By William K. Black*
Gary O’Callaghan, a former IMF economist has written about his distress over what he views as the European Central Bank’s (ECB’s) destructive policies toward the periphery.
The ECB, EU, and the IMF are the troika that contributed to the periphery’s crises and have responded in such a destructive manner to the crises. O’Callaghan’s column urges the European finance ministers to focus on “three simple questions about the [troika’s] Irish, Greek and Portuguese” loan programs. My column focuses on the reasoning underlying his third question.
“Third, how important is it that the programs succeed? Obviously it is crucial. The success of the programs is key to the survival of the euro and should, therefore, take precedence over any other European agenda.”
O’Callaghan, unintentionally, has disclosed the core irrationality that underlies the euro. It is not “obvious” that “the survival of the euro” is critical, much less a goal of such transcendent importance that it should “take precedence over any other European agenda.” The euro is simply instrumental to some substantive purpose such as economic security, employment, or at least increased efficiency. The economic welfare of the people of the EU should be the EU’s transcendent economic goal.
O’Callaghan conflated “the survival of the euro” with the transcendent “European agenda” and the success of the EU loan programs to Ireland, Greece and Portugal with “the survival of the euro?” The EU existed for decades without the euro. A number of EU nations have chosen not to be members of the euro. The euro is not essential to an effective EU unless the EU wishes to become a true United States of Europe. That new sovereign nation would want a sovereign currency. The crisis had revealed that most French, Germans, and Finns do not view the Irish, Greeks, and Portuguese as fellow citizens of a United Europe. O’Callaghan calls on the EU to the discard the concept of European solidarity as “distracting rhetoric,” but he does not see that the euro has become one of the greatest threats to any “European agenda.”
Why is O’Callaghan so disturbed about the EU and ECB’s lending program for Ireland? He is part of the IMF’s vast alumni corps and he’s horrified that the EU and the ECB are making the rookie mistakes common to novice loan sharks. The IMF knows how to bleed a nation – and it knows why the IMF bleeds nations. The IMF does not bail out poor nations. It bails out banks in rich nations that have made imprudent loans to poor nations. The IMF realizes that it is essential not to impose so much austerity that you kill rather than cripple the victim’s economy and harm the core’s banks. The ECB is dominated by theoclassical economists who have not yet learned this lesson. Their economic dogma is a variant on the old joke: the daily floggings will continue until morale improves around here. Bleeding is virtuous. If the victims aren’t screaming the ECB is not trying hard enough.
O’Callaghan writes primarily to convince the EU and the ECB to dial back the bleeding to the point where it is just sustainable. He urges them to “eliminate [] immediately” “punitive interest rates that undermine the chances of success.” O’Callaghan describes the ECB’s current loan terms as so bad that they are “preposterous.” “The rating agencies, the markets and most leading economists do not believe the plan is working.”
Sentient economists do not believe that imposing austerity during a severe recession is sensible. The CIA world book describes Ireland’s austerity program – prior to ECB demands for ever greater austerity – as “draconian” (and the CIA has special expertise with regard to the concept of “draconian”).
* Cross-posted with Benziga
http://neweconomicperspectives.blogspot.com/
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