Opening Session Feasta Annual Conference, Friday September 23rd 2011
Good morning everybody.
I have been asked to make the opening remarks today, and to set the scene for the two very interesting sessions that are to follow today. They deal with the questions of whether Ireland’s future is in the Euro-zone or not, and whether the introduction of secondary currencies, in Ireland and in other Euro-zone countries, would create greater systemic stability in the single currency union. We have a range of economic experts speaking on these subjects today and I’m sure there will be great audience participation in the debates that follow.
In the interests of promoting a good lively debate, I’m going to make a series of assertions – based more on a political than an economic analysis of the Euro-zone crisis. I look forward to both speakers and the audience disagreeing with me as we debate the issues during the day!

The Irish and European debt crises are inextricably linked.
It is impossible to talk about national strategies for tackling Ireland’s massive debt problems without touching on the wider European debt crisis. The extent of the massive debt crisis that Ireland faces is linked to our membership of the Euro-zone, and in particular the access it provided for Irish banks to cheap credit. Ireland is not the only Euro-zone Member State experiencing a crisis – the EU countries in crisis now account for about a third of the Euro area’s GDP. The banking and financial systems of EU Member States are closely connected, and also the political decision-making systems which support them. There is a legitimate expectation that a European level solution can be found to the Euro-zone’s debt crisis.

Ireland’s withdrawal from the Euro would have a very negative impact on the Euro-zone, and the global economy.
If Ireland were to decide to withdraw from the Euro-zone, the decision would have potentially very serious consequences for other Member States. Financial analysts and commentators have expressed their belief that the “mother of all crises” or a “financial Armageddon” could result if the already very volatile markets were to become spooked by the sovereign default of one or two Euro-zone Member States. It would not just be other crisis-stricken EU Member States that would be affected. The Italian Finance Minister recently likened the Euro-crisis to the Titanic. He pointed out that even though stronger Euro-zone countries like Germany are in the first-class cabin, when the boat hits the iceberg, all of the passengers are affected.

The financial disarray and systemic dysfunction that would infect not just the European but potentially the global economy if the Euro collapsed would be immense. The Euro is now the world’s second international currency after the US dollar, making it of major significance for market transactions, central bank holdings, pension funds, insurance companies and government agencies. There are more euros in value than dollars circulating this year – 820 billion euro against 940 billion dollars. About one quarter of China’s 3.2 trillion overseas currency holdings are in euro, giving them a real interest in the euro’s survival.

It goes without saying that one of the results of the break- up of the Euro-zone would be a considerable amount of “wealth destruction” – the loss of a huge amount of value that is stored in bonds, stocks and shares on the international financial markets. But the real litmus test that should be applied in assessing the impact of any meltdown of the Euro-zone would be its effect on ordinary people, and on the most vulnerable in society. These people are usually the real casualties of any deep economic recession. In the event that the Euro-zone broke apart as a result of one or several sovereign defaults, it is very likely that general liquidity would dry up as part of a overall credit crunch, citizens would not be able to access cash from their bank machines, small businesses would not be in a position to pay their creditors, and the continued payments of public sector wages and social welfare entitlements would be difficult, if not impossible. Chaos and turmoil would rein and great hardship would be inflicted on the population at large.

The option of Ireland reverting to its national currency is not a panacea
As Europe’s political class shows little real leadership, and as the international markets become more volatile by the day, the opportunity for Ireland to regain control over its own monetary policy and to benefit from many of the advantages of competitive devaluation appears superficially at least to be a sensible course of action for the Irish economy.
Unfortunately this approach is sometimes advocated on the basis of ideological and nationalistic reasons rather than an objective analysis of the likely economic consequences of this course of action. A recent UBS report suggested that the costs for countries leaving the Euro could be up to 50% of GDP. I don’t have the time to mention all of the potentially negative consequences of a reversion to a national currency and its devaluation. Let me take one example – that of our energy imports. Although a devalued currency might be very helpful to Ireland in some respects, how would the country deal with the high, and rising prices of our imported energy- oil and gas – which we rely on to meet over 90% of our energy needs on this island? Oil and gas are priced in dollars on world markets. After a devaluation, the costs of these fuels would hugely increase in terms of the devalued currency .People being paid in the devalued currency would find their fuel and indeed all their imports more costly. Wages would have to be allowed to rise to some extent to correct for this. The positive impact of the devaluation could neutralized in this way. These are the kinds of issues that need to be fully considered as Ireland tries to identify the most appropriate strategy to respond to its massive debt crisis.

