Last week the leaders of Europe held their 14th summit devoted to the economic crisis. Having watched events escalate to the stage where the scale of the emergency now threatens the foundations of the European Union, the leaders expressed their determination to act decisively. They announced that they were finally going to face down the crisis, prevent contagion and move Europe towards recovery. The challenges were clear and public expectation was high.
Emerging from the marathon session the leaders talked of having agreed a final and decisive package which would finally draw a line under the crisis and provide a foundation for a return to growth. The Taoiseach joined this consensus and expressed his pleasure at the outcome.
The rise in stock markets seen on Thursday was quickly seized upon as proof that confidence had been restored and that the deal was working.
Unfortunately the experience of other summits, and particularly the July and March summits, is that a couple of days’ information from the stock market is about as bad a predictor of the course of the crisis as it is possible to get.
The summit’s fifteen page communiqué is a very sobering document. No matter how much you want the deal to work, the detail gives little or no hope. It falls short on every one of the key issues; it provides no actions, only targets; it rigidly adheres to failed policies; it ignores the real causes of the crisis; it does not provide funding as a firewall against future contagion; and, worst of all, it commits Europe to months more of confidence-sapping negotiations. The leaders once again failed to put aside narrow agendas and work together in the spirit which created and built the Union.
In relation specifically to Ireland, this is the summit where the government of self-praised tough-talkers chose to propose nothing and negotiate nothing – not even raising the issue of the repayment of a €700m bond today for which there is no justification. For yet another summit the Taoiseach called no leader, met no leader and tabled no issue. He sat on the sidelines waiting to find something for which he could claim credit – using his time to script brazen articles about his own record.
It was a failed summit for Europe and a failed summit for Ireland. The events of the last two days are the logical outcome for a deal which is incomplete and inadequate.
The Greek situation is not the cause of the overall crisis but it is its most dramatic expression. A core objective for the summit was to agree a write-down of Greek debt to allow it to be sustainable. Austerity is inevitable for Greece because of the size of its deficit – but any continued austerity programme has to be based on the idea that there is an end point. The deal fails to deliver this and that is why it is falling apart.
The summit agreed to target reaching a debt limit of 120% of Greek national income in 9 years’ time. This is based on growth projections from the European Commission which are widely viewed as unrealistically high. Equally, the Commission failed to factor in the much higher ongoing cost of borrowing which Greece will face when it eventually returns to the market. Greece does not have Ireland’s export base and it has no ability to suddenly create growth potential during a period of austerity.
The agreed figure appears to be based on doing everything possible to avoid the ECB having to take losses on bonds it bought on the market before last year’s bailout. Policy on Greek debt is being driven by the demands of the ECB not by what is needed.
The fact that the exact details of how the private bank losses on bonds will be implemented are unknown is remarkable given that this has been under discussion for two months.
The call for a referendum is clearly motivated by the parliamentary situation and pre-election manoeuvring. Irrespective of the motivation, Prime Minister Papandreou is faced with a deal which he cannot sell as a final answer to Greece’s problems. He cannot say that there is a deal which shows how his country can return to a secure level of public service delivery within the next few years.
What is required is for a deeper cut in Greek debt, with the ECB accepting its role in this. Nothing else offers the possibility of a programme which can restore end Greece’s sovereign debt crisis and earn public legitimacy.
The parties in this House calling for an Irish referendum on our EU/IMF programme forget that this was their position in February and it was rejected. They have also continued to refuse to show how they would fund welfare, education, health and every other public service once the lenders had been told to get lost.
Increasing the funds available for any potential future bailouts was another core objective for the summit. The headline figure of €1 trillion is at the lower end of what is required. Given that Italy requires €250 billion next year just to refinance existing debt, the new figure does not provide the definitive answer which was promised.
