Sunday, July 07, 2019

Fintan O'Toole Brexit and Irish direct democracy

Fintan O’Toole, the chief political and arts commentator of the Irish Times newspaper, has made a stunning leap from November 2010 when he called the economic bailout of Ireland by the European Union-International Monetary Fund, “the longest ransom note in history,” to a torrent of scathing  commentaries since mid-2016 on the Brexit decision by Britain to leave the EU.

Concepts such as “parliamentary sovereignty” and the “will of the people” had been long debated in Britain. Clement Atlee, the Labour prime minister (1945-51), called referendums (in Britain the word referendum is interchangeable with plebiscite — see below)*  “alien to all our traditions” and an “instrument of Nazism.” Harold Wilson (PM 1964-70 and 1974-76) had a similar view until he supported the first national referendum in 1975 in response to a split Labour Party on the 2-year old membership of the European Economic Community (European Union from 1993). Margaret Thatcher, the leader of the Conservative Party called Wilson’s referendum “a device of dictators and demagogues” that would be dangerous to minorities and destructive of parliamentary sovereignty. Thatcher also said in 1975 that “To leave such a Community would not merely be a leap in the dark, it would be like a leap overboard from a secure ship into dark and unchartered waters.”

Despite a 67/33% loss in the referendum, the Labour Left had withdrawal from the EEC in the Labour general election manifesto of 1983. Thirty years later David Cameron (PM 2010-16) promised another referendum to leave the European Union to pacify Conservative Party so-called Eurosceptics that had grown in numbers and ignorance since the 1980s.

I have written here that Cameron could have learned some key lessons from the Swiss — the world’s experts in direct democracy:

Brexit: David Cameron's flawed referendum of 2016

Fintan O'Toole's "will of the people" moment

Two days after Ireland confirmed that it had begun negotiations on the international bailout,  O'Toole wrote in the Irish Times that the Irish Government was "an international laughing stock...that is now officially a zombie...What matters most is that we cease to be an invisible people. That our government is irrelevant is their fault. That the people are irrelevant is ours...Sovereignty belongs, not to the State, or the government, but to the people. We have outsourced it for too long to an incompetent, amoral and self-serving elite. Now we face the starkest of choices: use it or lose it."

'The people must act or we will remain irrelevant'

O'Toole called for:

1) The ouster of the Government to be replaced with an emergency government of technocrats;

2)  "At least two alternative plans need to be prepared by the political parties and put to the people in a referendum, restoring the idea of popular sovereignty';

3) A civic movement to be mobilised, in advance of a general election to demand radical political reform in 10 areas detailed on a website (the website no longer exists but the 10 reforms are detailed here).

While the 10 reforms including a cap of pay of public officials of €100,000 during the emergency (senior personnel at the Irish Times were earning up to €500,000 including bonuses, at the peak of the bubble) were not radical, Fintan O'Toole slammed the bailout terms and would soon begin discussions on the setting up of a political movement that would compete in a general election on a platform of holding a referendum to sanction what was called a "negotiated structural debt default."   

On November 29, 2010, Fintan O'Toole commented on the bailout deal:

'Abysmal deal ransoms us and disgraces Europe'

"European ideals and values have been exposed as window dressing...Yesterday’s bailout of broken and delinquent Ireland is much more Versailles than Marshall. There is no sharing of the burden. There is no evidence of a single thought for the consequences of mass unemployment, mass emigration and war on the most vulnerable. There is no European solidarity. And there is not even a genuine sense of self-interest. The sadistic pleasures of punishment have trumped the sensible calculation that an Ireland enslaved by debt is not much use to anyone.

Like the sorcerer’s incompetent apprentice, the Government repeatedly waves its wand and turns crises into catastrophes. It turned a banking crisis into a sovereign debt crisis, which it then transformed into a crisis of Irish democracy by undertaking negotiations it had no right to conclude. And now, in concert with the EU and the IMF, it has turned a crisis of Irish democracy into a crisis of European legitimacy.

Yesterday’s abysmal deal turns Ireland’s shame into Europe’s disgrace."

The suggestion of an emergency government of technocrats would only work if the members were elected to the Oireachtas (National Parliament):  

Article 28 of the Irish Constitution:

7 1° The Taoiseach (prime minister), the Tánaiste (deputy prime minister) and the member of the Government who is in charge of the Department of Finance must be members of Dáil Éireann (Lower House of Irish Parliament).

7 2° The other members of the Government must be members of Dáil Éireann or Seanad Éireann, but not more than two may be members of Seanad Éireann (Upper House of Irish Parliament).

O'Toole's referendum proposal would have had to be approved by the Oireachtas and it would have been inevitable that the international bailout and debt default would be issues that some political parties would wish to be voted on.

Versailles and a ransom of the Irish people

Edmund Burke (1729-1797), the Dublin-born Anglo-Irish parliamentarian, said in a speech on the French Revolution in 1790:

"When ancient opinions and rules of life are taken away, the loss cannot possibly be estimated. From that moment we have no compass to govern us; nor can we know distinctly to what port we steer."