An effective European-level response to the crisis is more compatible with Ireland’s long-term strategic interests
It is important to look closely at the long-term implications of any decision by Ireland to leave the Euro. Quite apart from the immediate and potentially serious market impact it is likely to have for other EU Member States, it is also likely to undermine the political and economic cohesion of the European Union in the longer –term.
Why should this be an issue for Ireland? Firstly Ireland’s membership of political and economic community that it joined almost 40 years ago, and from which it has gained significant benefits, cannot be an a la carte one which is abandoned when times are difficult and renewed again when conditions have improved. No political system could accommodate this kind of radical flexibility and continue to offer stability and continuity to its member states, or instil confidence in the wider international community. Furthermore, if Ireland leaves and the Euro-zone breaks up, the wider European project will be fatally damaged. I want to suggest this morning that it is in Ireland’s long-term strategic interests that the European Union remains a strong economic and political player in an increasingly uncertain international economic context, one where the global economy was already shifting to the East – to emerging economies like China and India – even before the crisis struck.

The international context is characterised by growing levels of risk and uncertainty
What do I mean by this? The excellent work that Feasta has carried out over the past decade has concentrated on the issues of economic growth and the debt –based money system, energy and climate. The organisation has consistently predicted that the international community will face three major interconnected crises over the coming decades– a financial crisis linked to the way in which the global debt-based money system works, an energy crisis and the crisis of accelerating climate change. We are in the midest of a very serious international financial crisis right now. The global energy crisis and the growing crisis of climate change still confront us. In the past it has been easy to dismiss Feasta’s predictions as typical of a group of environmentalists!! Unfortunately its predictions are being borne out to a greater extent with the passing of time.

A politically strong and economically cohesive European Union can play an effective role in global efforts to tackle risk and uncertainty in the global economy, particularly where energy scarcity and climate change are concerned.

The development of a continent-wide Energy Community is a major policy imperative for the EU, as it should be for Ireland
The ratification of the Lisbon Treaty enabled the European Union to gain new powers in the area of Energy Policy. The urgent need to develop an Energy Community within the European Union was seen as a major policy imperative. The International Energy Agency accepts that the peak in conventional oil production (otherwise known as Peak Oil) has been passed, probably in 2005. Energy prices reflect this, and continue to rise. Ireland has one of the highest energy import dependency rates of any country in Europe with 91% of all the country’s energy needs having to be imported. This costs the country at least €6bn a year at present. Ireland is not alone in its vulnerability to rising energy prices, or to potential interruptions to global oil and gas supplies. Already the 27 EU member states import more than half their supplies of oil and gas, a proportion that will rise to 70 per cent in 2030 if nothing changes. The recent upheavals in the Middle East and North Africa have also introduced some uncertainly in relation to the EU’s reliance on this region for a large share of its future energy supplies. EU leaders have pledged to reinforce the union’s fragmented energy infrastructure with new interconnections so that gas and electricity can move more freely between member states. They have also promised to boost investment in renewable energy sources to reduce harmful emissions, and to allow the Union become more energy independent.
As a small, peripheral energy market on the outer reaches of Europe’s existing energy systems, Ireland has much to gain from the implementation of a comprehensive EU energy strategy and much to lose if it fails. The plan involves the creation of an offshore North Sea electricity super-grid, an initiative already backed by Ireland and nine other partner countries. This grid would offer connection to northern and central Europe to transport power produced by offshore wind parks to big cities on the European mainland and to store it in hydro-electric plants in the Alps and the Nordic countries. There would also be new electricity interconnections in south-western Europe to transport wind, solar and hydro power to the rest of the continent. A southern gas corridor would be created to deliver the gas directly from the Caspian Sea, reducing dependence on Russian supplies. From a financial perspective the investment required is very considerable indeed. In the next decade, the EU Commission President José Manuel Barroso believes as much as €1 trillion may be required to replace old systems and to cater for increased demand. It is clearly in Ireland’s interests to remain centrally involved in a strong, economically cohesive European Union in which these ambitious but critically important energy objectives can be realised. There will also be many economic opportunities created in Europe’s energy sector that can be exploited by Irish companies, not just in our domestic economy, but across other European Member States and internationally.

