Paschal Donohoe TD – ‘Economic Sovereignty’ – Parnell Summer School, Monday 13th August.
Ireland faces a new National Question.
The old National Question focused on where our national borders should be, how we could establish independence from an Empire and what it meant to be a sovereign independent people. Throughout our history grappling with this Question was at the centre of our political sovereignty.
We answered it. Through establishing formal independence as a state, through the Peace Process, through our participation in European political and economic integration and through, until recently, the dividends of economic growth.
But just as the urgency of old Question has faded, either answered or made irrelevant, a new Question has now developed. This new Question also goes to the very epicentre of our sovereignty, but in this case, to our economic sovereignty.
The Question has gone through two phases, but currently exists simply as ‘How does Ireland restore our economic sovereignty?’
This version is just the current, but most urgent distillation of a broader Question that has permeated economic policy since we decided to accelerate our economic integration with the outside world for the benefit of our country.
It asks ‘How can a small highly integrated economy independently manage the impact of globalisation and economic integration elsewhere on our country?’.
This was asked by one generation in respect of a Western Europe re-developing itself in the aftermath of WWII. By the next, in respect of the Common Market. And by more recent generations, in relation to the global investment flows, the launch of monetary integration, and then attempts at a union.
Michael O’Sullivan framed this challenge in his book Ireland and the Global Question, published in 2006. He articulated the National Question as ‘a desire to maintain the sovereignty and independence of the nation in the face of powerful external forces’. The decisive factor in maintaining this freedom was ‘whether the state has a framework for dealing with the effects of globalisation on Irish society and social life?’.
Our current terrible challenge, as participants in an External Aid Programme, with chronic and tragic levels of unemployment is not a disruptive and distinct phase in the arc of Irish history. It is the latest phase in our attempts to manage global economic integration on behalf of the sovereign Irish people.
Sadly, while it is our most recent phase, it is also our most disastrous.
How we mediate globalisation is the very essence of economic sovereignty for our state. And this poses separate and demanding questions for us.
First, what strategic choice was made in relation to our economic sovereignty in the past?
Second, how did we lose it? This is a fundamental question – if we’re not clear why we lost our economic sovereignty then the challenge of restoration is even more severe.
Third, how do we recover our economic sovereignty?
One, overarching choice was made in relation to our economic sovereignty. This recognized the mercurial and supple nature of economic as opposed to territorial sovereignty. We made a ‘Trade Off’, perhaps ‘The Trade Off’.
We pooled our economic sovereignty through participation in global and European economic growth. Autonomy was weakened in return for first, exposure and then, participation in regional economic growth.
This slide, showing a league table of globalisation, demonstrates the extent of ‘The Trade Off’. Ireland consistently comes at the top, or near top, of this table.
Integration consisted of competition for, and then reliance on, foreign direct investment – the soft form of integration.
This accompanied by a ‘harder’ form of integration as we removed tariff controls through participation in the Common Market, pegged exchange rates by membership in the European Exchange Rate Mechanism and then relinquished our currency and ability to set our own interest rates through participation in European Monetary Union.
The depth of our participation in this process is immense – and must be appreciated in evaluating future policy options. An earlier chart measured our performance in a globalisation index. The current chart, measures foreign direct investment as a percentage of the stock of capital in our economy.
Again, Ireland is at the very apex of this measurement. Many will hold differing views of whether that is a good or bad thing. But by any measurement Ireland has deeply embraced ‘The Trade Off’, pooling economic sovereignty through integration, in anticipation of growth.
And there of course is the challenge, the massive challenge that we are now grappling with, the phrase ‘in anticipation of growth’.
We made this trade off in a largely benign economic environment. Our quest for FDI, our embedding into monetary union happened during periods of international and regional economic stability. Abroad, times were good, great even. Integration into a good thing was seamless.
