Last week the European Council and the Euro group issued conclusions which, will give us all some cause for hope. A new and more credible approach to addressing bank recapitalisation has been agreed in-principle. A joint regulatory framework for the financial system will emerge at some point, though the scope of this is unknown. These are very substantial moves forward. They mark a welcome departure months of aimless activity which helped to renew the crisis in the sovereign debt market and bring the Euro to the edge of collapse.
The reductions in bond yields this week show that the summit has had some positive impact. However, let us not be fooled into thinking that this summit has finally dealt with the crisis or that the actions required to stop an escalation of the recession have been taken. This summit was only decisive if you set it in comparison to what went before.
In light of the declarations of decisive action having being taken and of Europe having turned a corner, people should stop for a moment and look at the statements issued after last July’s emergency summit – or for that matter after any one of the over a dozen crisis meetings in the last four years.
If you look back on the record of this House over the last year and a half you find the Taoiseach repeatedly coming in here and telling us how decisive action had been agreed. After the December and March meetings he talked at length about how leaders had agreed moves which were already restoring confidence and would deliver jobs and growth. There is not even the merest hint of understanding about the scale and escalation of the crisis.
What you will also find is a systematic pattern of exaggeration about his influence and that of the government. At one point he informed the house about having held negotiations with President Sarkozy but subsequently had to admit to little more than a formal greeting at the side of the Council Chamber. Last June he actually claimed to have put the Greek debt crisis on the summit’s agenda.
Of course his biggest exaggeration before this summit was when he claimed to have negotiated last July’s reduced interest rate on loans to Ireland. All backbenchers were circulated with speaking notes claiming that the Taoiseach had heroically delivered enormous savings to Ireland because of his deep diplomatic negotiations. Of course the truth acknowledged everywhere but in Merrion Street is that Ireland benefitted from a deal negotiated for Greece and automatically extended to all countries. It was worth four times what the government itself admitted it had asked for.
This addiction to self-praise and exaggeration has got much worse. Because the government seems to have forgotten what it said as late as last Wednesday. They should look at what they said. The Taoiseach himself repeatedly said that he would not be raising the Irish banking debt at the summit. He was true to his word. On Thursday evening he and the Tánaiste sided with the majority which wanted to quietly agree the summit conclusions and move on. In fact the Tánaiste got on a plane and headed home.
In contrast, the Italian and Spanish prime ministers said no. They said no deal on anything until urgent issues are addressed. Thankfully they did not follow the Taoiseach’s approach of biding for time and in reality asking for nothing.
The deal which they won in the early hours of Friday is very important because at every stage of the last four years the Council and Euro group have adopted a consistent approach of extending the principle of agreements to all countries.
The performance since Friday morning has been so brazen it would make John Terry blush. Both the Taoiseach and Tánaiste have been out praising themselves for having tirelessly executed a cunning plan. Brief handshakes when entering the meeting room have been elevated to the level of in-depth consultations. Apparently the Taoiseach showed a masterful command of tactics by agreeing to move onto other business and not coordinating with the Spanish and Italian delegations.
Spain got a definite deal in relation to bank recapitalisation and Italy one concerning sovereign bonds – Ireland got a discussion.
It is a welcome discussion, but what happened to the detailed and advanced discussions which the Taoiseach has been telling us about over the past year? Given that we were told that a joint working paper on this issue was being drafted from this time last year, why the lack of any details whatsoever?
The problem for Ireland is that we do not want just what has been done for Spain. In their case bank recapitalisation has yet to happen so the ESM money will go directly to the purchase of new equity in Spanish banks. If the same core principles hold for Ireland then the ESM may purchase from us our shares in Bank of Ireland and AIB. It appears that the core principle is that the ESM must have an asset in return for its investment. It is highly unlikely, and it is little help, if all that happens is that these shares are purchased from us at today’s values.
Until last Friday it was the Taoiseach’s position that their sole priority was the cost of the promissory notes. Earlier this year the government declared victory on the basis of a deal which actually increased the costs of the first tranch and converted it into normal sovereign debt.
The promissory notes should remain our absolute priority in relation to the bank debt. As the Taoiseach has finally been willing to admit, the notes were agreed because Ireland was being responsible towards a Europe scared of contagion and which lacked any alternative.
