A tale of two prodigals

We all know the story of the prodigal son. The young chap hits the road after cashing out his share of the family farm, lives it up, blows it all, crawls out of a wheelie bin in his underpants and then comes back to his family, chastened and fully expecting to be treated as one of his father’s many servants. Instead, his father throws him a party.

The older brother, toiling away dutifully, comes back from the fields and finds the party in full flow, and goes mad. His father’s answer, that his prodigal brother was lost and is now found, never struck me as making much sense, especially from the point of view of the big brother. The father is being maximally compassionate, yes, but he’s also telling the older brother that his work isn’t as valuable.

We know now what happens to prodigal peripheral countries like Greece and Ireland. The fatted calf was not slain for an impromptu knees-up; we were put in with the servants, at least for a while. Then the newly chastened Ireland turned and, rather shamefully, began beating up the elected government of Greece in January of this year.

Thanks to rules designed by countries in the core of Europe, after a crisis they can’t adjust their economies back to competitiveness using their exchange rates, so they have to adjust using wages and prices in order to gain the confidence of the markets to be able to borrow again. This process is called austerity. It is slow and very painful, and it doesn’t work.

Greece lost more than 25 per cent of her GDP over a five-year period thanks to this process. Ireland lost a lot less, but it was painful and had pretty severe distributional consequences, and as Greece’s former finance minister Yanis Varoufakis says on the facing page, one big reason Ireland avoided much of the pain Greece experienced was because Ireland ‘did’ austerity after Greece, with a much more open economy.

We were effectively able to trade our way out of the crisis in a way Greece could not. The consequences have been horrifying. In Greece, there are young people who have never had state-wide medical care, the unemployment rate is still in the mid-20s, youth unemployment is still nearly 50 per cent, and they can look forward to at least half a decade of more painful reforms.

Comparing the IMF’s exceptionally rosy forecasts for Ireland and Greece is a revelation. Ireland is expected to have an unemployment rate of around 7 per cent by 2020, compared to 13 per cent for Greece. Borrowing levels for Ireland to fund the state are forecast to fall to almost nothing by 2017 while Greece will be borrowing for the foreseeable future, and just to run its welfare state, not to pay down its debt.

Dr Varoufakis is quite right to say that Ireland’s low corporate tax model was a strong comparative advantage which helped us during the crisis. Without tax revenue from strong exports, the state would have been forced to cut spending more on social welfare programmes, which would have made things worse for the poorest in our society. Income taxes would have had to rise, worsening our growth prospects and causing a stronger deflation in prices.

Today, with the rise of ‘Brexit’ as a real threat, as the ESRI outlined this week, could what saved us during the last crisis become a millstone around our neck as the next unfolds? No one is sure and anyone who says they are needs to have their head examined and to be left alone for a while.

Some of the same people writing scenario analyses about Brexit today were the ones saying Greece should stay in the eurozone at any cost. (The ESRI rightly stayed out of that debate.) Endless austerity just isn’t sustainable. It limits the effectiveness of monetary policy, and spills over by destabilising and radicalising political systems. The rise of the Syriza group of left and far-left parties to power-sharing with a far-right party is evidence of this.

Eventually the political systems within countries like Greece, Portugal, Spain, and Ireland will be deformed utterly by the processes of austerity. That is not good for democracy across Europe. Ultimately, Syriza was forced to renege on many of its election promises by the countries of the core, supported by Ireland, who by this stage had almost completed its time in its own programme of adjustment.

Ireland’s record in Europe is tarnished by its treatment of Greece. We could have shown solidarity privately, and said nothing negative publicly. But this didn’t happen. Scorn was heaped on the heads of people trying, and ultimately failing, to get a better result for the people of their country.

Varoufakis’ time as finance minister of his country was exciting, eventful, and a failure. None of his objectives was met. His appearance at Kilkenomics should remind us that when it comes to being the prodigal in Europe, forgiveness is not something to count on.