It is inevitably a fertile opportunity for demagogues and a time when normally rational people propose alluring remedies that can have disastrous unintended consequences.  

Evoking the post-World War 1 myth of a vengeful Treaty of Versailles (see here ) and dismissing the EU-IMF bailout of €85bn as a punitive ransom, was a serious indictment of the European Union.

The onset of the Great Recession had highlighted the incompleteness of the single currency project and it wasn't until mid-2010 that a temporary European Financial Stability Facility (ESFS) was established with guarantee commitments of €780bn and lending capacity of €440bn. It was replaced with the permanent European Stability Mechanism (ESM). A banking union and bail-in procedures for failing banks would be agreed later.

The European Central Bank (ECB) opposed haircuts on senior bank bond debt on fears of "contagion" that would impact fundraising in other countries that were in peril.

Several countries including Germany, UK, France and the Netherlands bailed out faltering banks and there was no public support in Northern European countries for assuming the bank debt of other countries.      

Fintan O'Toole had warned about the bailout:

"Welfare will be slashed, public health services will deteriorate, children, the disabled and the elderly will lose the already inadequate services that afford them some hope and dignity. But the €100bn that is owed by the Irish to German banks and the €109bn owed to British banks will be secured.

The consequences are entirely predictable. Mass unemployment and mass emigration will be locked in to an economy that, beyond the multinational sector, will not grow.

Poverty and inequality will increase sharply, with all the social and financial costs this implies."

On burden-sharing by late 2010 Ireland accounted for 25% of ECB lending which amounted to €140bn.

Expecting the 50/50 sharing of debts of Ireland, Spain, Portugal, Greece and Italy would not have been accepted by voters in other member countries of the single currency area.

The bailout interest rate of 5.8% — more than 3 times the ECB's marginal funding rate, was not justified while a small cut to the minimum wage paid to 3% of the workforce was also an unnecessary gift to anti-EU protestors.

Britain and Germany bailed out their own bank units in Ireland and O'Toole's claims about debts to Germany/UK totalling €209bn were wrong. At the end of 2007 German exposure to Irish domestic banks was just €1bn.

Following the expiration of the September 2008 Irish State Bank Guarantee in September 2010, that covered unlimited bank deposits and liabilities, bank bond debt to residents outside Ireland was down to below €40bn.

The National Treasury Management Agency (NTMA) calculated that about €9bn could have been saved if there had been a haircut on senior bond debt. Over the period 2009-2011, the total cash gained from the burden-sharing of subordinated debt was just under €14bn.

The obsession with burning bondholders eclipsed the protection of bank depositors including overseas banks.

Anglo Irish Bank had €72bn in deposits when the State guarantee took effect with €19bn retail; €20bn in deposits from banks (including controversial loans valued at €7bn from Irish Life and Permanent Plc) and  €33bn in non-retail deposits.

The State's investment in Anglo Irish had been mainly a bailout of depositors.

Once the State Bank Guarantee had expired in September 2010 the six covered banks began haemorrhaging deposits.

As for the Dystopian vision on welfare and mass unemployment, the EU-IMF did not force Ireland to cut its annual budget deficit during the crisis: in the 10 years 2008-2017, the deficit amounted to €152.5bn. While bank support amounted to €64bn, about €50bn was funded from borrowings.

Shortfalls in day-to-day government spending were covered by a deficit of over €100bn.

By December 2010 there had been 335,000 job losses since December 2007. The losses would peak at 370,000 in March 2012. 

Unintended consequences and Brexit

The British will become aware in time of unintended consequences of Brexit.

Sixteen months after the announcement of the Irish international bailout, employment began growing and in the period Q12012-Q12019 439,000 jobs — almost 24% — have been added in the Irish economy with 408,000 of those jobs being full-time positions.

Following the dramatic commitment of Mario Draghi, ECB president, in July 2012 to do "whatever it takes" to save the euro, bond yields in crisis member countries of the euro system plunged.

Unilateral debt default — that was the only choice available to Irish policymakers — and crashing out of the euro would likely have been much more damaging in relative terms to the Irish economy than a no deal-Brexit would be in Britain. 

The people who would have suffered most pain would have been the same people that Fintan O'Toole identified as the victims of what he called the EU-IMF "ransom."

If the siren Irish voices on radical economic remedies had been followed, Ireland today would be back closer to the London orbit than Brussels. A departure from the euro system whether voluntary or not would have poisoned Ireland's position in the EU for many years.

Fintan O'Toole's planned political movement was aborted when a general election was called in January 2011. On the proposed referendum to get a "structured negotiated debt default," public support in a referendum would have likely had no impact as happened 4 years later in Greece.