The detail of the communiqué shows that the €1 trillion is nothing but a general aspiration at the moment. On page 6 it states that the existing funds will be leveraged by over four times with no extra money from any EU country, with no new basic rules and “in the context of the agreed instruments”. What is actually involved is a highly risky insurance scheme which has yet to be detailed and making phone calls to China, Brazil and others who might have money.
The deal is so complex and so conditional on a string of agreements with others that it is almost designed to undermine confidence not to build it. The simpler and more credible approach of using the ECB to leverage national funding has been discarded, once again putting the protection of a failed policy framework ahead of doing what’s necessary.
As was seen in March, leaving detail to the Finance Ministers is not the same as something being a done deal. In March, they failed completely to complete an agreement which was effectively ready in February. They kept failing to act and thereby helped make the situation much worse, so that by July another crisis summit was required.
Given this, leaving the finalisation of measures to ECOFIN was a bad decision.
Recapitalising banks to take account of uncertainty and Greek default forms a significant part of the response, this time of all 27 members and not just the Eurogroup. The higher capital ratios are welcome, but it will surprise many that there is no detail provided about what is actually involved. The communiqué says that private funding should be the first option, followed by national governments and finally possible loans by the EFSF to those national governments.
This is cumbersome and unclear. It also fails to address the legitimate case for Ireland to restructure key elements of bank-related bonds.
Perhaps the most depressing part of the summit’s communiqués relates to the section on reform and governance within the Eurozone. It is based on a flawed and blinkered understanding of the crisis. Almost bizarrely it fails to even mention reform of financial regulation and the institutions of the Euro. It focuses solely on fiscal control and advances a pre-crisis agenda which is already distracting the Union from the urgent business at hand.
I cannot understand how the Taoiseach could have agreed the wording on page 9 of the communiqué where it states “Pragmatic coordination of tax policies in the euro area is a necessary element of stronger economic policy coordination to support fiscal consolidation and economic growth”.
Coordinating tax policy has nothing to do with this crisis, has nothing to do with fiscal consolidation and nothing to do with economic growth.
The control mechanisms of the Eurozone, most particularly the stability and growth pact negotiated during the Irish Presidency of the European Council in 1996, concentrated solely on public sector imbalances. However it is private sector imbalances which have caused much of the damage to the Eurozone.
The ECB has fundamentally refused to operate as a normal central bank. The fiscal problems in the UK and US are worse than in the Eurozone yet the crisis is not hitting them as badly. Their central banks have embraced the role of lender of last resort and have been highly creative finding new ways to intervene in the markets and the wider economy. In contrast, the ECB has embraced a destructive orthodoxy, proudly seeking out ways of not acting rather than showing a real urgency or any creativity. The support it is giving to banks and to sovereign bonds should not be seen as some exceptional actions deserving of praise – this is a basic part of their job and the reluctance to go further is a tragic error.
The ECB has been behind the curve at every significant point in the crisis and remains committed to this approach. There is no part of the deal announced last week where the ECB makes a significant contribution.
What is most damaging about the flawed reform agenda which is contained in the summit’s communiqué is the fact that it commits member states to a process which cannot reach a positive outcome and which will involve a major loss of time exactly when we can least afford it.
The President of the Council is due to propose measures including treaty changes next month. Final agreement on measures is due to be reached by next March. This is an absurd timetable.
The can be no progress without genuine consultation between and within all member states. There must be an opportunity to consider the real failures of the Eurozone, not just the dated fiscal control agenda of a core group.
Ireland’s Failure to Contribute
The issue of reforms and potential treaty changes is one of many where the Taoiseach and government have failed to outline or promote their policies at this or previous summits. The more we discuss EU matters here the greater the lengths the Taoiseach goes to avoid responding to basic questions about his policies.
Last week’s summit marks a very significant moment in the short history of this government. After eight months of posturing it finally became clear that the government has no European agenda and it has formally abandoned all of its pre-election commitments.
