The Domino Effect of a Greek Exit from the Euro

It appears almost certain that Greece will have to exit the Euro. What is most uncertain is the domino effect this will have on the rest of the Eurozone.

The cost of borrowing for the Spanish government shot up again today. Ten year bond yields are above 6 percent, the economy is contracting, the banks are exposed to colossal debt, unemployment is above 25 percent and the government are introducing radical cuts in public spending. It is almost certain that Spain will join Greece, Ireland and Portugal into the ECB-IMF ‘bailout’ program. This will exhaust the funds of the European Stability Mechanism, and put unforeseen political pressure on the Euro.

Spain might opt to request direct non-market financial support before the Greek elections on June 17th. The outcome of these elections is sure to see a rise in electoral support for SYRIZA. This is a broad left wing party made up of Euro-socialists in favor of rejecting the ECB-IMF bailout program (and its condition of austerity) but retaining the Euro. Merkel and the EU Commission see these policy demands as mutual incompatible. A Greek exit from the Euro will ultimately be decided by a Greek government. SYRIZA might well adopt this strategy if they secure a stable government. This, however, is unlikely. The knock on effect across Europe, particularly in Ireland, Portugal and Italy, in the context of Spain losing access to finance markets, is highly unpredictable.

At this stage it is not unlikely that Germany will seriously consider its future in the Eurozone.  The CDU just lost an election in the Nordrhein-Westfalen region to the a social democratic/green coalition. This is a region larger than most small EU countries, with a population of 18 million. It is also the powerhouse of German industry. From this region, the EU steel and and coal community was established,  evolving into the European Community, and the Eurozone currency itself. Merkel’s primary concern are the 2013 German elections. If she wins, and secures 5 more years in office, she may well decide that a German exit from the Euro is the best strategy to deal with the Eurozone crisis.

The outcome would be a break up of the Eurozone and a return to competing nation-states and national currencies. But it would also mean that citizens have some capacity to take control over the democratic sovereign state. History has shown that this can often lead to perverse right wing outcomes, rather than progressive socialist ones. Therefore, we cannot predict the outcome of a return to national currencies (and by default, more autonomous fiscal policies and an ability to devalue currencies). Nor can we be sure that nation-states could issue debt to finance expenditure again. Those with savings would lose big time. Those without would probably do better. It would enable a process of wage rises, inflation, increased demand and a general pick up in money-circulation. But it does not mean peoples living standards will increase.

The alternative of a return to the nation-state, and national currencies is that European political leaders mandate the ECB to start printing money, issue Euro-bonds and push for fiscal federalism across the EU. A Greek exit might actually increase this possibility, as it will become increasingly obvious to the ECB that they will lose a fortune unless the debt is socialized across the richer states of Europe. But the political will to push for this ‘United States of Europe’ does not exist. If one examines the Eurozone as a whole, it is in relatively good shape. It has a balanced current account, a manageable fiscal deficit, and moderate level of debt. Europe’s problems are internal to nation-states, lacking federal support. Therefore, economically speaking, it makes ‘technical sense’ to push for greater European integration and encourage cross-national transfers and investment. The question is whether it can be democratically legitimate.

We need a robust ideological confrontation between competing policy choices, at national and EU level, to decide the future direction of Europe and its diverse nation-states. At the core of this strategy should be European wide solidarity with countries in financial difficulty. If Greece decides to organise an orderly exit from the Euro, to secure a decent standard of living for its citizens, it should be supported by European institutions to do so.

Inequality is the source of the Economic Crisis

Europe depends on Germany. The success of the German economy can be traced to stable institutions that provide a complementary relationship between fiscal, labour market and monetary policies. The Euro currency provides a comparative advantage for their trading sectors in high end manufacturing. The competitive advantage of these sectors are premised on the collective skill formation that results from their coordinated labour market institutions and social security system (i.e. organised capitalism or a social market economy, that gives a central role to trade union and employer associations).