This debt should under no circumstance simply be converted to standard sovereign debt on the ESM terms available to all. They are a unique instrument, developed at an exceptional time which has no implications for wider policy. They deserve an entirely separate approach. A much longer term and nominal interest rate is what should be considered.
The ECB’s support for Ireland being mentioned in the statement is no surprise. The Bank’s core negotiating objective has been to transfer the promissory notes into standard sovereign debt and walk away. Its hard-line opposition to genuine relief on the promissory notes has not been changed by this deal, it has been confirmed.
Given the policy of systematic exaggeration which has characterised everything this government has done over the last year and a half, if you want people to belief that a major breakthrough has been made it is time for you to start producing some details. Do what the Spanish and Portuguese prime ministers did – publish your detailed demand and then go and meet people about it.
With the exception of the bank-debt element of the deal, nothing was agreed at the summit which fundamentally changes the dynamic of the crisis or addresses the core design faults of the Euro.
In relation to the absolutely essential introduction of joint banking supervision, the linking of this to the dispersal of ESM money to Spain suggests that it will be watered down to meet the demands of Germany’s regional banks. It is highly unlikely that agreement will be reached in time for the October deadline.
A central dynamic of the crisis has been the fear from investors about the lack of a lender of last resort. The ESM was supposed to ease this fear by showing how the resources were in place to rescue anyone. With €100 million to go to Spain’s banks and the other commitments, the ESM simply isn’t large enough to give the required confidence to investors.
Equally, the ESM gets involved in buying Italian bonds on the secondary market it may bring forward the date of the next crisis. When the ECB spent a much larger amount on similar purchases it gave short-term relief, increased its own risks and failed to save Greece, Ireland or Portugal. Why should the dynamic change now because it is the ESM and not the ECB buying the bonds.
The monetary ideologues insist on the purity of their vision for the ECB. What they also insist on is that the ESM’s funding cannot be leveraged to deliver firepower which can outlast a further run on the bond market. The failure to challenge this means the single biggest driver of the sovereign debt crisis remains in place and will probably come to the fore again.
Europe also needs investment if it is to get out of the recession. This summit again failed to deliver anything which could honestly be called a growth agenda. Giving money to the EIB and reallocating structural funds are good ideas but they fall down on two major areas – “a mere bagatelle”.
First of all, there is no detailed agreement to use the money exclusively for regions most in need. Secondly, and most importantly, the co-financing rules have not been changed. As a result the money, if it materialises, is likely to actually further strengthen stronger regions at the expense of weaker ones which cannot afford the co-financing.
If the entire allocation actually happened it would provide a stimulus of less than 1% of the income of the EU across more than two years. This is no growth pact.EU unemployment is at 11.1% the highest since the introduction of the euro in 1999.
A real growth pact is urgent and requires the direct transfer from regions in surplus to regions in deficit. Nothing agreed last week delivers this.
The full summit talks at length about moving to what is termed “a genuine Economic and Monetary Union”. What has been agreed is to look for areas to agree on rather than starting with a clear view of what is required. The text gives very little reason to believe that the leaders understand this.
The agenda is about control, not creating a genuine union. It is full of measures which originated in the pre-crisis period and involve neither ambition or reflection.
The House should note that the Summit explicitly noted that progress is supposedly being made on common tax policies but the government has failed to provide any update whatsoever on what it has been discussing.
The political and economic issues on the agenda for the next six months are profound. For Ireland the time has long since come when our government should start articulating exactly where it stands on these reforms.
They are even more important than debt issues in determining when the recovery will take place. They are not secondary to other priorities. If we do not set out what we believe is required to end the crisis and restore long-term growth, then we will continue to be bystanders.
Sometimes the outcome will be good and the government can rush out to try to claim credit – but equally there are many areas where we cannot adopt a position of just accepting what emerges.
Given the scale of the crisis and the length of time it has been underway, this summit delivered the bare minimum of what was required to stop a crisis becoming an immediate catastrophe. We need our government to spend less time on ridiculous self-congratulation and more time actually trying to shape Europe’s actions.