On October 12th the Taoiseach used the Fine Gael National Conference to launch a three months-long media campaign of which the last week has been the high point. During this time a seemingly endless parade of so-called ‘exclusive’ interviews and background briefings have been used to present a selective and misleading picture of the government’s actions. There will be many other opportunities to discuss these, and already we are seeing key claims being exposed.
With the exception of the Taoiseach’s cynical and untrue statement that Ireland hasn’t been a full member of the European Union for the past three years, he and his colleagues have laboured very hard to avoid discussing the European dimension of Ireland’s crisis. It doesn’t help with domestic party politics, so the central role of the EU in most aspects of the crisis over the past five years has been ignored.
What makes this serious is that the government is therefore deliberately ignoring issues which are central to long-term growth in Ireland. Some of these issues are on the agenda for this week’s summit and it is now clear that what will be agreed will mean that Ireland has not received a proper response to its case and that key flaws that led to the crisis will be maintained.
As the most partisan holder of his office for many years the Taoiseach has regularly told international audiences that every element of Ireland’s problems lies with his political opponents. He let this mask slip only once, when he said in Paris last year “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”.
In contrast, Minister Noonan has said this on a number of occasions, including last week in the Irish Times – though this has received little or no notice.
Time and again independent experts have stated that European policies, or rather their failures, were directly linked to Ireland needing a bailout in 2010. The ESM and the policies of Mario Draghi at the European Central Bank have changed a lot. The large spike in bond yields which followed the Deauville comments of President Sarkozy and Chancellor Merkel were predicated on the idea that there was no back stop available. While the new funds and policies are incomplete, they have greatly reduced any risk in investing in Euro-area sovereign bonds.
The scale of the crisis in the Eurozone in large part stems from the failure to have a common system of financial regulation. This has led to uncertainty and contagion – with countries like Ireland obliged to act in the interests of the whole Eurozone with a sharing of the costs.
A strong Banking Union is not only important it is essential if the Eurozone is to have a strong financial system which supports growth rather than destroys it.
There are three core elements to a genuine, strong Banking Union:
· A common supervisory mechanism which means that all financial institutions operate under uniform and effective oversight.
· A common resolution mechanism which means that individual institutions can be wound down without a risk of contagion including certainty about who will get burned.
· A common deposit guarantee fund which ensures that no individual part of the financial system can get swamped by limited bank failures.
With most of the political agreements already in place we now know that we will have a system called Banking Union but we will not actually have a Banking Union. Anyone who cares about the future of the Eurozone, anyone who wants the Eurozone to be stable and prosperous must be concerned by what will be formally agreed at this week’s summit.
On nearly every key decision, national interests have prevailed. The core principal of sharing risk so that risk is minimised has been ignored. There are pieces of progress, but nothing near the scale of what should have been agreed.
The key parts of the new so-called Banking Union will cover 128 banks in total. Many banks which have the capacity to cause systematic problems will not be covered.
The proposed Single Supervisory Mechanism has the most potential to grow into a strong and effective policy. It will initially be more about coordination than common supervision, but it is likely that the ECB will push it towards a more active stance. The effort to retain national influence has been successful for the moment. Over time Ireland should join the ECB in calling for the removal of any possibility that governments could interfere in oversight matters that should be independent.
This summit will formally sign off on an agreed method for winding down banks and paying off residual debts. The objective for this was set by the Taoiseach and others as being to ‘break the toxic link’ between sovereign debt and banking debt.
Even to most naive and partisan commentators must admit that the link has not been broken.
To break the link between sovereign and banking debt there must be no expectation that the state has an implicit guarantee to fund banks in trouble. This requires the availability of a large backstop of funds. This will not be available.
The Bank Resolution Fund which the Taoiseach will agree over dinner on Thursday night will take 10 years to build up its funds. After a decade it will have €55 billion available to it. This has been estimated at only 0.2% of the total asset base of the covered banks.
The fund could realistically cover no more than one or two mid-sized banks.
Breaking the link between sovereign and banking debt needs something else, such as an ECB guarantee to underpin the system, but this is not available. In part this is because of splits in the ECB, but it is also because some countries, in particular Germany, have threatened to take the ECB to court if it provides the required guarantee.
An evaluation of the banking agreements to be finalised this week published in Monday’s Financial Times stated “without a backstop there is no point. It is not a banking union and should be rejected.”
I would not go this far, but I certainly believe that Ireland should not agree this as a final deal. At a very minimum we should put on the table the need for a formal commitment that the funds available for safeguarding the banking system of the Euro should be greater than 0.2% of its assets base.
In the 2 years that a banking union has been under debate the government has refused to ever say publicly what it wants from the process. There is no public record of any statement by the Taoiseach setting out what would be required to “break the toxic link between banking and sovereign debt.” This enables the Taoiseach to hail anything which emerges as a great victory – something which has now become a standard tactic for him in Europe.
Is the Taoiseach happy with this deal? Does he believe it represents the banking union we were promised?
The Taoiseach has been notably silent on the statement of Minister Noonan that he has effectively given up on retrospective bank recapitalisation and isn’t worried about it. This is a complete reversal of the policy of the last three years and it is not good enough that this has been allowed to be buried under the weight of the government’s on-going media campaign.