This is not the case in Southern European countries, Eastern and Central Europe, the UK and Ireland. If the Euro (and in many ways, the European union, which is primarily a single market) is to survive it requires not just fiscal federalism but a coordinated labour market that provides citizens with real wages and secure employment prospects. Within member states, such as Italy, it requires a radical redistribution of wealth, which is primarily stocked and housed in the north, to the rest of the country.

In the USA there has been almost zero growth in real wages, over the past 30 years, for most working families. The wealth created was recycled into finance markets with minimal toil by the rich. The outcome is one of the most unequal countries in the developed world. In Germany, the Benelux countries and Scandinavia, inequality was kept relatively low because of coordinated wage policies between highly resourced employer and trade union associations. Employers have been breaking up these collective bargaining arrangements over the past 30 years, with the effect that they are no longer solidarity enhancing.

There have been growing levels of inequality in Italy, Spain and Greece since the collapse of their fascist dictators and rise of populist political parties. A legacy of distrust, clientalism and corruption is rampant. Without family transfers most young people would live in consistent poverty. This family support is the equivalent to the credit card for most young people in liberal market english speaking countries (i.e. both replaced the welfare state). Since the onset of the crisis, the policy response in these countries was not to tackle inequality, but the employment security of those who work in Unionised sectors of the economy.

In Ireland, high levels of inequality have remained stable over the past 15 years but have increased rapidly since the banking crisis. In the UK, inequality has been growing since Thatcher demolished British labour market institutions, trade unions and the manufacturing sectors. Given the credit card boom over the past 15 years, which was associated with aggressively de-regulated finance markets, a lot of people made quick cash, bought overpriced houses, and are now swimming in debt. Higher taxes and wage cuts, in addition to paying back debt accumulated, has resulted in a collapse in domestic demand. The outcome is an employment crisis. Those with capital only know how to gamble.

In all of these countries inequality is the source of the economic crisis. Enough money exists, it is simply concentrated in the hands of too few people. The economic crisis is ultimately about the politics of distribution. The only way to resolve this is to completely rethink the politics of production so that it leads to a radical re-distribution of wealth and income between social classes.

A New Politics of Social Solidarity in Post-Crisis Europe?

This is a power point presentation I will deliver at the Amsterdam Institute for Advanced Labour Studies (AIAS), at the University of Amsterdam, on Thursday 5th April. The title of the paper is ‘the Labour Market Response to the Eurozone crisis in Germany, Spain, Netherlands and Ireland’. Our conclusions point to distinct trajectories of liberalisation, premised on historically specific political coalitons, and challenges some of the core assumptions underpinning the ‘Varieties of Capitalism‘ theory. 

All are welcome. The abstract is as follows:

 The institutional architecture of the Eurozone prohibits adjustment to shocks by means of devaluations or exchange rate adjustments, and has exposed a variety of coordination problems in the EMU. Given this constraint, and using a comparative political economyframework, we will examine the labour market response to the crisis in Germany, Netherlands, Spain and Ireland. We will examine to what extent domestic policy responses follow a neoliberal logic of liberalization, supply-side measures, austerity and differentiation/inequality, or an egalitarian logic of coordination, demand-side measures, social protection and  equality.

We are particularly interested in trying to understand why certain responses have been prioritised over others at national level and to what extent they are being induced by domestic interests and/or European constraints. We illustrate that the national labour market reform strategy in our case studies are shaped by domestic political interests. The outcome is a form of coordinated labour market dualisation in Germany, coordinated liberalized flexibility in the Netherlands, liberalized de-regulation in Ireland and liberalized labour market segmentation in Spain.  

All of this seriously calls into question the future of diversity of European varieties of capitalism, and begs the question whether we need a new politics of social solidarity in post-crisis Europe?

European Economics, Fantasy and Popular Delusion

“The popular delusion that the fiscal compact is a cure for our economic problems is a fantasy that needs demolishing”

This is a statement by Michael O’Sullivan in an open-ed in the Financial Times last week, and I couldn’t agree more. There is broad and popular perception across Europe that Ireland got into its mess because of reckless fiscal behaviour by governments, despite its origins in the reckless behaviour of rogue banks in private markets. The newly proposed fiscal treaty provides fuel for right-of-centre governments across Europe to continue arguing that austerity is the answer to the Eurozone’s problems when it clearly is not. The source of this policy is a deep ideological commitment to the idea that government = bad, markets = good. It is a popular delusion akin to the fantasy of Stanley Kubricks ‘Space Odyssey’.

