herald

Thursday 19 April 2018

Will the departure of the troika make a real difference?

ON December 15, Ireland will exit the EU/IMF bailout. The good news is that our economic sovereignty will be restored and the Government will not have to submit its economics homework to the troika every three months.

The bad news is that, with total government debt projected to hit more than €210bn by the end of this year, the EU and the ECB will be keeping us under very close scrutiny.

Even the troika won't disappear completely from our lives, as a large chunk of the money owed by the State, about €67.5bn, is owed to official lenders – the EU, the ECB and the IMF.

A bit like the Skibbereen Eagle newspaper of yore watching the Tsar of Russia, they will be keeping a very close eye on us for many years to come.

In other words, the formal departure of the troika will not usher in a new dawn of sunlit uplands where milk and honey flow freely once again. The largesse of the Celtic Tiger years is gone for ever.

For the foreseeable future, the outlook is one of continued austerity as the Government struggles to balance its books in order to keep both its official lenders and the international bond markets happy.

So will the departure of the troika make any difference to us at all?

SURPRISE

That, as the man said, depends. Although the timing is completely coincidental, the formal end of the troika comes as the German-led, pro-austerity faction is losing control of the ECB's governing council.

Last week's surprise interest rate cut was the clearest sign yet that, having meekly accepted German control of the ECB since the introduction of the euro in 1999, the peripheral eurozone countries are finally standing up to the German central bank, the Bundesbank.

With the exception of its Austrian, Dutch and Finnish satellites, the Bundesbank finds itself isolated on the ECB council.

It is this change of control at the ECB rather than the formal end of the bailout that holds out hope of better times ahead for Ireland.

The main reason the post-2008 global economic downturn was so severe in Europe was that the ECB, unlike either the Federal Reserve or the Bank of England, refused to pursue a policy of quantitative easing – that is, printing more money – in an effort to compensate for the steep fall in demand.

This was because of the opposition of the Bundesbank, which believed that such a move would increase inflation.

Instead, we have had to endure deflation – falling prices – and depression as a result of the Bundesbank-dictated austerity policies foisted on to the peripheral eurozone countries. Now the periphery is fighting back against the Bundesbank's misguided inflation phobia.

Indeed, the interest rate cut may be only the beginning. This week, ECB chief economist Peter Praet gave an interview in which he appeared to hold out the possibility that the ECB would follow the example of the Fed and the Bank of England on quantitative easing.

"The balance-sheet capacity of the central bank can also be used," he said.

OMENS

A decision by the ECB to defy the Bundesbank and adopt a policy of quantitative easing would be a game-changer for the peripheral eurozone countries, including Ireland.

It would kick-start depressed economies by getting firms hiring and consumers spending.

So will it happen? So far the omens are good, but the Bundesbank can be expected to fight any ECB policy of quantitative easing every inch of the way.

Enda Kenny and Michael Noonan can only keep their fingers crossed and hope for the best.

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