What are the options when the needs of the economy are great, and urgent, and the Government’s coffers are empty?
The Central Bank forecasts that the pandemic and concomitant restrictions will lead to 500,000 job losses in Ireland and a 8.3% contraction in the economy. The OECD says 15%. Thousands of businesses will be in desperate straits – those that escaped bankruptcy will face strains on cash flow, the burden of debts accrued over the lockdown and question marks over the revival of demand. Without massive Government intervention, the pandemic’s impact on families and households risks creating a vicious circle of deficient demand, further job loss and prolonged recession.
Even before the pandemic broke, we had just come through a General Election driven by a powerful demand from Irish people for systemic change. If we are serious about our admiration and gratitude towards underpaid health workers and carers, our concern for the least privileged, and our new spirit of national solidarity, then the pressures for an ambitious programme of economic and social rebuilding will be immense.
But how will we pay for any of that? Talking with friends the other day about Ireland’s struggles to form a Government, I mentioned the far-reaching policy commitments that any of the smaller parties will surely demand as their price for joining a right-dominated coalition. The consensus was, “You can forget all that. There will be no money now for climate change, or social housing, or any grand aspirations.”
So are they right? By conventional reckoning, yes they are. It is expected that the €2.2 billion 2020 Government budget surplus forecast at the start of the year will become a €18 billion deficit. Ireland’s public finances will be looking sickly. Yet, not for the first time, what is possible for Governments may turn on obscure battles over economic theory – or more accurately, on a battle for political ascendancy between competing tribes of economists.
The last great battle of this sort followed the global financial meltdown of 2008. On that occasion, in Europe, the wrong side won and the price has been a decade of self-harming austerity, pitiful economic growth (Ireland is an exception), stagnant wages, growing inequality – and arguably the political pathologies which have given us Trump, Brexit and the revival of the far right in many European countries.
A decade ago the battle was between an out-of-fashion Keynesian minority and the guardians of budgetary rectitude, who insisted on tightening fiscal policy when the global economy was already in recession. Within the Eurozone, this sado-monetarism was imposed on Ireland and others as the price for EU support.
Today, some lessons have been learned. It is widely acknowledged that the EU’s harsh response to the Eurozone crisis was unjust, unnecessary and damaging to long-term economic prospects. Jean-Claude Juncker, then President of the European Commission, told the European Parliament last year that the EU had followed a policy of “reckless austerity”.
This time round, there is widespread recognition of the desirability of a strong Government stimulus to prevent the pandemic-related shutdown turning into a longer recession. The argument now is over - how to protect the Governments from being plunged into fiscal crises, with soaring interest rates or loss of access to financial markets.
For Eurozone countries, the financial limits on what is possible will be set in Brussels and Frankfurt. Learning from past mistakes, the EU has already suspended the deficit and debt rules in the Stability and Growth Pact, which in normal times restrict the counter-cyclical policy space of Eurozone Governments.
To meet the task of rebuilding after the pandemic, however, Governments will need access to vast amounts of cheap or free credit. For Ireland, that is likely to depend on the extent to which the European Union will stand behind Irish Government debt. In March, the ECB announced a massive €890 billion programme of quantitative easing, providing support both for Governments and financial institutions. A further package of support can be expected from Eurozone finance ministers when they have found a way to fudge their differences over mutualisation of debt.
But if paying down the newly-inflated public debt is not to become a medium-term drag on fragile economies, the ECB will have to become accustomed to carrying a much larger balance sheet for many years to come – that is, to monetary financing in all but name (which the Bank of England has just unequivocally embraced). When the political ground shifts, EU leaders will find ways to reconcile de facto monetary financing with the European Treaties’ ‘no bailout’ rule. The message of modern monetary theory is that in an epochal crisis such as we are now facing, it really is right to just print the money and not worry about repaying. But will Dublin, Brussels and Frankfurt learn that lesson in time?
Derek Reed is a former policy advisor on economic and social issues at the European Parliament.