The unconditional support by the Irish, Italian and Spanish government for conservative Euro policies will be totally counter-productive in the end, as they will do nothing to solve the crisis. The whole discourse surrounding the fiscal pact (which will be put to a referendum in Ireland at the end of May) provides political cover for the Dutch and German government to continue their aggressive austerity programmes when they clearly do not need to.

In the Netherlands there is a populist argument that effectively argues that because ‘we are doing austerity’ therefore ‘everyone else should too’. In the middle of a Eurozone recession the Dutch government (held hostage by an anti-European far right party) are agressively cutting spending to bring their budget deficit down to 3 percent. This has massive implications for weaker regions of the Eurozone. The more the Dutch and Germans cut back, the harder it is for Spain, Ireland and Italy to recover.

Politicians across Europe are selling the fiscal pact to their electorate as a mechanism to tame the periphery (including business friendly Ireland), by tapping into a populist nationalist discourse. There is almost no recognition that Euroland is a series regions and countries that are locked into a dependent relationship. This data from the EU clearly illustrates the relationship,  structural imbalances and dominance of the German economy within the Eurozone (and the limits of a begger they neighbour nationalistic politics amongst the populist left and right).

The overall impact of the discourse is a totally warped picture of reality. And as Michael O’Sullivan argues “the danger is that it will draw a shroud over the eurozones shortcomings and halt attempts to improve the framework”. The discourse simply reinforces the myth of the prudent core (Germany, Netherlands, Finland and Austria) and the reckless periphery (Ireland, Portugal, Italy, Spain and Greece).

The fiscal compact is legitimising the reckless economic management strategy of coordinated European austerity (that is choking off growth and the potential for recovery in Ireland, Spain, Portugal and Greece). It will serve one purpose only -  the self interested political motives of conservative right-of-centre parties in Germany, Finland, Netherlands.

Furthermore the fiscal pact makes a serious political resolution to the Euro crisis more difficult. Some economists seem to think that the fiscal pact will lead to the issuance of Eurobonds and other neccessary reforms in Euro governance. I would not be so sure. The level of economic conservatism that dominates German, Dutch and Finish policy making (and media) is particularly worrying. But what is more worrying is how far removed it is from reality. It is a post-modern, Baudrillard wet dream, where the distinction between representation and reality has collapsed.

The more the Irish, Spanish and Italian government throw their weight behind this strategy (i.e. to be good pupils in the European Peoples Party) the more their capacity to recover diminishes. Therefore the Irish, Spanish, Italian and Portugese government must change their strategic interaction with the core European actors determining the policy response to crisis. This requires a politics based on truth not popular fantasy.

The EU will be to Blame for Spanish Entry to the IMF

The Spanish government, under the conservative Partido Popular, will impose €15bn in spending cuts and raise €12bn in tax, as part of a €27bn austerity program . The objective is to bring  the budget deficit down from 8.5 to 5.8 percent. The composition of the cuts are spread across government departments whilst the revenue raising measures include an amnesty for tax avaders (aimed at raising €2.5bn) and a reduction in corporate tax breaks.   

The purpose of this radical austerity program is to satisfy an arbitrarily imposed number from Europe. The obsession with reducing budget deficits to 3 percent in a context of mass unemployment (almost 25 percent in Spain) is not only economically illiterate but socially dangerous. European elites have refused Spain the flexibility to lift the target to 5.8 percent because it is wedded to an ideological framework that assumes the economic crisis can be traced to bad fiscal policy (overstretched budgets). In reality, it can be traced to the maniacs who control international finance markets, and who are now speculating against the Spanish state.

The precise increase in the Spanish budget deficit can be traced to two factors in the immediate aftermath of the financial crisis: support for banks that were over exposed to the construction boom and the introduction of a fiscal stimulus package. Both of these policy responses were necessary to avoid a full-on depression in the Spanish economy. The immediate fiscal stimulus was soon rolled back (not just in Spain but across Europe), and therefore never had the intended effect on employment. In this context, an 8.5 percent budget deficit is actually quite low. In a context of growth, it could easily be sustained.

