on average, the focus is shifting increasingly to indirect taxes."

As throughout the 1990s, indirect taxes, with VAT making up the lion's share, hiked globally to a small extent: on average from 15.41 percent in 2009 to 15.61 percent this year. Meanwhile, managers and traders at banks and hedge funds are again pocketing gigantic sums of money -- as bonus for their supposedly pristine achievements.

But the bailout goes beyond the tax structure. The economic and budget crisis gives governments the perfect excuse to also intensify the neoliberal task of dismantling the welfare state and increasing the transfer of wealth from the bottom to the top of the social pyramid.

The arguments of the kind "we can no longer afford the welfare state", repeated during the 1990s and early 2000s, are rather commonplace now: The Irish people must tighten their belts, and so also Spaniards, Greeks, Portuguese, Germans, Italians and French. The problem with this collective punishment, except its sheer lack of social justice, is that it is likely to worsen the crisis rather than solve it.

This process, which economists euphemistically dub "internal devaluation", leads to further forcing the economy to shrink, unemployment to rise, and wages to fall. On such a basis, the Irish economy is expected to become competitive again and its exports to increase.

But because everybody else is doing the same in Europe, who are supposed to increase their imports of Irish goods and services? Portugal, Italy, Greece and Spain, which together comprise the so-called PIGS? Or the eternal champions of mercantilism, Germany and France?

Are there other alternatives to our plan? Government officials across Europe may ask. Yes, there are. They only need the courage look for them, and the willingness to get rid of their ideological stolidity.

The writer is a freelance journalist. This article appears in his regular column 'Stray Thoughts' in the December 2010 issue of Global Perspectives (www.global-perspectives.info), a monthly magazine for international cooperation, produced by Global Cooperation Council -- a non-governmental organisation campaigning for genuine cooperation and fair globalization -- in partnership with IDN-InDepthNews.

i On Global Trends will break for Christmas, Dec 11, 2010 and return Jan 4, 2011