The only sentence in the 15 page communiqué which refers directly to Ireland praises the implementation of an agreement which Fine Gael and Labour condemned and a budget they voted against. Otherwise, Ireland and its demands are completely absent. As the Taoiseach and Minister Creighton revealed under pressure in this House, he sought no meetings with other leaders; he made no calls to other leaders; he tabled no issues; circulated no papers; and made no demands. This is exactly as it has been for eight months. In July, the Greek deal was extended to every country so he could rush out of the Council meeting and claim to have negotiated something, but he wasn’t as lucky this time.
Every member of this government and every one of those sitting behind them were elected on a commitment not to pay the full €700 million Anglo Bond being repaid today. You can dress up your position in all of the brazen nonsense you want, but you can’t wriggle out of your own clear words. In fact, the value of the bond collapsed in February as a result of Fine Gael and Labour’s statements. Yet since then they have done nothing to implement their commitments. It is almost incredible the lengths which they have gone to not to burn these bondholders.
A major haircut for these bondholders was a demand of the last government which could not be implemented because others argued that it could only happen in the context of a comprehensive deal. The burning of junior bondholders was insisted on and delivered on, though the Taoiseach is now writing articles claiming that he was responsible for decisions taken before he was in power. The demand for burning others was repeated in negotiations in both January and February as part of the successful negotiation of the principle that Ireland’s debt needed to be more sustainable.
Both July’s deal and this deal remove all previous barriers to burning these bondholders but the government has refused to even try to do it.
Put aside the spin and what has happened since then is a complete refusal to actually push something which the government claimed was fundamental when it was looking for votes. Minister Noonan went to Washington and briefed RTE about how much he would do but wouldn’t raise it with Secretary Geitner. He then said he would raise it with President Trichet in Frankfurt but didn’t.
At the four crisis summits he has attended the Taoiseach did not table any measure to allow the burning of these bondholders. He did not meet Mr Trichet about it. He did not ask Mr Draghi about it when appointing him as the new ECB President. He did not raise it with his close friend Chancellor Merkel. He made a solemn promise of “not a red cent more” which evaporated as soon as he had got the votes he was targeting.
During their years in opposition, the government parties developed a very skilled political operation. As everyone saw during the general election, they put enormous effort into the presentation of policy rather than its substance. As the Taoiseach said repeatedly, their only focus was on polling day.
In government they have continued with their well-oiled media operation – with an ability to hype even the most minor development and to make claims which are divorced from reality. That’s how you can remove a net €250 million from the economy but claim that it is a ‘jobs initiative’.
On major issues and small ones alike, finding things to claim credit for has taken priority over actually setting out new policies. In area after area this has been a deeply cynical, increasingly arrogant and surprisingly inactive government.
The Taoiseach’s ridiculous article today is a classic demonstration of a government which is self-righteous and brazen in equal measures. Claiming credit for growth which began before you took up office takes some special brand of cynicism. Every day ministers industriously praise themselves for a budget they voted against and for a bank restructuring plan which was written by Brian Lenihan. In February you said the export-led recovery was an illusion, now you claim to have created it.
You voted for the bank guarantee in opposition and renewed it in government but still write articles attacking it. You lecture people about trust and reform but systematically fail to consult or release basic information before forcing decision through the Oireachtas.
In many areas the government’s “politics first” strategy is disappointing, but in others it is very dangerous. The failure to set out an agenda or even talk about key issues with other European leaders is beyond doubt. It doesn’t matter how many ministers the Taoiseach sends out to praise him for negotiating deals he had nothing to do with – his refusal to even try to honour a major pre-election commitment will not be forgotten.
The Next Crisis Summit?
Last week’s deal will not hold. The only question now is whether or not there will be an opportunity to try again? Everyone who believes in the European ideal hopes that there will be another chance. That Greece’s debt will be reduced to a sustainable level. That the bailout fund will be finalised and sufficient. That banks will have enough capital. Most of all that the leaders of Europe will start to work together on a real reform agenda which learns the lessons of the crisis and helps to restore growth to much of Europe.