Who could dispute the wisdom of learning from the mistakes of others? In the areas of fiscal and economic management there are a number of countries in the eurozone area that need to understand the realities that their country could face if it ever needed to be rescued by the troika – the IMF, the European Commission and the European Central Bank.
Ireland will be the first country to exit the bailout programme, but even if it has been labelled “the star pupil of the austerity school of economics in Europe”, it is still not out of the woods yet as more demands are being made by those who provided the rescue money.
The first reality that a bailed-out country has to face is that the troika will continue to influence the economic policy of such a country for several years. In a post-bailout period a country will have to agree to a system of thorough budget monitoring, regulation and even sanctions that will more than likely “enshrine permanent austerity” for such a country. Many argue that this is already the destiny of all eurozone countries as their political leaders have so far failed to come up with effective plans for economic growth and job creation.
The IMF is insisting that bailed-out countries should negotiate with it a credit facility that may have to be used if initial bailout money proves insufficient to deal with a second wave of creditors’ pressure. Luckily for Ireland the economy was fundamentally sound when its banking system collapsed as a result of the property market meltdown. Ireland has now opted not to ask for a standby facility from the troika but it will still be scrutinised closely to ensure that its economy remains on track.
The “outbreak of self-congratulation” that is afflicting Irish politicians as Ireland exits the bailout phase is misplaced. The political leaders of eurozone countries have a bad record of economic forecasting. Politicians of bailed-out countries, in particular, are quick to congratulate themselves when forecasting that their “government finances will shift into what is called a primary surplus, that is a surplus on government finances before interest payments are taken into account”.
This claim is quite meaningless as the payment of interest rates is a hard reality that any excessively indebted country must face. Unless the growth rate of an economy exceeds the growth in the interest bill, government debt will continue to mount and eventually become unsustainable.
Countries that fail to manage public finances effectively and the standards demanded by rigid regulators will have to face painful reforms that risk freezing them in a prolonged period of austerity
But there are other realities that eurozone countries with weak public finances will have to face, as the case of Ireland is making abundantly clear. The troika is mounting increasing pressure on the Irish government “to settle entrenched problems in banking, health and legal and welfare sectors” before the official bailout programme ends in mid-December.
Ireland, for instance, has to improve “its mortgage payment discipline” as thousands of home owners are refusing to repay their mortgages despite the fact that they can afford to do so. They expect their government to announce some scheme that will ease their burden. This mindset will make it difficult for the government to encourage banks to settle with mortgage borrowers who genuinely have no realistic prospect of paying off their debts.
A more painful reality for the Irish government is that the troika “believe that a new round of savings from the drug budget can be realised”. A troika source is quoted by The Guardian as saying: “There are further substantial savings to be made by cutting the state’s pharmaceutical bill”.
The troika is also clearly unhappy with “prolonged delays in a reform plan for the legal sector” which is supposed to cut legal costs.
“It is not enough only to publish legislation, it needs to be implemented,” insists the troika.
The professional bodies of barristers and solicitors in Ireland understandably resent this interference by the international regulators and progress on this matter is stalling.
So reforms in key sectors of the economy of any eurozone country that faces financial difficulties is likely to remain unfinished for many years after receiving assistance from the troika. International financiers are insisting that bailed-out countries need to “wear a belt as well as braces” to be granted much needed assistance.
Put simply, countries that fail to manage their public finances effectively and to the standards demanded by rigid regulators will have to face painful reforms that risk freezing them in a prolonged period of austerity.
johncassarwhite@yahoo.com