This had a very direct consequence for Ireland. We achieved financial integration without the parallel focus on continued competitiveness and productivity and avoided the need to create institutions and a culture alive to the need to make these decisions.
Which leads onto the direct question of how we lost our economic sovereignty.
I do not believe that we lost it when the Troika arrived. Or that we were clubbed into handed it over by belligerent European or international institutions.
The arrival of the IMF and ECB into the Merrion Hotel was not the cause of our loss, it was a symptom of our loss.
We lost our sovereignty when we made 2 separate but interwoven decisions. First, when our Government decided to fund day to say current spending out of the economic proceeds of a credit boom. Second, when we allowed our banking system to grow to the size of a multiple of everything we sold or created in our country.
Let me be clear. Bad, very bad decisions were made elsewhere that did not help and have damaged us.
I am still not clear what was the role of external institutions and forces in our decision to implement such a broad based bank guarantee that horrifically compounded the ‘deadly duo’ of our decisions in relation to budgetary and banking policy. But those other two decisions were made first.
But I am clear that bondholders, reckless gamblers, foreign central banks and regulators did not force, did not even tell or suggest that Irish banks grow to that size or that the ongoing pay of our teachers be funded by receipts from a once off housing boom.
The more vulnerable a state is, the less it can withstand the impact of bad choices.
We forgot that an economic sovereignty that delivers unsustainable budgetary deficits and a concentration of banks that are ‘too big to fail’ is a sovereignty that is a deadly chimera.
An illusion that can bewitch a country but that is capable of wrecking havoc.
At this point I want to quote JJ Lee who observed in relation to the period of 1912 to 1985 that:
‘Small states must rely heavily on the quality of their strategic thinking to counter their vulnerability to international influences. Without superior strategic thinking, they will be buffeted rudderless, like a cork on a wave…There is little point in bewailing factors beyond one’s control until one has taken the steps necessary to achieve the best results from those within one’s control’.
This all leads back to how we can restore what we have lost and whether the restoration of it will make the difference that we hope for.
I am clear what the restoration looks like, clear about what we need to do to answer the latest version of our national question. But also want to stress that this restoration will bring new challenges and opportunities that we need to recognise now or we will be back, to use JJ Lee’s analogy, on a wave heading to rocky shores again.
What the restoration of our sustainable economic sovereignty looks like is:
Irish taxes paying for Irish public services. We cannot be continually reliant on the savings of other countries to pay for services that we believe to be essential. We should access the savings of other countries during recessionary times, not as a matter of course.
A domestic banking system that is capable of funding itself and funding the needs of our businesses and people. Once a Government makes a commitment to stand over the savings of its people then the health of a banking system becomes a vital ingredient in the economy sovereignty of a country. But it cannot be dependent on that country for it’s survival.
The ability to borrow from other countries.
All leading to the final and most important element – which is the creation of an environment that creates jobs for our people.
In framing this I used the qualifier of ‘sustainable’ economic sovereignty, for one market based reason.
The relationship between sovereigns and their funders – the financial markets – has changed fundamentally and is unlikely to change during my adult lifetime. Simply put, the bond markets will not lend to us at the same rate as Germany unless our economy and institutions merit it. Lenders will now price in the risk of not getting their money back from sovereigns.
This will be a constant reminder of the choices needed to maintain our sovereignty – but I should point our that the less we need to borrow each year, the smaller this pressure.
The trick will not be just getting out an external aid programme – but ensuring there is never any prospect of our return. Otherwise, the European Stability Mechanism runs of the risk of becoming the ‘Hotel California’ of the ‘Eagles’ – once you check in, you never leave.
That is our new National Question, we answered the last one.
Maintaining our economic sovereignty in a deeply uncertain global economic environment. Where a benign environment is replaced by a host of challenges, from the shift of global political power, to the moderation of global growth rates to a change in the role and size of financial powers.
We answered the last Question through courage, imagination and solidarity.
I have no doubt that we will do the same again.