Europe today is in the middle of the largest economic, social and political crisis since the Second World War. Last week its leaders met and once again failed to show the ambition or urgency which is so badly needed. No significant step forward was taken on a single matter. The final communiqué is a long repetition of things which have been said before, with a number of small exceptions. These exceptions represent areas where there have actually been steps backwards.
This summit has been followed by near panic as the on-going strategy of over-spinning everything and failing to undertake serious negotiations threatened to completely undo Ireland’s interests. The rear guard action of recent days has done nothing to challenge the basic fact that the supposed ‘campaign’ for debt relief for Ireland has been nothing of the sort. Thankfully the Taoiseach has finally put aside his partisan obsessions and been willing to state publically what he has rejected before; Ireland incurred significant debts solely because of the lack of EU policies and because it showed solidarity with the rest of Europe.
The Taoiseach stated on Monday: “Ireland was the first and only country which had a European position imposed upon it in the sense that there wasn’t the opportunity, if the government so wished, to do it their way by burning bondholders”. The Taoiseach is absolutely right in this and it’s a great pity he has taken over a year and a half before saying it. Who knows how much he has previously set back our case by his unwillingness to admit this.
In spite of all your spin the truth has become obvious that a policy of sitting on the side-lines and hoping something turns up is not a campaign. Failing to talk to people before summits is not a campaign. Failing to even state your specific negotiating objective is not a campaign.
The Summit Stepped-Back from June’s Deal
The Taoiseach has said that the Summit agreed to fully implement the deal agreed in June. He of course hasn’t outlined in any specific way what that deal is – because he doesn’t know. There is no agreement between member states as to what exactly the June deal means. It was important and full of general commitments to actions which are badly needed – but nearly every element of the specifics remains un-agreed. That is why there have been months of confusion.
Before going into the detail of what Ireland should be looking for we should note that it is factually untrue for the Taoiseach to say that the June deal has been reaffirmed in full. It has not. The summit conclusions involve two significant dilutions of the June deal.
In June it was agreed that the new supervisory regime for banks would be in place by January 1st next year. Last week it was only agreed that a legislative framework would be agreed by January 1st and that implementation would happen through next year. Because it was also reiterated that there will be no ESM money available for bank debts until the new system is fully up and running, it represents a significant delay on even the possibility of the ESM funding Spanish and Irish bank debt. This could be very significant impact on the costs faced by Ireland when we fully return to the sovereign debt market.
The Taoiseach should not come in here and pretend that everything is on track – it is not. Implementation of the deal has been delayed by up to a year.
The summit also stepped back on the issue of a common bank resolution regime and deposit insurance. These are essential if banks in all parts of the Union are to see a restoration of confidence and to rebuild bank lending. In June it was understood that a common regime was to be proposed but last week this was reduced to merely ‘harmonisation’ of national policies. This is a major step backwards from one of the most important parts of a banking union.
What was agreed?
When Chancellor Merkel gave a press conference saying that historical bank debt would not be covered by the ESM she was fully entitled to say that that is her understanding of the deal because the deal itself is so vague. Nothing in Sunday’s rushed statement has seen her or Germany back off her basic statement. We know they like and admire Ireland. We know that they recognise us as in a unique situation. We know that Mr Schauble will come here in Monday and say nice pleasant things about us. What we don’t know is what Germany and other countries will agree in terms of the contents of the banking union or the ESM.
In June it was agreed that something should be done. Since then the deadline for doing something has been moved back and we are no wiser as to what exactly that something is.
Too much damage has been done over recent years by leaders systematically exaggerating their agreements. It needs to stop and a good start would the Taoiseach putting aside the empty formulas and casual over-claims which fill his statements on Europe and start being open.
What is Ireland looking for?
Since it became obvious last July that you are reluctant to engage in the sort of diplomatic activity undertaken by other prime ministers or your predecessors down the years I have been tackling you on this. Day after day you came in here to say that everything was fine and was being left to others. Well last week we saw the outcome of that: German briefing that they would not be accountable for your government’s spin and clear evidence that a solid core was not engaging with Ireland’s case.
The Tánaiste then went out to tell us that he was certain the game had been changed in June, even though he left the meeting early and wasn’t involved in the deal. Then in a final show of the government’s attempt to shore up its flanks Minister Rabbitte was sent out to do what he does best – attack everyone else.
The briefings after Sunday’s phonecall and Monday’s 45 minutes in Paris have been typically euphoric. Advisors have been doing the rounds talking about a great victory, about incredible personal chemistry and about games being changed once again. Given the history of massive over-claim about every small diplomatic encounter there is no reason to believe any of this until the Taoiseach is honest enough to state what he has asked for.
The basic point is that Ireland is seeking the assistance of the European Union in order to make its debts more sustainable. What does the government believe that this means? What is its definition of debt sustainability? Surely this should be at the centre of every financial plan – at the centre of every budget measure?