A commentator recently called Minister Noonan to be a “master of misdirection” in his handling of the media. This tactic has now been deployed by the entire government.
In case you’ve forgotten in June of last year Ministers Noonan and Howlin held a press conference where they were giddy their outlining how they had just achieved a breakthrough on financing banks. The agreement of the European Council to potentially directly recapitalise banks with EU funding – something Ireland had neither put on the agenda or lobbied for – was, they claimed, a great victory for Ireland worth potentially up to €60 billion.
Minister Noonan when asked what he was looking for said “It’s clear you’ve never been to the Fair of Glynn or sold a calf. Sure, if I told them the minimum, that’s what they would give me.”
Well last week it was revealed that in spite of his experience selling calves and visiting the Fair of Glyn he has got exactly nothing.
In that the government has given up, the minimum it owes the Irish people is a statement on what it looked for and why it has accepted receiving nothing at all.
We also need to hear why the government appears to not even be asking for full equality for Ireland in relation to its debts. We have received the same interest rates as all other countries, but the ECB is retaining its profits on holdings of Irish bonds. In the case of Greece it is returning these profits.
The ECB often, and quite rightly, points out that its credit has maintained the Irish and European financial markets. This is of course the duty of a central bank and not something where anyone should be asked to express gratitude. Equally, the ECB has lost nothing whatsoever from this support. It has ‘given’ Ireland nothing. It has lent money to Irish institutions which has been and will be returned.
The ECB’s holding of Irish bonds stem directly from a failed policy implemented before the ESM and other measures were agreed. After costs, the profits on these holdings have been estimated at around €1/2 billion. The ECB returns its profits on Greek bonds to Greece, it should return its profits on Irish bonds to Ireland.
No Irish minister, let alone the Taoiseach, has put this on the agenda. It represents nearly the whole amount of the health cutbacks which the government is so concerned about it withheld them until the week before Christmas.
If the Taoiseach and his government have formally given up seeking a reduction in Ireland’s bank-related debts, and if they are not seeking a return to Ireland of ECB profits form Irish bonds, then they should be honest enough to admit it and stop the misdirection.
Overall, the model of banking union which is being agreed conforms with the idea of a common control framework without any shared responsibility. This is not what Europe needs.
On Friday morning the President of the European Investment Bank will attend the Council for a discussion on measures to promote growth. The EIB has not even scratched the surface on what it could do. The main reason for this has been the decision of leaders to require national co-financing and other restrictions.
In the budget for next year the government has again cut capital spending more than necessary. This is part of the reason for the ESRI stating that the budget will act as a net drag on the economy next year.
The time has come for the government to take a more assertive and ambitious approach to leveraging EIB financing.
In relation to the scheduled discussions on defence policy, nothing has been produced which supports the case for any new initiative in this area. The current structures have not been given time to work and they cannot be said to have failed. As has been seen in a number of recent cases, even NATO members retain the right to disagree and go their own way on many issues.
Earlier this year Minister Shatter signalled that he would try to water down Ireland’s commitment to the triple-lock which is the core of our neutrality. He presented the idea that it was contradictory and we were given unsavoury countries a veto over our actions. This is an argument which has been behind the efforts of a wing of Fine Gael to erode neutrality over the years.
I and my party completely reject this. Yes the United Nations isn’t working as it should – but we must not abandon it as an essential part of the international system. Ireland has and always will have a limited defence capability. Focusing this on humanitarian actions is not only the right thing to do it has full democratic legitimacy.
There is no pressing need for a changed defence capability for the European Union and our policy at this week’s summit should reflect the will of the people and not the preferences of Fine Gael.
The situation in Ukraine is both deeply troubling and inspiring.
The actions of the Yanukovich government have been an outrage. You do not have to see Yulia Tymoshenko as a hero to understand that her continued imprisonment is a disgrace. The repeated beating up of peaceful protestors, censorship of the media and undermining of parliament are not the actions of a democratic government. The actions of the Russian government have not been those of a government which believes in respect and cooperation between nations. The fact that it appears to believe in an exclusive ‘zone of interests’ covering other countries is the rhetoric of ideologies that should have long since been buried.
In the face of this hundreds of thousands have taken to the streets. They have marched, sung and shouted their belief in future of democracy and progress in their country. Beside their own flag they have carried the blue flag of the European Union. After a period of on-going crisis this should remind us that the EU remains an inspiration – it remains the best hope for all who want a Europe of peace, democracy and development.
I warmly welcome the action of Catherine Ashton in going to Kiev and refusing to back-down on the Union’s core demands. If we ever give up on the basic requirement that every member and every associate must abide by democratic norms our Union will lose its entire reason for existing.
We could not and must not give in to the demands of Ukraine and Russia. We must continue to assert European values and stand with the Ukrainian people.
I hope that you Taoiseach will make a strong public statement of where Ireland stands.
Finally Taoiseach, the British Prime Minister has launched the latest element of his campaign to build domestic popularity by scapegoating the EU. He appears to be proposing that Britain adopt a pick and choose approach to agreed EU law. His coalition partner the Liberal Democrats have spoken out against this. We should also do so.
The European Union must be a rule-based community, where you respect the law until you succeed in getting it changed.