Ireland Calling by John Spain
Irish political parties make promises they can't afford to keep
Posted on Wednesday, February 09, 2011 at 09:06 AM
- "Greed is good", especially in Ireland it seems with pillars of society on the take
- Vintage pamphlets offer a glimpse at the rules of 50s-era Irish Catholicism
- A leap of faith by Ireland, the exit from the IMF/EU bailout
- A temporary detour from ecomic issues to Irish soccer madness
- Give Britain a break after decades of Irish emigration to the UK
After the first week of the election campaign here it's hard not to sink into a profound depression at the posturing of our politicians.
This should have been an election that no political party would try to buy. It should have been an election free of promises about tax cuts or extra spending, neither of which we can afford since the country is broke.
But that has not stopped our politicians. Not a bit of it.
We may be on financial life support from the International Monetary Fund (IMF) and the EU, but our politicians have been busy this past week making costly promises they know we cannot afford, promising to spend money we don't have.
An example is the Fine Gael promise last weekend to give special financial help to mortgage holders who are in negative equity, and to reduce the extra tax put on lower paid workers recently.
Not that there is anything wrong with politicians wanting to help those in trouble (even if they are also doing it to get votes).
Every political party here would like to help people in negative equity, people who have lost their jobs or had their pay cut, people who have been affected by the cutbacks in state spending or the rise in taxes. And in many cases it's the same people who are being hit several ways at once.
Since the start of this year, as the changes in the December budget kicked in, people here have seen their after-tax pay shrink and many people are struggling financially to keep their heads above water.
Plus things like the cost of health insurance has jumped, mortgage interest rates are going up and the cutbacks in state services is making life uncomfortable for many people. So people are hurting and it's natural for politicians to react to that.
But instead of making empty promises, what they should be doing is telling people the truth.
Our politicians should be explaining to people why it's tough and why it's going to stay tough for the next few years at least. They should be explaining to people why there's little or nothing anyone can do about it, and why there is no easy way out.
Instead of that, in the first week of the campaign we have got a plethora of promises from politicians here (they call them policies to make it sound better). It's as though the politicians have not really grasped the desperate situation we are in.
They are trying to give the impression that it's business as usual. They are attempting to carry on as normal despite the fact that the country faces the biggest crisis since the foundation of the state. The country is bankrupt, but they're still promising big amounts of extra state spending.
And it's not just Fine Gael who are at it, unveiling plans for the future which bear no relation to the financial mess we are in. Their potential coalition partners in the next government, the Labor Party, have been even worse.
They want to extend the four year time frame agreed with the EU and the IMF for getting our budget deficit under control so that they can slow down the cutbacks in state spending. And at the same time they want to borrow an extra couple of billion to sink into a national recovery plan to create jobs.
Both of which will completely undermine the agreement the present government made with the EU/IMF to get the bailout fund to stop us going bust.
The leader of the Labor Party, Eamon Gilmore, has been pontificating away on the election trail like a puffed up bishop. It's either Frankfurt's way or the Labor Party way, he said the other day, setting new benchmarks in hubris and hyperbole.
This putdown was aimed at the head of the European Central Bank Jean Claude Trichet, who had said Ireland must stick with the four-year plan and stop talking about renegotiation of the bailout deal.
Gilmore's response was that Trichet was a mere "civil servant" who would do whatever EU politicians decided, and he insisted that Ireland's rescue package could be renegotiated with the other EU countries. But there is absolutely no evidence that other countries in the EU would agree to this.
The more we saw of Kenny and Gilmore last week, the better Brian Cowen and Brian Lenihan looked. Kenny, the taoiseach (prime minister) in waiting and Gilmore, the deputy taoiseach in waiting, had little enough credibility to start with, but their antics over the past week made them look like a pair of buffoons. The thought of this pair sitting down with other EU leaders to discuss our financial future makes one shudder with embarrassment.
All of which has made the new Fianna Fail leader Micheal Martin look better than he should. Fianna Fail, having negotiated the four-year plan and the bailout deal with the EU and the IMF, cannot now start unveiling new plans which undermine that deal. So in a perverse way they are protected from giving in to their own worst instincts (and no one makes empty promises better than Fianna Fail!)
Despite this constraint, however, Fianna Fail have also been making promises, although on a more muted level. They have said their election plans will contain no extra state spending.