Ireland’s membership of the EU enables it to participate in international efforts tackle climate change

Former Vice President of the US, Al Gore, a prominent voice in the international debate on climate change, has spoken of the need for an unprecedented level of global co-operation in order to respond effectively to the growing threat of climate change. The international community has begun to accept that if tackling climate change does not become a global priority, the economic devastation that it will eventually wreak will be immeasurable. The Stern Review on the Economics of Climate Change commissioned by the British government and published in 2006 by economist Sir Nicholas Stern stated that climate change is the greatest and widest-ranging market failure ever seen, and that the costs of not acting on this growing global threat will be equivalent to losing at least 5% of global gross domestic product (GDP) each year, now and forever. The report conceded that including a wider range of risks and impacts could increase this to 20% of GDP or more.

The kind of international co-operation called for by Al Gore has already begun within the UN’s International Framework Convention on Climate Change. Indeed the European Union has demonstrated considerable climate leadership to date in within this framework while many other global powers are unwilling to live up to their responsibilities. The EU is a signatory to the Kyoto Protocol and is the only major power to have established its own internal Carbon Emissions Trading System (ETS). It is also trying to promote the establishment of a common carbon market involving OECD countries and other emerging economies by 2020. An EU-wide climate and energy package has been adopted by member states which commits them to binding emission-reduction and renewable energy targets to be reached by 2020.

Importantly, the EU is also a major signatory to an international climate agreement reached in Durban last year which will direct substantial flows of climate finance to the developing world over the coming years. This will be an extremely important part of an effective global response to the impact of climate change. The financing requirements for climate change adaptation and mitigation will be considerable for developing countries which are already disproportionately experiencing the impact of climate change, a problem largely created by the rich developed world in the first place. As the populations of many developing countries live in poverty and are dependent on subsistence farming, the negative impact on their livelihoods of unseasonal weather, extreme floods, droughts, desertification and so on is immense. There is an urgent need to ensure that the resilience of communities in much poorer parts of the world to the impacts of climate change is greatly increased. It is also important to recognise that the spending of this climate finance will present significant overseas economic opportunities for Irish and European businesses, as a significant transfer of technology, expertise and services will be required. If the Euro-zone were to break up however, and the European Union significantly weakened as a political system, the probability of its global leadership on climate change being abandoned would be high. This outcome would significantly undermine existing international efforts to tackle climate change, and should be avoided at all costs.

Any European- level solution to the debt crisis must be based on an acceptable level of popular consent
The perception that politics and economics are very separate spheres of activity is a popular one. In fact macro-economic decision-making is highly political in nature. Politicians understand the importance of popular consent where economic policy is concerned. In modern liberal democracies, governments cannot make economic decisions or implement economic programmes without at least the tacit support of a majority of the electorate. This can pose difficulties where governments have to implement economic policies that inflict pain on their populations. The assumption underpinning representative democracy is that enough of the population are capable of recognising when the economic conditions are so serious that they justify tough economic policies, to enable politicians to introduce the difficult measures without inciting revolution. What are the implications for the Eurozone’s debt crisis?

The European establishment’s response to the Euro-zone debt crisis has breached the most fundamental rules of the free-market capitalist system
Free-market capitalism has been a popular economic model that has commanded broad public support in the US, and increasingly in Europe over the past few decades. Political parties promoting these policies have been successfully re-elected. However, few would disagree that the excesses of free market capitalism caused the current debt crisis in the Euro-zone, facilitated by the flawed design of the Euro-zone project. The immediate reaction of the European establishment to the crisis has been to rescue the banking systems by facilitating the injection of vast amounts of capital into banks, many of whom acted delinquently during the boom years. Governments assumed the massive debts of the banks as sovereign debt. The ECB subsequently insisted on the implementation of a policy whereby no senior bondholders were permitted to suffer losses when their bonds matured. (This is despite the fact that the bondholders had accepted a certain level of risk when they took the bonds out in the first place). These actions – an emergency response to prevent the possible systemic collapse of European banking systems – breached and indeed corrupted the most fundamental rules of the free market capitalist system. They significantly undermine the credibility of any subsequent official attempt to impose punitive austerity programmes on the European public as part of an orthodox free- market capitalist response to the Euro-zone’s debt crisis

