Mediating Policy

Greece, Ireland, and Portugal Before the Eurozone Crisis

Kate Nicholls

• Publisher: Taylor & Francis
• Year: 2015
• eBook ISBN: 9781317642725
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

Amongst the most serious consequences of the 2008 global financial collapse and sovereign debt crisis were a series of unprecedented international bailouts for Greece, Ireland, and Portugal between 2010 and 2011.

This book analyses the development policies of Greece, Ireland, and Portugal between 1990 and 2008, before the Eurozone crisis. It identifies national-level differences between the policy strategies and outcomes that have characterized recent developments in the Greek, Irish, and Portuguese political economies. In addition, it provides an explanation for these differences that takes into account variations in political institutions and state-society relations. In doing so, it locates an explanation for policy divergence in the presence or absence of the policy-making institutions and processes that make up a 'zone of mediation'. Overall, it argues there is significant variation in the extent to which Ireland, Portugal and Greece have adapted their developmental goals and strategies in order to address the labour market challenges posed by the post-industrial era.

This book will be of key interest to students and scholars of European politics and studies, comparative political economy, public policy/policy studies, and democracy studies.

1 A tale of three crises

Same symptoms, different underpinnings

DOI: 10.4324/9781315760629-1

Since late 2008, the news coming out of Europe’s southern and western fringe has been overwhelmingly dominated by economic crisis and its resulting political fallout and social misery. Public debt on the periphery of the Eurozone mushroomed in the wake of the 2008 Global Financial Crisis (GFC), cascading into a series of events surrounding a round of unprecedented international bailouts for Greece, Ireland, and Portugal between 2010 and 2011. From 2007 to 2010, public debt spiralled well out of control in Greece and Ireland, from 112.9 to 147.3 per cent of Gross Domestic Product (GDP) in the former’s case and more than tripling in the latter’s. Portugal’s level of debt, while not quite as serious, had also reached just over 103 per cent of GDP over the same period (OECD, 2011a: Table 3.1). Meanwhile, the larger economies of Spain and Italy similarly teetered on the brink of requiring rescue packages, with levels of Italian debt approaching those of Greece by 2010–2011, while the Spanish economy took a dive along a number of important dimensions in 2012. In all five countries, commitments to reducing sovereign debt, either as the direct result of the bailouts or as the result of efforts to avoid international intervention, led to the implementation of severe austerity measures including dramatic cuts to pension pay-outs and the slashing of public sector wages. The consequences of these events have been multidimensional, including the fall of several governments across the region since 2009 and rising levels of social dislocation and protest in response to increased unemployment, poverty rates, and a general feeling that the costs of the debt crisis are not being distributed particularly evenly across society.

Much has been written in the popular press as well as by economists about the ‘causes’ of the European sovereign debt crisis. In particular, attention has been paid to the failing of the European Monetary Union (EMU) experiment, which harmonized monetary but not fiscal policy in its member states, to include Greece, Ireland, and Portugal. In addition to these structural deficiencies, the response of the European Union (EU) to first the GFC and then the emerging sovereign debt crisis has also been criticized from a number of angles (Prausello, 2012). Analysis of national-level policy failings has concentrated on the immediate causes of rising debt itself, although the fact that the reasons for the national-level debt crisis diverge sharply across these three national cases is frequently glossed over by the international media. In other words, government spending per se is most often blamed for the crisis, with much less attention paid to the other side of this equation, namely reduced government revenues, let alone the stark differences between the roots of the crisis in each peripheral state. Put in bolder terms, the common perception that ‘spending too much on social programmes and entitlements’, or even ‘European social democracy’, lies at the root of the crisis is quite a distortion of the truth of the matter. Furthermore, the recurring reference to Portugal, Ireland, Greece, and Spain as the ‘PIGS’ of Europe (or PIIGS with the addition of Italy) in the English-speaking press during the years of crisis not only carried highly derogatory overtones, but lumped together this set of countries in a way that is unhelpful for understanding the specific causes of their woes. The present chapter of this book works against these unwarranted stereotypes by outlining the divergent underpinnings of the Eurozone debt crisis as it unfolded in the three smaller peripheral countries that received international bailouts between 2010 and 2011.

As a work of comparative politics, however, this book does not only seek to identify national-level differences in terms of the policy strategies and outcomes that have characterized Greek, Irish, and Portuguese developments in political economy in recent times. It also seeks to provide an explanation for this divergence in outcome that takes into account the political causes of crisis across the three countries. This explanation, which centres on basic features of state–society relations that vary markedly across the periphery of the Eurozone, and, more specifically, on the presence or absence of a robust ‘zone of mediation’ in each case, is fully fleshed out in the following chapters of this book. Yet before moving on to an analysis of the politics underpinning Greek, Irish, and Portuguese policy failures (and some significant successes), a better understanding of the nature of the debt crisis itself as it actually emerged in each of these three countries is required. Furthermore, as Chapter 2 explores in much more detail, the three tales of debt crisis presented below also hint at the very different developmental trajectories followed by the three countries over several decades.

