2014-04-22 - Socio Economic Review 2014 - Full text and cover - FINAL

pressing concerns surrounding the link between Ireland’s private bank debt and
national debt and instead focus on what type of European Union Irish citizens seek
for the future.
When challenged about the role of the ECB and the dangers of monetary union in
the early 1990s, Jacques Delors used to reply that ‘social Europe is coming’.
Unfortunately, the response to the crisis has ignored ‘social Europe’; indeed, the
European response has been to dismantle many of the social protections that Delors
considered, and considers, as constituting the pinnacle of European achievement.
The role of a ‘social Europe’ in the coming debate on Ireland’s place in Europe must
be central. This will require Irish politicians to take a hard look at their own role in
promoting or dismantling ‘social Europe’ in the last twenty years.
The Irish Response
The dangers of attempting an austerity policy in the face of a ‘balance-sheet’
recession – characterised by private firms and households holding debts larger than
the value of the underlying assets – have been highlighted by many economic
commentators, and the effects of Irish austerity have borne them out. Output has
contracted rapidly, partly under the pressure of austerity, reducing government’s
tax revenue, while the severity of unemployment has led to increases in the social
protection budget, even as most rates of social protection payments have fallen. This
has led to remarkably little reduction in Ireland’s deficit to GDP figures, due to a
combination of successive bank bailouts, leading to a potentially onerous future
interest schedule, and the contraction of GDP, partly due to austerity measures.
Between 2008 and 2010 the policy of austerity failed to increase market and investor
confidence and the continuing insolvency of Ireland’s banks – despite extensive
recapitalisations (see Table 2.2) - led to increasing doubts about the future solvency
of the Irish state, as reflected by steadily rising bond yields on Irish government debt.
In late 2009, the government sought to achieve a back-door recapitalisation by
establishing the National Asset Management Agency (NAMA), which was designed
to purchase loans related to commercial property developments at a price above
their market value (but below their face value of €74bn) and hold the assets until
such return as was possible could be made on the loans. However, the market value
(ultimately €32bn) of the loans NAMA sought to acquire was far lower than
policymakers initially assumed, requiring extensive recapitalisation of the banking
sector in 2010. Attempts were made to enforce some kind of burden sharing on those
who held bonds issued by Irish private banks. However, the European Central Bank
insisted that there could be no write-downs on any Euro area bank debt, even as
unemployment rose rapidly in Ireland and the country came under severe pressure
on international debt markets.
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