The banking debts for which ordinary citizens now bear the burden meet the definition of illegitimate or ‘odious’ debt
Having converted bank debt into sovereign debt, the burden of fiscal adjustment has since been shifted on to wage, welfare and labour market policies. From the perspective of ordinary people, the interests of the rich have been protected while the pain of the corrective measures will be borne by the middle classes and the less well- off. The approach lacks the kind of fairness and equity that must characterise any approach to tackling Europe’s debt crisis if it is to have democratic legitimacy. The concept of ’odious’ or illegitimate debt was one that was introduced into public debate about the debts of developing or third world countries whose despotic rulers had borrowed large amounts of money from the international community to fund what were often vanity or white elephant projects. These poor countries were left shackled by debts and interest repayments for expenditure from which they gained no benefit. Major international debt cancellation campaigns such as Jubilee 2000 were based on a fundamental rejection of the foisting of these illegitimate or odious debts onto populations that had no responsibility for creating them in the first place. It is not unreasonable to suggest that the banking debts for which ordinary citizens now have to bear the burden are equally illegitimate and should be subject to debt write- off or cancellation.

Mainstream political parties and, in the longer run, the EU’s parliamentary democracies, are likely to be the casualties of the ECB’s misguided approach to tackling the debt crisis
Developing the theme of democratic legitimacy a little further, it is because of the deep inconsistency in the overall response of the European establishment to the debt crisis that the austerity programmes being promoted increasingly lack democratic legitimacy. Unfortunately a rigid adherence to neo-liberal monetary policy has characterised the approach of the ECB to date. Marshall Auerback – one of our speakers this morning has accused them of “sado-monetarism” while other commentators like Paul Krugman has accused them of subscribing to a simplistic morality tale of debt and punishment where austerity programmes are imposed on delinquent states to pay for their alleged fiscal sins. These programmes will be more and more difficult for governments to implement as the austerity measures bite deeper. If the austerity programmes result in the kind of prolonged deflation, economic recession and high unemployment across the European Union that is widely predicted, the outcome will be even greater levels of economic crisis, matched by considerable political instability and social disorder. In the absence of an acceptable level of public consensus to support the hard-line policies of the ECB, the ultimate casualties of this misguided approach are likely to be the mainstream economic parties which have governed in Europe over the past few decades, and who are currently implementing these policies. In fact public trust in representative democracy itself will be seriously undermined. This is not in anybody’s interests. Any economic response to the debt crisis must be based on an acceptable level of popular consent.

Ideology must be set aside, and political and economic innovation embraced if Europe’s massive debt crisis is to be successfully tackled
It is clear that when attempting to resolve the massively complex debt crisis in Ireland and across the EU, there is a need to move beyond fixed ideological positions and to be willing to embrace new forms of political and economic innovation if a major financial and economic catastrophe is to be averted. ‘New paradigm thinking’ is needed, as the financial and economic problems that have been created by the neo-liberal paradigm are so great that they cannot be resolved within that same paradigm. The extent of the problems presented by this massive debt crisis will mean that the process of tackling them will result in a fundamental transformation of the system of economic management in Europe. Indeed it has been suggested by some that as the EU debt crisis is part of a global crisis, there will be a need for a co-ordinated, creative and multilateral response by the international community. This may involve the equivalent of a Bretton Woods II to rewrite the rules of the global economy for the new more uncertain future that confronts us. In other words the current global economic crisis, of which the EU debt crisis is a part, is likely to usher in a new global economic order. Given the extent of the debt crisis, the huge levels of uncertainty and the horrific scenarios that could unfold if the wrong policy decisions are made, there may be reluctance on the part of political leaders to engage in innovation. But innovate they must. European citizens must be convinced that a well-designed European level solution is more likely to promote economic recovery across EU Member States than purely national efforts.