The divergent underpinnings of crisis in the Eurozone

The GFC, usually traced to declining property prices and the sub-prime mortgage crisis in the United States that came to a head in 2007, ushering in the ‘Great Recession’, had a varying impact across the developed world. Some regions were able to weather the storm better than others. Notably, East Asia, and countries heavily dependent on East Asian success such as Australia and New Zealand, fared somewhat better due to what turned out to be superior Asian financial regulations and practices. The United States managed to avoid the recession deepening into a full-blown depression through large stimulus packages, but at the expense of gradually rising public debt, levels of unemployment far above those enjoyed since the early 1990s, and heightened political polarization. Several European economies, notably Germany, also came out of the crisis with a new-found respect for the German slow-but-steady growth model, traditionally high national savings rate, and generally cautious economic policy approach.

The crisis, however, exposed and deepened existing developmental and policy flaws across Europe’s western and southern periphery. In Ireland, the GFC hastened the end of Ireland’s construction boom, demonstrated the dangers of lax financial regulation, and uncovered a series of somewhat unhealthy relationships between bankers, property developers, and politicians. In Greece, the crisis highlighted a myriad of economic and political problems, including: the basic underdevelopment of the Greek economy, reliant as it has been in recent times on low technology-intensive growth concentrated in the retail and service sectors and with a still very large informal economy; a weak private and innovative sector contrasting with a large public sector; a distorted, expensive, and reform-avoidant pension system; and rampant tax evasion among other forms of corruption. By contrast, the evolving debt crisis underlined Portugal’s status as a late-developing country of the European periphery that has, since the mid-1970s, frequently relied on public debt in order to rapidly catch up with European developmental standards. Recent events have exposed the country’s position as a rather weak and dependent marginalised economy, since arguably the international bailout occurred in this case as the result of contagion, investor fears, and international pressure to take the bailout package rather than absolute necessity. The remainder of this chapter elaborates a little more on these divergent underpinnings of economic crisis in Ireland, Greece, and Portugal, before moving on to outline the main argument made in this book, along with the theoretical and methodological approach it takes.

Ireland

During the 1990s, Ireland reversed its historical status as the ‘sick man’ of Western Europe to become its so-called ‘Celtic Tiger’, exhibiting extraordinary economic growth rates based on high levels of foreign direct investment. This growth levelled off somewhat during the 2000s, but Irish success was celebrated right up until the impact of the GFC exposed cracks in the country’s economic development model. Analysts have tried to present Ireland’s post-1987 economic recovery, then boom, as less of a ‘miracle’ and result of luck, than as the consequence of a number of long-term policy strategies finally paying off.¹ Among these is the decision to pursue an outward-looking, investment-oriented strategy as early as 1958, focusing on tax breaks for overseas companies in particular. From the late 1980s the number of especially North American owned foreign companies taking advantage of these policies, as well as of Ireland’s relatively young and well educated but comparatively cheap labour force, certainly increased.

The role of Ireland’s technically inclined higher education strategy in all of this is discussed extensively in Chapter 4 of this book. Other factors clearly include the support received from the EU’s Structural Funds and its associated cohesion policies, and the pursuit of a mixed economic development strategy that combined orthodox stabilization measures with expanded state planning in the field of industry policy and active labour market programmes. How much the recovery, especially in its early years, can also be traced to ‘fiscal contraction’ is something of a debate in the literature (Barry, 1995; Bradley et al., 1993). The adoption of centralized wage bargaining, helping to control inflation, is also believed to have assisted in the recovery, and the broader implications of this for Irish policy-making patterns is a major theme of this book.

Ireland’s stunning economic performance during the 1990s and into the 2000s meant that the country changed extremely rapidly over a comparatively short period of time. Dislocating consequences of growth included rises in the cost of living, driven especially by housing costs, and infrastructural inadequacies, especially in roads and public transport. Nevertheless, on the eve of its banking crisis, Ireland was generally considered a much more modernized and arguably happier place than it was twenty years before. The issue of housing, however, is particularly worth underlining, because, along with deficiencies in financial regulation, it lies at the heart of the predicament in which the country found itself in 2008. Given Ireland’s historically low-income, underdeveloped economic status, the country entered the 1990s with one of the lowest housing supplies in the developed world. A decade or so later, however, this had completely changed. Rising income levels helped fuel an unprecedented housing boom, witnessing an increase in stock from 1.2 million dwellings in 1991 to 1.9 million in 2008 and construction accounting for the highest proportion of total employment, at 13.3 per cent, in the OECD.²

The construction boom itself was made possible on the supply side by the easy availability of loans, particularly to large-scale developers, facilitated by Ireland’s relatively laissez-faire approach to financial regulation, putting it in line with other, predominantly English-speaking, what the political economy literature terms ‘Liberal’ Market Economies (Hall and Soskice, 2001). Thus, what made the Irish housing bubble – and its burst – distinctively different from that of the United States in particular, is that instead of the problem being chiefly located in the ‘sub-prime’ market where, due to the failing economy and rising interest rates, individual home-owners could no longer afford to pay their mortgages, the Irish crisis was due to large-scale developers suddenly no longer having a market for their houses. Banking loans to developers had in fact overtaken those of loans to households by 2007 (OECD, 2011b: 78). An over-supply issue combined with a decline in consumption sent many of these development companies into bankruptcy, leading in turn to the Irish banking crisis.