The Spanish debt to GDP ratio is less than 60 percent. Technically it is in a much better position than the UK. Yet it is being treated like an insolvent state because the government, in effect, are issuing debt in a foreign currency. The monetary constraints of the Euro have transfered the entire burden of adjustment on to national fiscal and labour market policy. The ECB (quite unlike the Bank of England) treats the Spanish state as a foe not a friend. The biggest beneficaries of the Euro are Germany, Netherlands and Finland yet these governments fully support the imposed Spanish austerity.

European elites and the Spanish Prime Minister, Mariano Rajoy, will argue that the budget cuts are necessary to bring down the bond yields on Spanish debt. Hence to avoid Spain’s entry into the European financial rescue fund (the European stability mechanism), they must act fast and aggressively to cut the deficit. This is precisely what Ireland did and ended up in the hands of the IMF-ECB-EU Commission (Troika). If the past three years have taught us anything it is that continued austerity does not bring down the interest rate on government debt. It simply drives the country into a deflationary spiral.

The reality is that the austerity package in Spain will make the country’s economic problems worse not better. It will choke off economic growth, as GDP will further contract. This will make the servicing of the debt more expensive. Unemployment will increase which will put additional strain on the fiscal resources of the state. Furthermore, it will make minimal difference to the budget deficit or the price of government bonds. More importantly it has the potential to destroy the social fabric of Spanish society. No country can sustain that level of unemployment without conflict.

I am always reluctant to make ‘predictions’ about the economic world but it is highly probable that Spain will be pushed out of finance markets by the end of this year. This will not be because of too little austerity but because of too much austerity. To satisfy a crude accounting exercise,  European policymakers and the Partido Popular,  will have pushed Spain into the hands of the IMF-ECB bailout program (it is too big an economy for the newly established European stability mechanism to handle), with unforseen consequences for the rest of Euroland. The ECB might pre-empt this situation and directly buy up Spanish government debt. If they do, the German state will be infuriated. But it wont stop the austerity brigade from imposing their failed ideology on European citizens.

Interview with Paul de Grauwe

This is the first part of a series I am trying to develop, aimed at audio-visual interviews with leading scholars, experts and commentators in political economy. The motivation is to open up the analytic space in political economy, and challenge the orthodoxy that governs contemporary public policy. Prof Paul de Grauwe is the leading expert on the economics of the monetary union, and a regular contributor to the Financial Times. This interview took place prior to a public lecture in Amsterdam last week and the core theme is that “macroeconomics is in deep trouble”.

You are very critical of the ECB at the moment. Why are the ECB not directly intervening in sovereign bond markets?

There are several reasons. One is German opposition. Germans just don’t want to have it. Your question then, might be, is why do the Germans not want it? Here it is a combination of different things. First, a basic misunderstanding that has not been explained to the Germans. The basic misunderstanding is they think this is just a case of creating money that will lead to inflation. This has a strong emotional content, an element of ‘just rejection’, it is something ‘bad’, it is very much emotional, linked to history, which makes people very upset. From my experience it is very difficult to talk to Germans about this, even German economists. That is one of the reasons.

The other reasons is moral hazard, there is a fear that if the ECB does intervene in bond markets, it will give a license to governments to go on creating deficits and debt. Here, of course, there is a serious problem, but it is no different from the moral hazard you create when you give money to the banks.  It is the same, maybe even worse. But this seems to be acceptable. It is quite irrational: it is ok to do it with banks but not government bond markets? So these are the reasons. It has become laden politically and emotionally, that it is very difficult to do it.

What is the implication for the politics of adjustment?

Now that the ECB does it all indirectly through the banking system it has to create much more liquidity than it would otherwise had to do, because banks don’t use all the cash that is created to invest in government bonds. Another problem  is that you delegate the entire responsibility to stabilize government bond markets to banks, who themselves are subject to fear, and who may not have the general interest at the back of their mind. It is better for the central bank to take on this role. It is also much more efficient way to do it.

