Published on February 17th, 2011 | by Yellow Magpie4
The Legacy Of Milton Friedman: A Bankrupt Ireland (Part 3)
It has been nearly 60 years since Friedman’s economic policies were devised. In 2008, two years after Friedman’s death, defects in the European System have been revealed. With this, the damaging legacy of deregulation is fast becoming apparent.
No where is this more evident than in Ireland which now has become bankrupt.
The Ireland Problem And Deregulation
Ireland followed an open deregulation policy proposed by the Progressive Democrats (PDs), a now defunct political party, and Fianna Fail, a political party which has virtually been in power since the inception of the Irish Free State.
This new Irish model was based on a ‘closer-to-Boston-than-Berlin’ concept. Which meant that Ireland would follow the model of unfettered capitalism. Essentially, it meant privatising many of the state-owned companies and facilitating a deregulated banking sector.
The Public’s Phone Losses
Telecom Eireann was the original state owned monopoly telephone service provider.
European Union (EU) regulations forced the privatisation of Telecom Eireann in 1995. That year, the company was floated as the renamed Eircom on the Irish Stock Exchange and many members of the public bought shares. Share prices crashed after initial gains burning over 500,000 shareholders in the process.
In the meantime, the mobile phone subsidiary of Eircom, Eircell, was privatised for a paltry sum in comparison to what the company was truly worth. Eircell would eventually be bought up by Vodafone.
Two of the most damaging aspects of the privatisation of Telecom Eireann, apart from the huge losses incurred by public shareholders, have been felt acutely by the Irish public. They are the exorbitant line rental that Eircom charges – the highest in Europe, and the hugely overinflated prices that Vodafone charges their customers (although this has recently abated). A 2006 article by the Sunday Independent cited that if Vodafone set their Irish prices at the same rate as the Vodafone group’s average, each Irish customer would save over €80 a year.
The EU’s Unjust Closure Of The Irish Sugar Beet Industry
The European Union caused chaos to the Irish Sugar Industry in 2006.
Sugar forms part of virtually every food, from ice cream to bread, sauces to baby food, and both sweet and savory produce requires sugar. Because of this, it is a highly sought-after and valuable commodity. Virtually all of Ireland’s sugar processing was done at the Greencore sugar beet processing factory in Mallow, Co. Cork.
Although Greencore had relatively small operating profits, it formed a vital cog in the Irish food and agriculture sectors and it was worth approximately €150 million. Ireland was advised to close the facility down by the EU Commission as it would become unprofitable. It would also suggested that its closure would benefit poorer African nations by importing sugar cane into Ireland.
A later audit would reveal that this assertion of profitability was false and that Greencore was in the black.
Not alone was the Greencore Beet factory closed down but in order for Ireland to be illegible for a EU Restructuring Fund the entire factory had to be decommissioned and dismantled. This means that reopening the factory will be a costly exercise.
It is now believed that Ireland imports most of its sugar from Germany and continental Europe, not African nations, which causes money to flood out of the country.
The Folding Of Fishing Rights
Ireland’s succession to the EU (previously the European Economic Community EEC) in 1973 came with a large price tag attached as to do so Ireland’s membership of the EU meant that the country lost its exclusive rights to its 200 mile zone of Economic Influence.
This allowed other EU member states access to a bountiful fishing area, which is worth somewhere between €400 and €500 million in lost revenue per annum or in excess of €16 billion since the inception of the EU. These numbers are based on figures freely available from the Marine Institute, Ireland.
The Loss Of Ireland’s Oil And Gas Deposits
The Fianna Fail-led government also presided over the handing over of public assets to Royal Dutch Shell, an oil and gas company based in the Netherlands.
Shell have obtained the rights to Ireland’s oil and gas deposits off the north coast of Mayo in what equates to hundreds of billions of euro worth of natural resources.
In May 2007, the former Department of Communications, Marine and Natural Resources, noted that the ‘guaranteed’ minimum amount of oil in the Irish seas was worth €450 billion. However, the real worth of oil and gas is expected to be worth trillions according to the department.
The Privitisation Of Ireland’s Health-care
The Progressive Democrats, under Mary Harney, aggressively pursued the privatisation of large parts of the Irish health-care system with devastating consequences.
The highly complicated and dysfunctional Health Service Executive (HSE) was set up to replace the inefficient regional health boards.
However, under the HSE things have dis-improved and waiting times have gotten considerably worse due to overcrowded hospitals. It has been widely commentated that the health-care in Ireland operates on a two-tiered system with private patients getting preferential treatment irrespective of needs.
Under Harney, the HSE adopted the National Treatment Purchase Fund to deal with the ever-growing waiting lists. This fund means that public patients will receive treatment in private hospitals through the state. Effectively, public funds are being used to pay private hospitals.
Meanwhile the number of patients on trolleys waiting for beds has reached epidemic proportions. Despite the fact that the budget for the HSE has quadrupled from €4 billion in 1998 to €15 billion in 2008, services remain as poor as ever. In 2010 it emerged that 58,000 X-ray radio-graphs had not been looked at by a consultant radiologist.
In applying the ‘closer to Boston than Berlin’ model Ireland choose to model itself on the appalling healthcare system employed by the United States which benefits only those that can afford to pay. This was despite the fact that the US healthcare system is enormously inefficient (with one of the highest healthcare to GDP per capita ratio in the world) in comparison to the much fairer and more efficient healthcare provided by other European countries.