The proximate cause of Ireland’s sovereign debt crisis was the near-collapse of Ireland’s six major banks, for which the burst of the housing bubble and the worldwide economic downturn led to a ‘liquidity’ problem. In short, the rapid expansion of the banking sector combined with a lack of supervision and oversight meant that it had been loaning money that it did not really have and was unable to honour demands for withdrawals once the financial crisis hit. Believing that the only way to avoid a major depression was to recapitalize the banks, in September 2008 the Irish Government announced that it would guarantee the Bank of Ireland, the Anglo-Irish Bank, the Allied Irish Bank, Irish Nationwide, the Education Building Society, and Irish Life and Permanent. This was followed in October by bailouts of €3.5 billion each for the first two banks that found themselves in danger of insolvency, the Allied Irish Bank and the Bank of Ireland, then in early 2009 by the nationalisation of the Anglo-Irish Bank. By 2010, the country had to turn outwards for assistance, accepting a bailout package of €85 billion in November, which amounted to over 50 per cent of Ireland’s GDP for that year. Of that total €17.5 billion was sourced from Ireland’s own National Pension Reserve Fund, while the remainder was drawn from the ‘troika’ of the European Commission’s European Financial Stability Mechanism, the International Monetary Fund (IMF) and the European Financial Stability Fund (EFSF), and bilateral loans from the United Kingdom, Sweden, and Denmark (Lane, n.d).

By the end of 2013, Ireland had met all targets in terms of repaying that loan, entailing the raising of €5.3 billion in taxes and the reduction of public spending by €9.6 billion, but at enormous social cost, including an unemployment rate of around 12 per cent, a far cry from the steady 4 per cent of the early–mid 2000s. In many respects, however, this sorry state of affairs pales in comparison with that of Greece, which by 2013 was nowhere close to paying back its loan, despite having had it restructured several times, and had unemployment rates of around 30 per cent.

Greece

Whereas the Irish debt crisis is relatively easy to pinpoint as fundamentally a banking crisis stemming from a burst housing bubble, the causes of Greece’s woes are much more multifaceted. On one level, the story is simply one of too much state spending versus a failure to expand its tax base. On the other hand, the tale is much more complex, involving blatant government corruption overlaid on basic developmental deficiencies stemming from the fact that in many respects the Greek economy still exhibits features that are characteristic of the developing rather than the developed world. Economic modernization in Greece did not really begin until the 1950s. Since then it has been relatively rapid, but belated development has bequeathed contemporary Greece an economy, and associated labour market structure, that put it at odds with Western European developmental norms. These include: a continued reliance on agriculture, despite the shift to industry and more especially services that has occurred since 1950; a very large informal or shadow economy; comparatively low female workforce participation; very high unemployment rates amongst the educated; an extremely high rate of workers employed in very small, especially family, businesses and a high level of self-employment; and a high incidence of unregulated home- or piece-working, much of which is considered to be highly exploitative.

During the 1990s Greece had drawn praise (and occasional astonishment) from its fellow EU members for managing to meet the EMU convergence criteria, which included strict limits on both government debt and inflation. By 2004, however, the Greek government was forced to admit that it had falsified its accounts in order to make it appear to have met this set of criteria, specifically by masking the level of public debt genuinely held. By 2009 the state revealed an annual budget deficit of 12.7 per cent of GDP, which was twice that announced previously. This caused Greece’s international credit rating to plummet and a series of government austerity measures to be introduced. In the first half of 2010, the recently elected government of George Papandreou implemented the Stability and Growth Programme designed to reduce the deficit to 2.8 per cent of GDP by 2012, froze public sector wages, then implemented three successive austerity packages. In early May, the first ‘troika’ bailout totalling €110 billion was granted to Greece, followed by a second rescue package negotiated between July 2011 and February 2012. Despite widespread privatization and ongoing aus...

Table of contents

• Cover Page
• Half-title Page
• Series Page
• Title Page
• Copyright Page
• Dedication Page
• Table Of Contents
• List of figures
• List of tables
• Acknowledgements
• 1 A tale of three crises: same symptoms, different underpinnings
• 2 Labour market challenges for Greece, Ireland, and Portugal
• 3 Explaining policy divergence
• 4 Ireland
• 5 Greece
• 6 Portugal
• 7 Conclusions and further reflections
• Appendix: list of interview subjects
• Index