Will the fiscal compact improve economic governance in the Eurozone?

 I am not very much in favor of this, as it has so little to do with the causes of the crisis. But, again, it is necessary for the German chancellor, to be sell the other pieces of what she has been doing. It is not that much different from what is contained in the stability pact. This also says that you should maintain equilibrium over the business cycle. This is what the compact says but it specifies the ‘structural’ budget which should be in ‘equilibrium’, over the business cycle. From a practical point of view it doesn’t make much difference. But what it will do is lead to interminable discussions about ‘structural budgets’, there is nothing more imprecise. It will lead to discussions, disagreements. I mean, I have worked with these measures, in a few seconds I can produce very different structural budgets, very very different, just by statistical tricks. And the kind of smoothing you can apply to the numbers, there are parameters you can change in one click. It is ridiculous. It will not work.

In Ireland there seems to be a general consensus amongst economists that the fiscal compact is to be accepted. Critics would say it makes Keynesianism illegal?

Maybe that is a little bit too far. It is all in terms of structural budgets. If you apply it well, and that is the whole problem, you allow budget deficits during a recession, provided you have surpluses during a boom. The problem is that the cycles are not smooth. We don’t know. For example, let’s take 2008-2009, the downturn, I can produce numbers that say it is all cyclical, some would say, ‘no it is a structural change’.  As a result, it will be difficult to apply. It simply will not work. It is such a waste of time and energy, that will lead to endless discussions that are counter-productive.

But of course, I agree with you, there is a more fundamental problem here. It is very much based on the view that all of what government’s do is unproductive. Therefore, the debt-GDP ratio should go to zero, that is what is implicit in a balanced budget over the long run. This doesn’t make sense. Why should governments not have debt, like private companies, if they do useful things, spread the cost over many years? There is nothing wrong with this. The problem is unsustainable debt. But there is so much cynicism these days about what governments do.

So, it is really about ideas?

Yeah, it is a really bad idea. It is going back 100 years in economic thinking.

Do you think Ireland will default?

I don’t think so. I don’t think Ireland will default. I think Ireland is a solvent country but has been pushed into a corner by the markets. Instead of providing more financial help that could have alleviated the problem, other countries have not been willing to do that sufficiently, and therefore has made things worse for Ireland.

But given the level of debt involved, do you think Ireland can get out of the crisis without restructuring at least some of it?

Yeah, why not. What is the debt-GDP ratio now?

Just under 130 percent

That is the level Italy has reached and should be able to stabilize this. Let’s not forget that after world war two, the debt to GDP ratio of the UK was more than 200 percent. They got out of this. Now of course there is the added difficulty that you are part of the monetary union, and you cannot do the same thing, like devalue your currency and all that. It is not going to be easy but I think it is possible.

On the design of the monetary union, would it be fair to say that given the monetary constraints of the EMU, the politics adjustment has to fall on wages and the labour market?

(Phone rings). Excuse me.

Will this focus on labour market flexibility work?

It puts a lot of pressure on labour market flexibility and I have mixed feelings about this. Of course, flexibility is ok, but sometimes flexibility is not ok. In particular, I like to make a distinction between shocks that are permanent and shocks that are cyclical. If you have permanent shocks, like competitiveness, then you need flexibility in the labour market. But if you have cyclical shocks, then flexibility is a bad idea. Then you better don’t have flexibility. In a demand shock, like the recession now, having flexibility in the labour market means reducing wages, which means people earning less, and making the recession worse. So one must distinguish between different types of shocks. Unfortunately, the thinking has been in such a one dimensional way, that assumes for any shock we need more flexibility. I am saying, no, not necessarily. It all depends, we have to be much more sophisticated. Sometimes you are wrong to have too much flexibility.

Look at Spain. Now that there is a deep recession they are changing the law to make it easier to fire workers. You may say in the long run, structurally, it is a good thing to do,  because there will be more hiring. But when you do it in the middle of a recession there will only be firing and no hiring. As a result, unemployment increases and the recession gets worse. We should be very careful with these things.

