WHAT’S
THE EU’S ENDGAME?
Half
of all Irish businesses are on the verge of collapse
3
August, 2012
The
headline in yesterday’s Irish Independent was eye-catching. It said
that half of all Irish businesses are on the verge of collapse,
according to stress tests carried out by business and credit risk
company Vision-net.
Companies
in the hospitality, construction, IT, motor, and wholesale and retail
sectors are least likely to survive, Vision-net said. Added to this
is the news that five companies went bust every day this month.
This
news came on the day that the central bank pronounced that lending to
the private sector continues to slide. On an annual basis, lending
fell by 3.7 per cent, with mortgage lending down by 2.2 per cent and
lending for consumption and other purposes down by 7.9 per cent in
June.
Credit
for companies also declined, down by 2.9 per cent on an annual basis.
Loans to companies fell by €399 million during June, following a
decrease of €338 million in May.
We
also have new data showing a complete collapse in retail sales last
month, more evidence that houses prices continue to fall, news that
long-term unemployment has reached 200,000 and four out of every ten
people on the dole have been out of a job for over a year.
The
picture painted by the most recent data, is one of a domestic economy
that is grinding to a standstill. Far from recovering, this evidence
screams that the domestic economy is getting weaker. People and
companies aren’t borrowing, we are not spending and there are debt
and cash flow problems emerging everywhere in the local market while
long-term unemployment, the most significant indicator for absent
demand, continues to rise.
Doubtless
exports are doing well, but this is coming from the multi-national
sector, which is part of the global supply chain and hardly
indicative of unique competitive gains in Ireland. The big change in
Irish competitiveness has come from the fall in the Euro against our
major trading partners. As Ireland does 62% of all its trade outside
the Eurozone, we benefit more than most from Euro weakness.
But
still the weakness in the local market predominates and the better
perfomance in exports is not dragging the local economy upwards. In
fact it is decoupling from the local economy. The hope would be that
the greater production would be leading to increased demand from the
multinationals for products that Irish companies can sell them. But
it looks like they are sourcing their inputs abroad, implying that
the positive effects their hyper-production might be limited to wages
of those directly employed in the sector, which is not that high at
just over 100,000.
If
this trend continues, Ireland will become an economy where there is a
highly profitable multinational sector, a large public sector and a
smaller and smaller private domestic economy. The private sector will
be turned into the debt servicing agency – a type of extractive
industry where rent will be extracted to pay for the public sector
but where profitability will be tampered by high local costs and an
exchange rate, which although now weakened, is still far to strong
for our domestic conditions.
If
you think the weakened Euro reflects conditions here, just look at
the data released by the EU on unemployment yesterday which shows the
lowest unemployment rates were recorded in Austria (4.5%), the
Netherlands (5.1%), Germany and Luxembourg (both 5.4%), while
Ireland’s rate was almost three times that of the core; Ireland’s
rate was 14.8%. The Euro is still far too strong for us.
But
maybe that’s the point.
In
the course of the next few years, it is likely that the mandarins and
the political elite in Ireland and elsewhere will use the current
crisis in the Euro to push for greater integration. Political
integration means the end of the nation state – make no bones about
it. That’s what it means. With the end of the nation state comes
the end of the nations state’s ability to engineer its own
policies. The first thing that would go in Ireland is our corporation
tax. With this gone, the Americans would be out the door like a flash
and what does Ireland do then?
For
a few years, the local business sector will be squeezed by high
costs, maintained by the costs of a large public sector, the legacy
of high debts and an exchange rate that offers no support to local
exporters. What happens then?
Maybe
we settle into the role of an inoffensive group of 5 million odd
people on the western fringes of Europe, kept in a sort of concubine
existence by some wealthy neighbours, living on Euro handouts which
is in turn are used to buy imports made in the productive core of
Europe.
Maybe
that’s the essence of the coming European deal. Countries like
Spain, Ireland, Portugal, Greece, most of Italy, maybe even the new
entrants like sunny Croatia and some other Balkan states, see their
domestic economic marrow hollowed out in this crisis and credit
crunch, but see their public sectors expand, so there are enough
sated appetites to keep everything ticking over.
In
such an environment, the fiscal compact is delivered without
affecting public sector numbers but by wage freezes, higher taxes and
off-shoring of the bits of manufacturing that the core doesn’t want
to do.
The
ECB – as is becoming clearer – will buy up all the debts, opening
its balance sheet and operating more like the Federal Reserve. This
goes against every monetary value that the Federal Republic of
Germany was built on. Why will the more dogmatic Germans, Dutch and
Finns accept the deal unless it is part of a grand bargain?
Rather
than the periphery acting as a threat to the core via lower costs, it
will be allowed to emasculate itself via higher costs and ongoing
credit rationing, reinforcing the industrial dominance of the core.
Maybe
this is just a bit of sun getting to your columnist, but sometimes
events that appear random and unfathomable – like why a country
such as Ireland would actively allow its private sector grind to a
halt – happen for a reason. Maybe that reason is that these events
fit into a larger plan, someone else’s larger plan.
Otherwise
why do Germany and its creditor friends countenance what is happening
right now in Europe? Why would they let their central bank be looted
to pay for the debts of the peripheral countries and why would they
let all that they hold dear about not printing money go out the
window?
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