This delayed summit marks the last chance for Europe’s leaders to tackle the enormous and growing crisis which is facing the Eurozone. Europe needs them to agree a dramatic package of supports and the revision of failed policies. The alternative is damage to the economic and political fabric of the Union which may take decades to undo.
An unforgiveable amount of time has been wasted by leaders looking for easy ways out or clever ways of appeasing national sentiments. The process of halting and half-hearted actions has managed to escalate the crisis.
It is over two months since it became clear that existing deals are inadequate and that the Greek situation could engulf Europe. The contagion which forced Ireland and Portugal out of the bond market has not been contained and confidence has not recovered. Larger and more systemically important economies are now on the edge, with rising concern about bank capitalisation adding an extra layer of instability.
We have had a succession of regular and emergency summits which issued claims to have drawn a line under the crisis. Each summit has been followed by the crisis getting worse.
Today even Jean Claude Trichet, the high-priest of orthodox financial policy, is warning that Europe is on the edge of disaster. There is one overwhelming message before this summit: act decisively or be prepared for the consequences.
There is no room left for delay.
As the crisis has escalated so too have the measures required to defeat it. Europe needs the summit to deliver on a series of very specific agreements:
It must allow Greece to reduce its sovereign debts to a sustainable level.
It must provide for the recapitalisation of banks to take account of these and other debt write-downs.
It must ensure that the funds available to do this are large enough to tackle all current and potential needs.
It must commit to the reform of Euro governance which tackles the actual causes of the crisis.
It must end the destructive limiting of negotiations to a couple of the larger countries and start involving all member states.
Europe’s Leaders must talk to each other
The failure of Europe’s leaders to have an inclusive and active dialogue is at the heart of the escalation of the crisis in recent months. France and Germany having detailed discussions has always been a valuable part of achieving progress on big European issues. They often have seriously conflicting policies and bilateral negotiations are an essential part of helping the institutions of the Union to function.
However, this cooperation has never before been so exclusive of other countries and has never before included issues which affect so many countries in such a profound way. No major reform of the Union has ever been achieved in this manner.
More fundamentally, they should realise that you cannot reinforce European ideals by acting against them.
At the start of this year there was intensive contact between different countries on the way forward. In February the key principles were agreed – these being debt sustainability, sound bank capitalisation, larger more flexible funding and improved coordination. For reasons which are still unclear, the March 11th Summit confirmed these principles but delayed their implementation.
There were many fine statements about a resolve to act decisively but in reality there was little or no decisive action. The Ministers for Finance signally failed to finalise arrangements while market pressures were allowed to grow again.
The heads of state and government who should have been holding an intensive series of meetings stepped back and had few direct contacts.
The Taoiseach’s non-intervention policy is more inexplicable today than ever. Seven months into taking up office he has still not met a Eurozone leader away from the margins of a major Summit. In April he announced that he would lead a major diplomatic offensive but none has followed. In advance of the July summit he actually neither met nor phoned any other leader.
Having told the Dáil that he had not tabled proposals for the summit, he emerged from it claiming to have skilfully delivered an interest rate cut four times the level of what his government had been asking for. Once again it was spin rather than substance which was the priority. The search for things to claim credit for has trumped the harder work of trying to shape events.
The last time the Taoiseach had more than a snatched conversation with his good friend Chancellor Merkel was when he flew to Berlin for an electoral photo-op. Given that he has abandoned most of his policies from that time, the Chancellor is clearly in need of an update.
As the issues have become more serious the leaders of Europe appear to be spending less time directly engaging each other.
Franco/German cooperation is welcome, but it alone will solve nothing. In fact, the failure to consult others in a meaningful way makes it more difficult in countries such as Slovakia and Finland for governments to persuade parliaments and citizens to show solidarity with other countries.
The situation in Slovakia is that the Prime Minister has been left to sell a deal to parliament in the face of a perception that this deal is being imposed on Slovakia. Because there is no sense of their country having been involved properly in discussions even pro-EU parties feel free to attack it.
The Taoiseach’s meeting with President Barroso is no substitute to an effort by him to promote Ireland’s policies directly to other heads of state and government. Given that President Barroso has not been at either Franco/German summit he is in no position to negotiate about its outcome.
The Taoiseach should use this summit to insist on a return to the communitaire approach amongst leaders. If they do not get back to working together there can be no successful outcome.
Greek Debt Restructuring
In terms of specific items for agreement at the summit, the first must be the substantial restructuring of Greek debts.
The scale and pace of the budgetary adjustment being implemented by the Greek government is enormous. There have been problems, but yesterday’s agreement with the EU and IMF confirms that it is moving forward with necessary adjustments.
Greece’s particular difficulties are being made significantly tougher because of the constraints of Eurozone membership. The lack of the options of devaluation or unilateral restructuring puts a major limit on their ability to come out of the crisis. The attitude towards the Greeks that everything is their fault is ignorant of the facts. Europe is Greece’s problem just as Greece is Europe’s problem. Helping Greece is a proper recognition of the duties of a currency union which freely admitted Greece as a member.
The contagion argument is bogus if restructuring is done at the same time as providing a credible firewall for others. The markets have traded for some time on the assumption of a partial default. A large section of bondholders purchased at rates which had default priced in. But more fundamentally, the market can see when a debt is unsustainable.
Denying the inevitable just increases its likely impact.
It will be a bad outcome if the summit finishes without a comprehensive and generous plan for Greek debt.