But in their election document launched on Monday they are talking about a half billion fund to support small businesses which create jobs -- and you can be sure there will be a lot more where that came from before election day.
So in spite of the reality we face, they are all at it. The reality is that we are completely at the mercy of our EU partners and the IMF because without them what would happen here within a year would make Greece look like a tea party.
The reality is that we are buried in a financial quagmire of our own making which has robbed us of the ability to do anything. So the election promises being made are meaningless.
That is the reality, not the waffle and hot air that is coming from Fine Gael and Labor about our future. Why they are doing it is beyond me, since they already have the election sewn up.
Fianna Fail are going to take a battering and deservedly so, since they created the mess. Fine Gael and Labor will form the next government with a big majority, unless the polls are completely wrong.
The fact that Kenny and Gilmore still feel it necessary to make all these ridiculous promises about the future indicates how insecure they are. They seem to be afraid that although Fianna Fail is virtually dead it might outdo Lazarus and steal the election from them.
But that's not going to happen. So Fine Gael should be confident enough to tell people the truth.
They should stop sugaring the bitter medicine and offering false hope. They should stop making spending promises they won't be able to keep and that will come back to haunt them when the IMF and our EU partners say no. And they will say no.
Let's look at the facts. Of the €85 billion bailout fund, €67.5 billion is coming from the IMF and the EU with the rest coming from our own state resources, including our national pension reserve. To get the foreign money we had to do that -- our money is mainly going into our banks. One third of the €67.5 billion is coming from the IMF, and the interest rate on that is set to a rigid formula which we will not be able to renegotiate.
Two thirds of the €67.5 billion is coming from the two EU funds dealing with the crisis facing the euro zone and the structure and interest rates involved have been agreed by all the EU countries.
So to get any change in that does not mean simply Kenny and Gilmore going over to Brussels and acting like tough guys. It would mean convincing all the other countries -- most of whom are already fed up with Ireland because of all the trouble we are causing -- to give us a special deal.
I'm not saying the deal (with its penal 5.8% average interest rate) is fair. But it would have been the same deal for any other country that got into similar trouble.
It's not meant to be a walk in the park. It's meant to teach us a lesson, while preventing us going down the tubes and dragging the euro down with us.
But let's for a moment suppose that, yes, we can renegotiate the deal. Let's say that we manage to get a full 1% knocked off the interest rate we're paying.
Even with the cutbacks in state spending, our deficit is so big that we're currently borrowing €19 billion a year, which we're now getting from the IMF and the EU since no one else will lend to us. If we get a 1% cut in the interest rate on that, it will save us around €200 million this year.
But we're borrowing €19 billion this year, which is €350 to €400 million a week. So the interest saving is tiny in comparison with the size of the problem we face.
I'm not saying €200 million does not matter. But let's keep it in perspective.
Even if we were to get a full 2% off the 5.8% interest rate we are paying, it would still only amount to two weeks of the vast sums we are borrowing at the moment.
It doesn't solve the overall problem. The only thing that will is drastic cutbacks in spending here, implemented over the agreed four-year time frame.
Let's threaten them with default, some Labor Party people have been hinting. That might make sense if we had another source from where we can borrow money over the next few years.
The fact is we don't. A sudden default would cause chaos here, not just for the state's finances but for the banks as well.
If funds from outside suddenly dried up our banks would collapse and our state would struggle to survive, as the money to pay the army, police, teachers, hospital staff and all the other state workers began to run out.
The problem in our banks is enormous and it's getting worse as funds from elsewhere are withdrawn as confidence falls. Recent figures show that last year Irish banks lost over €70 billion in foreign funds, with 40 billion of that being withdrawn in December. They now depend heavily on the European Central Bank which has lent the Irish banks a staggering €130 billion to keep them going.
In addition to that the Irish Central Bank has given special funding of over €50 billion to the Irish banks, largely by printing money (and you know where that leads).
So without the €85 billion rescue deal, the four-year plan to cut spending and the ECB support for our banks, we would be toast in no time. Defaulting is not a realistic option.
Renegotiation - on which a lot of the Fine Gael and Labor election promises are predicated -- will be very difficult, if not impossible, and won't solve the problem anyway.
All the parties here are promising electoral reform and other things they say won't cost money. And that's okay.
But most of what they are promising will cost extra money, and that's just not on.