What is driving this emphasis on labour market de-regulation and flexibilisation?

It is a particular paradigm. It is also very much driven by academic theories. The theory of optimal currency areas, as you know, says that when you have asymmetric shocks you need flexibility to deal with it. What is flexibility? Well, labour market flexibility, wages, mobility and all that. That has been quite influential I must say, that is now the paradigm.

So it all comes back to ideas? Would it be fair to say that economics is in crisis?

Macroeconomics is in deep trouble. It has been based on a very narrow view of human behavior and not taking into account the problems that exist at a macro level. The paradigm of macroeconomics has become a paradigm of individual atomistic behavior, of representative agents that optimize plans over their lifetime, and are perfectly informed. That is so useless. Most of the problems we have now is a reflection of the reality that people were not informed, did not understand, did not understand the nature of the rules. There was a divergence in beliefs. As a result you get a totally different dynamic from what these models are predicting.

As a result macroeconomics has been totally useless. Modern macroeconomics that is. The paradox is that when the crisis erupted, modern macro-economists had nothing to say. They were saying consumers are doing their utility maximization, in infinite horizons, nothing can go wrong in a model like this. They are all rational. So these guys couldn’t say anything. In fact their model had predicted that the crisis would not occur. Not only did their models not predict the crisis but much stronger than that, they predicted it could not occur at all!

You can’t ask these guys for advise when the crisis erupts. So you had to go back again to Keynes. It’s amazing, suddenly everybody went back again to Keynes, took out the old textbooks. Oh yeah, here, look at this, the ‘savings paradox’, ‘oh wow, never heard of this’. A savings paradox arises because of a coordination failure. In these economic models, coordination failures cannot occur, because it is on one agent. He coordinates everything himself. It is internal.

And it is these same models that are being used to form the strategic response to the crisis?

That is right, and they are still being taught. It is incredible that people continue to use these models that have been massively rejected. They even receive Nobel prices. Like last year, two guys who worked on this, received Nobel prices. I fail to understand this.

Where do you see Europe in five years’ time?

I don’t know, very difficult to say. I don’t know how we will get out of this, will we get out of this? I hope so. It seems to be a case of just muddling through, going from one crisis to another. We overcome one, and then there is another. I am just afraid that we will apply such deflationary policies that people will be disgusted by all of this, and want something else. But five years is too far into the future. I cannot make predictions because there is nothing to draw upon.

But does it ultimately come down to a choice between a breakup of the Euro or further integration?

Yes, that is my view. We have to make choices and we have to work toward further integration. But that is going to be very difficult. In this country (the Netherlands) people don’t want political integration, Germany the same, everywhere is the same. So, yes, hard choices will have to be made.

Thank you

It was a pleasure.

The Political Crises of Capitalist Development in Ireland

Ireland is a paradigmatic case of liberal market globalisation. This was a development project driven by the state rather than private entrepreneurs in the market. The public policy regime includes a commitment to foreign direct investment, low taxes and a flexible labour market. To understand this process of capitalist development we must examine the underlying social forces underpinning Ireland’s political economy. Central to this is a populist commitment to a low tax economic growth machine.

Imports and exports in Ireland remain one of the highest in the globalised world.  Financial transactions that speed through the Irish Financial Services Center (IFSC) are only matched by London and Wall street. Employment and social protection legislation are one the weakest in the European Union. Social inequality is high but it is lower than the USA and UK. Wages are significantly higher than the USA, UK, Portugal, Italy and Spain. Furthermore, social welfare payments are relatively high. Ireland does not have the workfare schemes associated with the liberal market economies of the USA, New Zealand, Australia and the UK. This complicates a straight forward neoliberal interpretation of the Irish case.

How then should we explain the historical evolution of capitalist development in Ireland?

The current economic narrative in Ireland argues that the 1990s (the Celtic Tiger period) was driven by liberal market policies, foreign investment, wage restraint and austere fiscal policies. This was a success. After Ireland’s entry into the EMU, government expenditure increased, crony capitalism kicked in and everything fell apart. Hence, if we bring down government spending, wages and increase foreign direct investment (FDI) everything will be fine. This narrative suits the economists and it is wrong. It is the unconditional commitment to a low tax economic growth machine that has Ireland in a mess.

