Was the US Treasury Secretary’s deep sixing of a plan by the seldom-charitable IMF to give the Irish some debt relief Versailles redux? By that I mean the Treaty of Versailles, the agreement at the end of World War I devised by the victors to dismember the German economy. Bear with me as I tease out this conceit.
When most people think of the punitive deal, which most see as the cause of economic and social dislocation in Germany that fueled the rise of the Nazis, they focus on the unrealistic reparation payments without looking at the specific provisions intended to strip Germany of assets and productive capacity. As John Maynard Kenyes, a member of the British Treasury department who quit the negotiations in disgust to write The Economic Consequences of the Peace, the treaty seized, along with coal-rich Alsace Lorriane, but any assets held by German nationals in these territories were expropriated. In addition:
The Allies ‘reserve the right to retain and liquidate all property, rights and interests belonging at the date of the coming into force of the present treaty to German nationals, or companies controlled by them, within their territories, colonies,possessions and protectorates, including territories ceded to them by the present treaty.
The provisions regarding German coal production were even more destructive. Keynes noted:
The provisions relating to coal and iron are more important in respect of their ultimate consequences on Germany’s internal industrial economy than for the money value immediately involved.
The German empire has been built more truly on coal and iron than on blood and iron. The skilled exploitation of the great coalfields of the Ruhr, Upper Silesia, and the Saar, alone made possible the development of the steel, chemical, and electrical industries which established her as the first industrial nation of continental Europe. One-third of Germany’s population lives in towns of more than 20,000 inhabitants, an industrial concentration which is only possible on a foundation of coal and iron. …It is only the extreme immoderation, and indeed technical impossibility, of the treaty’s demands which may save the situation in the long run….
Our hypothetical calculations… leave us with post-war German domestic requirements, on the basis of a prewar efficiency of railways and industry, of 110 million tons against an output not exceeding 100 million tons, of which 40 million tons are mortgaged to the Allies….Every million tons she is forced to export must be at the expense of closing down an industry….the surrender of the coal will destroy German industry.
Now what, pray tell, does this have to do with Ireland, and Geithner? Geithner is as doctrinaire and short-sighted a defender of bankers’ privileges as the Allied Powers were of their rights to make Germany pay for the costly and bloody Great War.
We had noted that the Irish could have stared down the EU and held out for a bailout of its banks only, and were mystified at the quick capitulation. Consider this section of a very instructive op-ed by Ireland’s highly respected economist Morgan Kelly in the Irish Times (hat tip reader disgruntled observer):
On November 16th, European finance ministers urged [finance minister Brian] Lenihan to accept a bailout to stop the panic spreading to Spain and Portugal, but he refused, arguing that the Irish government was funded until the following summer. Although attacked by the Irish media for this seemingly delusional behaviour, Lenihan, for once, was doing precisely the right thing. Behind Lenihan’s refusal lay the thinly veiled threat that, unless given suitably generous terms, Ireland could hold happily its breath for long enough that Spain and Portugal, who needed to borrow every month, would drown….
Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”
The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.
The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.
In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.
The Stockholm Syndrome point is important. Banks who have engaged in widespread looting and reckless behavior have nevertheless managed to persuade the public that acceding to their demands is virtuous. In a narrow sense, that isn’t wrong, in that healthy communities depend on most people honoring their commitments . But how long will this widespread use of what amount to one sided agreements, where the financiers can break them with little in the way of consequences while ordinary citizens required to adhere to them, continue before the collateral damage engulfs the bankers? This repudiation of basic notions of equity will prove to be as corrosive to the foundations of our society as the German hyperinflation was, although it will take longer to play out. And the economic costs are increasingly evident (hat tip reader Philip Pilkington):
Update 3:15 AM: In an interesting bit of synchronicity, the New York Times has a front page story on Ireland’s economic woes.