The Summit must also provide a mechanism for recapitalising many more banks in recognition of both the Greek position and the fact that reserves need to be higher on an ongoing basis. German, French, Italian and Spanish banks are under pressure as well as those in smaller economies – which reinforces the idea that financial regulation is a trans-European issue and not one which can be brushed aside as a problem for the periphery.
It is a mark of this government’s abandonment of its pre-election policies of “Labour’s Way” and “not a red cent” were followed by the complete adoption of the restructuring proposals being prepared by its predecessors. In fact, they have even gone as far as to try to claim to have developed these proposals.
This is just another irrelevant political game.
What is highly relevant is that the recapitalisation policy is showing the potential to work and is helping, albeit slowly, to restore confidence.
As the government knows but likes to ignore, agreement to burn many bank bondholders was sought last year but rejected by the key funders. Unilateral action was not and is not an option.
The argument we were faced with last November was that there was a risk of contagion which could be a European equivalent of Lehman Brothers. Lehman’s happened at a time when there was no planning for recapitalisation and no decent information about the exposures of different banks. If Greek sovereign debt is restructured and if banks have reserves which meet rigorous stress tests then this contagion fear is no longer valid in any way.
At the summit the Taoiseach must insist that the proposal to restructure Irish bank debt now be agreed.
For the bank and sovereign bailouts to restore confidence they must be backed up by a dramatically larger fund. Half measures haven’t worked. It is only when markets know that there is enough funding available to support larger countries that they will feel more secure in lending to them.
If this requires the leaders to have a direct conflict with the ECB about leveraging already agreed funding then so be it.
Reform Focused on the Real issues
These measures relating to Greek debt, recapitalisation and adequate funding are what is required to deal with the crisis in hand. They will address the lack of confidence. They will provide certainty that the members of the Eurozone have taken actions which are proportionate to the crisis in hand.
The summit will apparently also be presented with proposals concerning the reform of governance within the Eurozone to include not only increased coordination but also a substantial increase in central fiscal powers.
This has nothing to do with tackling the crisis at hand and actually threatens to distract the Union – wasting time in interminable and possibly futile discussions.
On top of this, many of the proposals do nothing to address the core weaknesses of the currency union which have been exposed over the last three years.
They owe more to a pre-crisis agenda than one which has critically engaged with the evidence of what has gone wrong.
This crisis is not one which would have been prevented by greater coordination of fiscal policies. Throughout the decade before the recession the European Council, Commission and Central Bank produced report after report about the fundamental strengths of the Irish economy and regularly praised our fiscal policy. In 2007 a detailed research report on Ireland by the OECD predicted medium-term growth of 5% per annum. Increased coordination will be based on the same expertise – it is no panacea.
Those who care to look back can see that it was Germany and France in 2004 who led the way in breaking agreed deficit limits and who brushed aside criticisms of their actions.
The idea that this is a crisis caused by a wild periphery which ignored the advice of the restrained centre is superficial nonsense.
The stability and growth pact has comprehensively failed – and an agenda which is based mainly on ways of strengthening its enforcement will also fail.
For example, there has been no consideration of the absurd provision that the punishment for a country getting into budget trouble should be to make those troubles worse through fines.
The example of the currency union of the United States is instructive, in that the federal government has never had some of the controlling powers being proposed for the Eurozone.
One glaring omission from the debate has been the need for a radical reform of the working of the ECB. It is a young institution which is as arrogant as it is powerful.
It has made an enormous number of bad policy decisions over the last few years. It has followed the most inflexible and orthodox policies of any major central bank, inflicting substantial pressures on countries and citizens in the process.
If you want to see a bank out of touch with reality all you need to do is to read a speech given to the London School of Economics by Jean Claude Trichet in June. At length he praised the ECB’s work in the past decade – admitting no error whatsoever in any policy area.
He bizarrely talked about achieving a “precision landing” for European inflation and he justified being the last central bank in the world to keep raising interest rates after the recession had started. This he followed with a defence of raising them again this year, just as the recession took another turn for the worse.
Four months later he is warning the leaders of Europe that the financial system is on the edge of a precipice.
The ECB’s mandate must change. Employment levels must be included in addition to inflation.
In changes which do not necessarily require treaty amendments, it needs to be given increased powers to oversee national financial regulation. A hawkish approach to bank capitalisation and risk management is far more relevant to addressing the causes of the current crisis than a hawkish approach to inflation.
The debate about reforms should first start with a proper consideration of the many factors which led to today’s crisis. Simply saying, ‘let’s have a fiscal union’ is not a policy and it’s certainly not an answer.
There is a lot which can be done within the existing treaties, in particular in relation to financial regulation. There are also a lot of administrative changes which would help, including a greater diversity of advice and oversight from within the institutions.
Any attempt to rush structural decisions will take a long-term issue and use it make to the short-term crisis worse. Let’s deal with the issues in hand and not complicate them.
The silence of the government on most of these issues has been striking. There has been no detailed statement about what the government’s policy is. Are we supporting Greek debt restructuring? Are we demanding that bank bondholders be burnt? What institutional changes are we supporting? Have we tabled any policies for discussion?
The Taoiseach and the Tánaiste have delivered a few comments on the side of media events but there has been little else. Equally they have not initiated a round of contacts with Eurozone colleagues. One meeting with the Commission President is not an adequate preparation for such an important Council summit.
This summit may well be Europe’s last chance. There is a desperate need for decisive action and real leadership. It has been missing for most of this year.
The crisis has been allowed to become an emergency.
Time has now run out and this summit meeting has in its hands the future of the Euro and the hope of many millions throughout the Union.