But one must look further back into history to establish the ebb and flow of Irelands political economy. When examined over a longer time period, Ireland’s political economy is characterized by periods of extreme boom-bust cycles (these extremes are remarkably similar to the Irish personality stereotype: outrageous, witty, argumentative and intense).

The 1990′s were not a simple case of free market globalisation. This period was driven by state developmental policies aimed at industrial upgrading. During this very brief period, the hidden developmental policies of the state were central to patterning capitalist development. The 2000′s, contrary to what the economists would argue, was much closer to the de-regulated free market policies that supposedly made the Celtic Tiger a success.

During the 2000s there was what Sean O’Rian (2008) calls a hyper-commodification of money. State developmental policies amounted to nothing more than low taxes and active support for financialisation of the economy.

Lets unpack this a little bit further.

The idea of neoliberalism would have us believe that economic success comes from free market contractual relations. But the political practice would show that markets are always institutionally embedded and constructed around historically specific social forces. It is these political forces that enable us to explain variation in the process of capitalist development in Ireland and Europe.

For example, in the liberal market theory, an increase in the market allocation of resources should lead to the efficient allocation of market resources in an economy. In Ireland, we can see that this has not been the case. The de-regulation of markets actually increased clientalism and cronyism. This can be seen in the relationship between the state and Shell in west Mayo or between Anglo-Irish bank and Fianna Fáil. Increased market relations leads to an increase in corporate political power.

The state is central to shaping all market activities. In the early Celtic Tiger period, venture capital investment and research & development in Ireland was almost entirely funded from public agencies. This was central to the high-tech boom and a core factor in explaining the success of Dublin’s ’creative industry’.  During this success period Ireland retained a 48 percent rate of income tax and maintained capital gains taxes at 40 percent. Low taxes did not create the Celtic Tiger.

In this period of economic growth Ireland had the opportunity to refocus its political economy toward using revenue for public investment goods. We didn’t. We shifted to a low tax growth machine. People were given back their taxes and encouraged to buy private health, pensions and education. The outcome was a two tier welfare state. The middle class could opt of the public service and increasingly look down upon it.

Irelands growth machine from 2002 turned into a financial money machine. This was primarily driven by domestic neoliberal tax policies of the populist Fianna Fáil/Progressive Democrat coalition. The ideology of market driven growth replaced the political practice of state developmentalism. Low taxes, we were soon told, created the Celtic Tiger period not public investment.

From 1997-2007 income taxes and capital taxes were slashed.  This led to a speculative lending and real estate bubble. The market driven growth model, premised on low taxes and private banking, continues to be celebrated by many sections of the Irish media and the political elite. But the private market did not create development it created a speculative bubble. Public spending increased in this period but it was nothing compared to the revolution in Irelands low tax regime. This is a central cause of the fiscal crisis of the state.

Increased marketisation did not lead to less of a role for the state in the economy. It led to an increase. There was an explosion in regulatory agencies aimed at coordinating market contractual relations. This had the impact of increasing state activity but decreasing public accountability. This semi-privatization of the state would contribute to the tension between the ‘public and private’ in Irelands political economy – a conflict that is hard to find in other small open economies of Europe.

To complicate matters even further, all of this was managed through a labour inclusive process of social partnership. This was a central strategy of the state to manage the constraints of a liberal globalised economy. The nature of the bargain was aimed at increasing private disposable income not collective investment in public goods. It was a conduit to rather than constraint upon an increasingly liberalised economy.

How then should we characterise capitalist development in Ireland? Was it a straightforward case of neoliberalism?

Not really. It was a state led political strategy that fostered trade liberalisation and integration into a globalised economy. This ideological commitment to market led growth masked the developmental role of the state. Therefore, the Irish political economy is not as ‘liberal’ as many assume. It created a perverse liberal capitalism after 2002. This led to the collapse of the Irish economy and can be traced to a growth machine premised on low taxes and financialisation. Neither of these have been questioned in the crisis.