ANALYSIS by Patrick English: The Comment Space's Europe Specialist
During the considerations by the Irish government on the proposed bailout from the EU, George Osbourne, the UK Chancellor, announced that the UK was prepared to loan the Irish government money directly or indirectly through the EU to stabilise its failing banking and housing sectors. This provoked much controversy from commentators and the public at large, who were unsure as to why in a time of austerity, the UK should be loaning away vast sums of money to other countries. The answer in two words? Economic Interdependence. The answer in several hundred words? Well, prepare for some heavy economic stuff.
The Irish economy only properly developed into a fully functioning economy in the 1970's when the country ceased becoming a third world nation; hard to believe I know, but a European neighbour of ours was indeed living in poverty up until just four decades ago. Due to its sudden emergence as a viable economic force, inward investment into the Irish economy was seen as the smart move by banks, states, and businesses alike, the logic was that 'things could only go up' from just bordering poverty, the returns would be colossal.
Indeed they were right, Ireland developed what was known as a 'Tiger Economy' in which grew at an incredible pace, partly exasperated by joining the EU in 1973 and the subsequent investment that brought. The banking, construction, and housing sectors boomed in enormous proportions after the 'Free Movement of Workers' agreement passed in the EU, and foreign labour and business, predominantly Eastern European, flooded into the country. The government set corporations taxes at record low levels, around 14%, and low interest rates to accommodate the bank's desire to loan to the construction and housing industries at record levels. Such a rapidly grown and narrow economy was bound to come down with a crash at the sight of trouble. Indeed, when the recession came around, foreign investment into Ireland effectively ceased, and the imported business and labour already in Ireland near enough left the country for their homelands in a mass exodus between 2006 and 2009. With business failing and banks no longer seeing returns on their risky expansions into the housing and construction industries, the Irish economy practically fell apart.
Why then, might you ask, are states now so desperate to get involved from meltdown across the Eurozone and here in Britain and save the Irish economy? As previously pointed out, states, not only businesses, invested heavily into the Irish economy while it was growing in the 80s and 90s, and Britain in particular lent money to the Irish government for social welfare and trade expansion programmes and invested a lot of her own money into strengthening and improving the trading ties between herself and Ireland. The result of that has a massive legacy today; Ireland is currently, by far, our biggest export nation. If the Irish were to collapse as a state, Britain would lose a colossal chunk of its export trade and our economy would suffer greatly as a result. Indirectly also the British economy would take a hit from the drag on the Euro that an Irish collapse would present. Considering that Ireland utilizes the single currency of the EU, just like any other state its economic condition and policies greatly affect the strength and viability of the currency across all Eurozone states, which in turn then dictates itself the health of the economies which utilise it. The EU needs Ireland to be in good trading shape to protect the Euro.
Think of it this way, You own a farm and are producing food for yourself to eat and then the surplus food is taken to trade for other foods from other farmers, vital for a balanced diet, in market with. If your food was then found to be substandard as the ground you farmed it on contained impurities, and it started causing ill-health amongst those who purchased it; then not only would people stop trading their food for your food, thus detriment your health due to lack of variety, but your own food would also itself cause yourself and your own family to fall into ill-health. This then detriment your ability to go and produce better food and become able to trade with the other farmers again.
This analogy is easily transferred to economics; think of the family as your state, food as the currency, and the health to be the condition of the economy or economic capacity: If your currency is seen to be built on weak grounds or debt, then other states will be highly reluctant to trade in the state's currency and businesses will not wish to store capital in it. This then means that the state will cease seeing inward investment and capital flow into it. Combined with the weakness of the currency, this then in turn would weaken the state in economic capacity, and the ability to combat the found flaws in the economy, thus further weakening the currency. It is something of a vicious circle; the more a currency fails, the more the economy fails, unless a mass devaluation, which isn't viable such is the complexity and size of the EU as an economy, takes place.