The quadrupling of the allocation afforded to the HSE, with little in return, has significantly contributed to Ireland’s fiscal crisis.
The Housing Farce
Although many of the above have not gone unnoticed – the true problems of deregulation have only been crystallised in people’s consciousness with the Irish banking crisis.
In late 2007, the huge unsustainable property bubble crashed in Ireland. Although many Irish people were aware that the year-on-year property price increases were unsustainable – the true extent of the problems took everyone by surprise. What in essence was happening was that Irish people were hiking up property prices by purchasing houses off one another.
Eventually, this left a glut of houses that could not be occupied and there are now thousands of empty and unfinished ghost estates scattered throughout the country as the housing market tanked.
Gradually, it began to emerge that the property bubble was little more than a government-backed Ponzi Scheme. As properties became virtually worthless in some cases – the true extent of bank debts became apparent.
Ireland’s Banking Bankruptcy
What was so catastrophic about Irish banking was the manner in which the banks bought into the property game wholesale without ever thinking about the repercussions. Cheap credit from other European banks, facilitated by the ultra-low interest rates of the European Central Bank, meant that Ireland’s banks could borrow much more than what their deposits would ordinarily allow.
Like in the US, the banks adopted the fatalistic notion that even if people couldn’t pay their mortgages – the bank would still have the value of the house. Thus many people were given 100 per cent mortgages, in some cases funds for furniture and fittings were also released meaning that some mortgages exceeded 100 per cent of the house’s market worth. There was very little checking of the financial circumstances of people applying for loans.
When the house prices hit the floor – the banks were left with toxic assets and no way of repaying the other banks that had lent to them.
Like the US, ultra-lax banking regulation facilitated the practice of poor banking policy.
Michael Lewis in the highly publicised Vanity Fair article, When Irish Eyes Are Crying, noted that Philip Ingram, a former consultant for Merill Lynch, highlighted that three Irish banks were the ‘nuttiest lenders around’. Ingram ranked Anglo Irish, Bank of Ireland and Allied Irish Banks (AIB) as the first, second and third worst banks in the British Isles.
From Bankrupt Banks To A Bankrupt State
When the Irish government, led by Fianna Fail decided to give a blanket guarantee to the banks – the Irish State, already facing a large fiscal deficit from overspending in the inefficient public sector (largely the HSE), became insolvent.
More money had to be borrowed when depositors began withdrawing billions from Irish banks. To prevent a liquidity crisis, funds had to be secured from elsewhere and the Irish government had to obtain a loan with crippling interest rates from both the EU and International Monetary Fund (IMF).
This has placed a huge burden on every Irish citizen, a burden which will absorb any future funds that will be accrued by economic growth. With inflationary adjustments the burden, according to the Irish Times is roughly half the punitive figure of the World War One Treaty of Versailles per head of population.
It should be noted that Germany only paid the last €70 million installment of that treaty last year, 91 years later.
The most noticeable consequence of Ireland’s insolvency is unemployment as the property boom had placed a large dependency on construction. The consequences of this dependency has been the mass exodus of people and emigration is now rampant. Whole swathes of people are living for Britain, Australia, Canada and the United States as they seek employment elsewhere.
The Endless Euro Cycle Of Systematic Economic Failure
What the above highlights is systematic flaws within the Euro-zone. As Irish economist David McWilliams argues, the Euro is geared towards having economic melt-downs over regular periods.
Besides the limitations imposed by having a European Central Bank, which removes the possibility of devaluing a nation’s currency (often used when a country has difficulty securing funds), there is is also another huge flaw in the European Union, Germany.
Germany is the world’s largest economy and a powerhouse of efficiency. Despite the huge labour might of China, in 2010 Germany was the world’s largest exporter, a staggering achievement giving the differences in the cost of labour between the two countries.
McWilliams notes that Germany’s public sector is just as efficient as its private brethren. This means that very little money is wasted. Therefore, Germany’s excess money is kept in German banks but because of the vast quantities of money, the German banks have little choice but to lend money to banks in other countries.
Germany’s economy is growing at huge rates but it is also dependent upon other EU countries buying its merchandise. So it is a catch 22. It needs to lend money to other countries so that they can buy from Germany – or else its economy will slow down.
This is the problem with the Euro. In order for Germany to be successful – it must loan money to the less-successful, peripheral EU countries.
The Irish Problem In Context
The deregulation of the Irish banking sector, the privatisation of Ireland’s public assets together with the flaws in the Euro-zone model and coupled with very poor governance have seen Ireland accumulate a disastrous mountain of debt. Like the other countries that tried out Friedman’ model – failure was inevitable.
When the house market crashed in Ireland and the United States it deeply affected other countries too as they had speculated on house prices continuing to rise. German, French, British and Dutch banks all invested in Irish banks.
Deregulation, despite its atrocious record, has conned many governments into adopting it as a policy. When things turned sour everything collapsed like a house of cards leaving bankruptcy in its wake.
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You can read Yellow Magpie’s Milton Friedman: The Man Whose Philosophy Brought The World To Its Knees (Part One) and The Legacy Of Milton Friedman: The Economic Virus Spreads To Europe And The US (Part 2) here.
You can obtain Naomi Klein’s fantastic book The Shock Doctrine, (which this article derives many of its facts from) here from Amazon.
For people living in Ireland or the United Kingdom you can access The Shock Doctrine here.
For those living in Canada you can obtain The Shock Doctrine from here.
For Germany: The Shock Doctrine.
For France: The Shock Doctrine.