Posted by Michael Breen (16 November 2011)
The international media’s spotlight has been firmly on Ireland over the last few days. The talk of the town is of an IMF or European-led bailout. This raises several interesting questions. Why now, with the state apparently funded until June 2011? What sort of terms would be offered in the event of a bailout? And, most importantly what would this mean for Ireland’s economic sovereignty?
Many commentators were expecting a bailout later rather than sooner. While it is true that Ireland can stay out of the bond market for now, many of our European partners do not have the same luxury. As markets drive up yields on Irish bonds, other members of the euro zone are being dragged along for the ride. With the contagious effect of our debt crisis spreading to our neighbours, markets are even questioning the long-term viability of EMU. A working paper that is published at DCU’s Centre for International Studies illustrates a similar logic at play in previous episodes of crisis: even countries with a lot of foreign reserves can end up in IMF programs due to the exposure of their creditors to risk and loss.
Suppose Ireland accepts financing from the IMF/EFSF, what next? Assuming that Ireland follows Greece into an IMF program that is backstopped by the EFSF (and it is still an open question as to whether a bailout would be European or IMF-led), I expect that the only conditions the IMF would insist upon would look remarkably similar to the government’s recent proposal to reduce the fiscal deficit. This has already been noted by many commentators. What hasn’t been noted, however, is that the IMF’s position on fiscal adjustment has softened considerably. It’s not beyond the pale to imagine the IMF recommending a (slightly) less stringent fiscal adjustment.
Finally, what of the IMF’s dreaded structural adjustment? In March 2009, the IMF did what critics have demanded for years by discontinuing the use of structural performance criteria – the only binding structural conditions in IMF arrangements. This is a notable change in the direction of policy, as it implies the Fund is getting out of the business of micro-reforms and focusing on macroeconomic policy. In Ireland’s case, the IMF might well draw up a list of non-binding structural benchmarks as they did for Greece, but implementing these conditions would be entirely voluntary. What all this means is that an IMF-led bailout would not be the end of Ireland’s economic sovereignty. Even more importantly, it means that the necessary impetus for political and economic reform must originate from Ireland, bailout or no bailout.