Thus, it is quite evident that it is in the interest of the Eurozone and Britain, such is the level of economic interdependency between the two and Ireland, to offer assistance to Ireland and prevent its collapse. If the two chose not to help, there would be dire consequences. The EU would see the Euro take a huge hit from one of its utilizers collapsing, this in turn would most likely cause Portugal, Spain, and Belgium (all in similarly precarious situations) to collapse, further damaging the Euro and its economies. Germany, the heart of the EU and Eurozone, would also see massive losses in the collapse of Ireland, as much of its banking sector has large investments placed in Ireland's banks. Britain's trading would suffer then greatly, with her biggest export nation in Ireland and also the EU, responsible for 50% of our total trade, limiting or perhaps ceasing trade effectively altogether, the economy would be at risk of once again sliding into recession.
The argument pretty much speaks for itself, there is no way we can feasibly afford to let Ireland collapse; such are the levels of investment from Britain and the EU in its economy, and the reliance on its trading capabilities from both parties. It's an unavoidable situation given the current circumstances, but are there possibilities that, in future, we could build an economic system where wouldn't have to worry about exterior economic factors detriment our own economy? The answer if of course, yes, but the follow up question; "Why don't we adopt such an economic structure?", is something a little more complicated. It is possible and probably sensible for the coalition government to stay away from the previous government's highly interdependence favourable lending and borrowing attitude, and adopt a more conservative approach with British investments and borrowing, but a fully independent Britian, or any other state, for that matter, is something which is quite impractical.
The reasoning for perhaps why, although possible, it may not be such a good idea to operate a form of isolationist economic policy can be demonstrated by examples of those who tried to do just that. The best would probably be the USA in the 1920's, the Republican party under Harding, Coolidge, then Hoover operated highly isolationist economic policies which effectively saw inward and outward investment cease, and America running a self sufficient economy. For ten or so years, as we all know, the plan worked and the USA experienced an urban boom. However the country began overproducing goods and was then unable to sell them to the global market, such were the trade boundaries put in place by both sides of the Atlantic as part of the isolationist policies. This factor contributed greatly, most importantly I would argue on a personal basis, to the collapse of the American economy which triggered the Great Depression. In communist China, until Deng Xiouping brought in the "Socialist Market Economy (Capitalism within Communism)" in the 1980's and allowed capitalism to operate in some selected coastal cities, China was a poverty stricken nation trying to live within its own means. North Korea today operates a similar approach to economics, and recent footage displays (allegedly) just how much poverty and unhappiness Kim Jung Il is forcing his people to live under.
In order to operate a successful fully isolated economy in which there is no reliance on international trade or investment, a state must be able to live entirely within its own means and be completely self sufficient. In other words, to be out of the global system of intensely entwined economies, food and resource trading, and financial sectors, you have to replicate that entire system within your own state. No state, certainly not Britain, has the natural resources, infrastructure, or workforce to be able to pull that off. The fact is we need Ireland and the EU to trade with us, just the same as we need China to contiune producing cheap goods for our consumer economy. In other words, you are part of the system, until you can become the system.
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In Europe this week:
Wikileaks have released cables claiming that a Senior Spanish prosecutor has told the US hierarchy that Russia, Belarus, and Chechnya have virtually become what he describes as 'Mafia States'. In a move set to embarress both Spain and the US, and throw the spotlight on the 3 accused countries, the official asserted that he could not tell much difference between the dealings of these 3 countries, and those of Organised Criminals. More here.
The agreed, in principle, Irish bailout from the EU has sparked a rise in global markets; the Pound and Euro both advanced in the currency markets, and financial markets particularly rose in Asia in response to investments in Ireland being made apparently safe by the bailout funds. More info here.
No longer shall foreign, well EU anyway, drivers be able to commit minor offenses on our roads and get away 'scott free'. Major offenses are obviously followed up and prosecuted in Britain, but until now Police time and lack of appropriate legislation has limitted the ability for our traffic law to be enforced on drivers from the EU on our roads. This shall no longer be the case, with the EU asserting that soon, under EU law, prosecutions shall be easy and uncostly. The legislation will not set punishments thus not compromising soverignty, but will set a time scale of 2 years during which the legislation may be put into place in the statute books of each member state. More from the BBC here.
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