Fiscal Union will not be enough
Fiscal Union is now spoken about as a major element of any likely European –level response to the debt crisis. This will require a new European treaty, which will have to be popularly ratified by some, if not all of the electorates of the Member States. I think most politicians who are living in the real world realise how difficult- if not impossible- it will be to secure the necessary levels of public support for such a treaty. Having been personally involved in two Nice Treaty & two Lisbon Treaty referendum campaigns in Ireland over the past decade, I think it would represent a political miracle if the Irish Government succeeded in persuading the Irish people to vote to ratify a treaty that introduces a fiscal union, as things stand. This is not because the Irish people are not capable of acting in their own economic self-interest, but because the prospect of having fiscal decision-making centralised in Brussels is likely to fill them with horror. Irish citizens, along with the citizens of countries like Greece, Portugal, Spain and Italy increasingly view the ECB as the institution that has bailed out banks, protected the interests of wealthy bondholders and acted as the enforcer of punitive austerity measures that are causing growing levels of unemployment, a reduction in wages and social welfare, the fire sale of strategic public assets to private interests etc.
Furthermore, in the inevitable push for the harmonisation of taxation that would follow a fiscal union, the loss of Ireland’s low corporation tax rate would be seen as a very negative outcome. For a peripheral island nation like Ireland, a low corporation tax rates helps us to attract foreign direct investment and compensate for the economic disadvantages that do not apply to many of the economies of mainland EU Member States. In fact, each EU Member State has its own particular set of economic concerns. Any European- level solution would need to be broad enough and sufficiently flexible in its design to accommodate the diverse needs of the different economies (In other words a ‘one size fits all’ approach won’t work). Finally, one of the most significant issues for EU citizens in relation to the Euro-zone debt crisis is that of the huge need for employment/ job creation, on which the livelihoods of most Europeans depend. Any European level solution to the debt crisis must be seen to tackle these issues if it is to win the support of the European public.

What might a comprehensive European- level solution to the debt crisis involve?
A European-level solution to the debt crisis will elicit the support of many citizens if they are convinced that sustained economic recovery is more likely to occur through closer EU economic integration rather than through national efforts. In my opinion, any comprehensive EU-level solution to the political and economic crisis that faces us at present needs to include the following elements if it to gain broad public support : (i) A fundamental reform of the ECB’s monetary policy, as has been suggested by the proponents of Modern Monetary Theory (MMT) in order to remove any risk of future insolvency on the part of the EU or its Member States, give the ECB the spending power it may require to realise its ambitious energy and climate objectives and enable it to respond to other major challenges or crises as they arise in the future. (For more information on MMT and its applicability to the Eurozone debt crisis, please see paper by Marshall Auerback on the Feasta website) (iii) Immediate debt relief provided by the ECB to Member States through the distribution of several trillion euros of debt-free money across all euro- zone nations on a per capita basis. This could be done in a controlled or staggered way to minimise the risk of inflation. This would not constitute a “bailout” as such, as Germany (with the largest per capita economy) would be the largest recipient. Each individual euro-zone nation would be allowed to use this emergency relief as it saw fit- whether to purchase some of its outstanding public debt or to introduce fiscal stimulus packages. (iii) A widening of the remit of the ECB to include the objective of creating full employment as well as maintaining price stability (Modern Monetary Theory also proposes a Job Guarantee Scheme which has the state taking on the role of employer of last resort) (iv) The introduction of a fiscal union with the flexibility to accommodate the diverse needs and circumstances of the economies of different Member States, and to allow for their gradual harmonisation over time (v) A clear and coherent overall macro-economic strategy supported by investment which will stimulate demand. This strategy should centre on the promotion of a green industrial revolution across the EU, and prioritise innovation and employment creation. The strategy could foster a much greater use of the Services Directive through the deliberate promotion of trade between member states in the areas of emerging green/knowledge industries. Many economic opportunities could be created for European businesses overseas as the EU met the climate financing commitments it has entered into as part of the international climate agreement it has signed (v) A material stake for EU citizens in the strengthening and consolidation of the European economy. Governments would be required to pass some of the money they receive from the ECB on to each of their citizens on an equal basis. The money could be used to either reduce citizen’s personal borrowings (ie mortgage debts) or people with no debt would be required to invest their gift in existing and new green industries to speed the EU’s transition to a low carbon economy.

It is essential that Ireland prepares its own national strategy
Although a European level solution to the debt crisis best reflects Ireland’s short and long-term interests, it would be a mistake for this country to adopt a passive approach to the overall resolution of the crisis. Ireland must be proactive in promoting its own proposals for a comprehensive EU-level solution. It must also have contingency plans in place to deal with a default on the part of another Euro-zone Member State and the possible disintegration of the Euro Area. Finally, it must have a strategy prepared to deal with the scenario whereby Irish citizens reject an EU-level solution in a popular referendum that they deem to be inadequate.
Thank you for listening to me this morning and I look forward to your questions later on.

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