One of the reasons Ireland, notwithstanding its budget deficit, will soon be able to borrow at bearable interest rates in commercial markets, is that it has met all the deficit reduction targets it had agreed with the EU/ECB/IMF troika.
All parties who have held office in Government since the programme was agreed deserve great credit for that.
Against that background, one or two statements, buried in the middle of a long article entitled
“No Margin for Error”,
in the “Sunday Times” on 10th November, on Ireland’s exit from the troika’s loan programme, ought to be discussed more widely.
On the question of whether fiscal discipline would be maintained, after the troika were no longer visiting every three months, the Sunday Times claimed
“One senior Labour source said he expected the government to immediately ease back on austerity once the troika left town”.
The “Sunday Times” went on
“” There are all those new EU oversight rules, but there is already a general sense that they will not be taken too seriously” said the Labour source.”
”The government will be taking the foot off the pedal as soon as we are out of the bailout. I think there will be tax cuts, maybe even a reversal of some of the unpopular budget cuts“, the source continued, according to the Sunday Times.
This senior source seems to assume that the reason Ireland had to impose austerity was because of instructions by the troika.
He or she also seems to think that commercial lenders, on whom the country will be relying future, will be much less worried about whether the government is meeting its budgetary targets, than the Troika would have been.
My understanding is that austerity came about, not because of instructions from anybody, but because Ireland was unable to borrow in commercial markets because the gap between its spending and its revenue was just too big in 2010.
That was not “imposed” by the troika, but by an Irish government’s own earlier spending decisions, decisions that could no longer be financed by commercial borrowing.
To meet day to day outgoings, there had to be seen to be a plan to close that gap between spending and revenue , troika or no troika, if the state were to continue borrowing for those outgoings……from ANYBODY.
Given that commercial lenders, or purchasers of future Irish government bonds, will want their money back with interest, just as much as the troika will, is hard to see them taking a more relaxed view of budget targets than the IMF would in similar circumstances, especially as commercial loans/bonds will be subordinate to the existing IMF loans.
I am also surprised to hear that a senior source believes that the new EU rules will not be taken “ too seriously”. I had not come across that view before, until I read it in the “Sunday Times”!
These rules have only recently been approved, after long debate, by the European Parliament and apply to all euro area states. My sense is that they were necessary to persuade EU states, with good credit ratings, to lend money or provide back stops to EU states with poorer credit ratings.
These rules are also based on EU Treaties, which the Irish people themselves approved in referenda ….. the Maastricht Treaty, and the Fiscal Compact Treaty.
The Fiscal Compact Treaty explicitly commits Irish governments to continued reduction in deficits, until we achieve a structurally balanced budget. We are not there yet.
The Maastricht Treaty commits the state to a deficit of no more than 3% of GDP, and a debt/GDP ratio of 60%. Ireland exceeds both numbers substantially, indeed by more than almost any other EU state does at the moment.
As long as it has to pay any interest rate, a government, which borrows money, will find itself repaying MORE than it has borrowed.
Repaying loans will require a future government to set aside money that it will have to raise from taxpayers, refuse to spend it on services , and instead pay it to government bondholders.
That might not be a problem if the economy is growing rapidly, but who can guarantee that, ten years ahead?
I doubt if the anonymous “source” can give any such a guarantee!