When Fintan O'Toole bemoaned before the general election that he expected voters to be "timid" in supporting right of centre parties, an Irish Times reader named Aidan went to the heart of the matter in a comment on the article:"I believe it comes down a failure of those with a left leaning to sufficiently capture the imagination. In theory I might agree with some of the sentiment of Joe Higgings (sic) et al, but what struck me about their arguments is the complete lack of realism. I, as a politically aware 20 something, with left wing-pinko tendancies (sic), would have been in their demographic, but their answers were so juvenile as to be disingenuous. They simply didn't address the 'what ifs?' in relation to rejecting the EU/IMF issues. To think of a vote as a contract, I would like to know what the worst case scenario is, if I agree to sign up to something. It saddens me that we will be once again governed by party political verterans (sic) in ill fitting suits with a snide discontent for 'lay' people, but once again it was they who got their message across better, be it right or wrong. On the brighside (sic), think of this as a first outing for the new left, they may learn to beat them at their own game yet...."

Fintan O'Toole in 2015: 'Europe never existed. It was a story made up to deal with the legacies of war' 

In May 2011 Morgan Kelly, a professor of economics at UCD, who had begun warning of a crash from 2006, proposed:

"National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately...By bringing our budget immediately into balance, we focus attention on the fact that Ireland’s problems stem almost entirely from the activities of six privately owned banks, while freeing ourselves to walk away from these poisonous institutions."

Kelly assumed that the ECB would have to take control of the Irish banks — in effect the economy would still have a functioning banking system — while Ireland could remain in the euro system.

However, where banks in the euro system run out of acceptable collateral (such as non-junk rated government bonds), ELA (“emergency liquidity assistance”) can be provided by the national central bank to its country's banks but at its own risk and at a higher interest rate — this is where in reality the choice can end up on staying in the euro system or not. When Greeks questioned their membership of the euro in the summer of 2015, banks closed as customers queued to withdraw their money. 

Voluntarily leaving the euro system was seen as a panacea by others and David McWilliams, the economics commentator, in May 2010 according to the Guardian newspaper reported that he saw significant benefits from leaving the euro:

"McWilliams...argues that Ireland's attachment to the euro, and the EU, is born of the establishment's traditional desire to eschew the British, who are still Ireland's biggest trading partner. If Ireland left the euro and returned to the Irish pound, its currency would take a hammering. Let it, says McWilliams: if it fell by 40%, suddenly Ireland's wages would be 40% less than its rivals. Investment would flood into Ireland; exports would be super-competitive." 

There would be no return to the old punt: a new currency would have to be created amidst chaos and shuttered banks while beyond multinational supply chains, the Irish indigenous exporting sector was small with a limited presence outside of Britain. Launching a new currency would have resulted in scenes like in Argentina in the early 2000s.

Iceland had fish, a natural resource, that accounted for about 60% of exports.

One prominent Europhobe, Ray Kinsella, a former professor of banking and financial services at University College Dublin's (UCD) Michael Smurfit Graduate School of Business, in 2017 proposed that Ireland should follow Britain out of the EU claiming in an Irish Times op-ed, that the Union was "a hegemonistic and increasingly militarised political behemoth, controlled by Germany and, to a lesser extent, by a Franco-German identity of interests."

This was my comment: 

[Again Ray Kinsella gets space in this newspaper to promote a crazy idea and this one is on a par with leaving the euro. 

A business school professor would be expected to cite some facts rather than rely on gut feelings/prejudices, and contrast this piece with a recent one where Kevin Hjortshøj O’Rourke, professor of economic history at the University of Oxford, argued that “Ireland’s accession to the then EEC in 1973, and the construction of the single market in the early 1990s, were the two crucial turning points that allowed our Republic to put decades of underachievement behind it and become the prosperous and self-confident State that it is today” http://bit.ly/2vXMEMD . 

“Brexit means Ireland, which shares a common stance on key issues with the UK, is left marginalised, peripheral and dependant” is an argument similar to what the Leave campaign Brexiteers made in 2016. 

Britain has had an annual budget deficit (government spending exceeding income) for all but 8 years since 1945 while the UK has also recorded a current account (Balance of Payments) deficit in every year since 1984 and a trade deficit every year since 1998. 

This is NOT the fault of the EEC/EU nor is the underperformance of the Irish indigenous international exporting sector. 

Mr Kinsella writes “the establishment has pulled down the shutters on reform. It is now impelling members towards full political union and, beyond that, further supra-national enlargement” ─ there is no credible evidence for this alarmism. 

Kinsella warns of an “increasingly militarised” EU and blames the EU for the migration crisis but he seems to have forgotten that it was the UK that participated in the invasion of Iraq against the wishes of Germany and France. 

The professor wants us to launch a new currency that presumably would be linked to sterling ─ just imagine the chaos that such a plan would trigger!! We return to the junior relationship with the struggling UK at a time where their services exporting sector will inevitably be reeling from Brexit. The UK itself has a car industry that is its biggest exporter but it's owned by foreign firms that can move elsewhere...Mr Kinsella alludes to the old myth of the EU stealing our fish. There simply isn't processing capacity for most fish landed - see here: http://bit.ly/2gnP6Gk

If small Denmark — a true high wage knowledge economy — can thrive in the EU why not Ireland?]

*A win in a referendum typically is followed by legislation implementing the decision as happened in the UK in 2011 when there was a vote on the electoral system. A plebiscite is a vote by the people for a question given to them and is typically used in authoritarian systems.

The Brexit vote legislation did not include a requirement that a Leave win should be followed by Parliament.