Over the last year and a half the Taoiseach has delivered many speeches praising himself for turning around everything and delivering us on the fast track to sorting everything out. Unless the Taoiseach has been telling us untruths during question time and statements, this has been his message at every summit and every meeting with a foreign leader. European leaders hearing this would surely be forgiven for thinking that our government believes the debt is sustainable as it is. Remember, what is being discussed is sustainability not simply making things easier.
There have been a series of contradictory statements from the government over the last year and a half as to what its core objectives are. Minister Noonan originally said that the main concern was the interest rate on the promissory note. When it was pointed out that this was returned to the government through the Central Bank he moved on and announced in Washington that he’d be burning lots more bondholders. Then we were told that it wasn’t the bondholders that mattered but the interest rate on EU loans. When we got a reduction of four times what we were asking for as a result of Greece’s needs, the government announced victory and returned talking about the promissory notes.
The much heralded technical paper never appeared and briefings stopped on our suppose promissory notes campaign. Then in June, Spain and Italy refused to let a summit finish without a deal on their funding needs. Ireland had done so little preparation and expected so little that the Tánaiste went home early. The statement that our debt sustainability would be looked at and we would be treated equally was and remains welcome. What was and remains a major error was the failure to do the advance work to get an understanding of what that meant.
In the case of Spain it is clear what they want. They want the ESM to recapitalise its banks to an amount of over €50 billion and to take the associated risk. That is known to everyone.
In the case of Italy it is also clear what they want. They want the ESM to be open to purchasing its sovereign bonds in order to reduce interest rates. That is known to everyone.
What is Ireland looking for? Our situation is different from Spain’s not just because, as the Taoiseach finally admitted on Monday, and it is worth repeating again because of how significant it was: “Ireland was the first and only country which had a European position imposed upon it in the sense that there wasn’t the opportunity, if the government so wished, to do it their way by burning bondholders”.
Are we looking for the ESM to buy our stakes in AIB and the Bank of Ireland? Are we looking for the ESM to finance our repayment of the promissory notes? Are we looking at all parts of bank-related debt or just the bank shares? What is the government’s definition of sustainability?
Unlike Spain we are not looking for extra capital to be put into our banks. They have enough capital. They are today amongst the best capitalised in the international system because of the state’s investment. The book value of the state’s capital in the banks is just over €29 billion.
The ESM purchasing this from us would be done only at current market prices. Given that the investment is booked as an asset in our net debt figures, selling it would either have no impact on our net debt or it would make it worse by forcing us to book a loss at close to the bottom of the market.
Money saved on interest payments might be significant, but there is no indication whatsoever how much is involved or the technicalities of this. Unlike the Spanish government, our government has failed to provide even the most basic information on what is being discussed or its implications.
In relation to the promissory notes, it is my understanding that at a minimum those countries involved in the Helsinki statement believe that this is a matter purely between Ireland and the ECB. They do not believe it is a legitimate use of the ESM and they do not believe that there is any legitimate expectation on this front contained in June’s deal.
On a number of occasions recently the Taoiseach has deliberately misquoted me in exchanges here. He has done so again with his claim that I said that it would be easy to get the ECB to restructure the promissory note. The record shows I said nothing of the sort. What I said was that they could be restructured easily if the ECB agreed – which is a 100% factually accurate statement. The fact that Mario Draghi and others are opposed to the restructuring is clear – what is not clear is what the government’s strategy for dealing with it is.
When the 2012 promissory payment was converted into a sovereign bond financed by the Bank of Ireland, the government claimed it was a huge step forward. It was nothing of the sort. It converted a note whose interest was returned to the state into a long-term bond requiring interest payments.
Ireland does not want the ESM involved in refinancing the promissory notes; it wants the term of the notes extended significantly. In light of what even the Taoiseach now admits were the unique circumstances faced by Ireland which obliged the creation of the promissory notes significant relief from these payments is the minimum we should be demanding.
Future of EMU
The summit’s other conclusions contain a long list of items which add up to very little progress. In relation to the future of the Economic and Monetary Union, there will be a negotiating framework agreed in December – by which time the Taoiseach will hopefully finally have outlined what Ireland’s policy is for the future of EMU.
In talking about measures to encourage growth, the summit produced a lot of high talk but little substance. None of the measures involved allow a stimulus which is any way in proportion to the crisis being faced in many parts of the Union today.
In relation to the European Investment Bank, the expansion of its capital base is welcome. The fact that much of the potential new lending will go directly onto countries’ debt figures means it is of limited potential benefit. However, it would be good if the Taoiseach and Minister for Finance would outline what Ireland is proposing to do in order to benefit from a share of the potential €60 billion in extra investment over the next three years.
This was a summit which mainly reiterated a general deal made in June but stepped back on a number of important areas. Uncertainty as to what exactly has been agreed remains no matter what the Taoiseach and his press operation say. When the new system will come into operation and what the benefit to Ireland will be is unknown. Amazingly, what is also unknown is exactly what Ireland is asking for.
It’s time to put aside the generalities and the constant over-claiming of every development. Now that we have a consistent story from the government on the unique circumstances which mean Ireland should be helped they need to state clearly what they are looking for. What is a sustainable level of debt and what European assistance are we looking for?