Europe’s Leaders Once Again Fail to Deliver Real Reform – FF

Published on: 21 January 2014


December’s meeting of the European Council produced no major breakthrough or even any significant news.  It involved a series of general discussions and the formal noting of decisions signalled long in advance.  In spite of this it was a very significant meeting.

It will be remembered as the summit where Europe’s leaders effectively announced the end of any attempt to introduce radical reform in the face of the biggest economic and social crisis in the Union’s history.

Faced with an unprecedented challenge the Taoiseach and his colleagues have agreed no more than incremental steps.  They have not agreed a credible long-term programme to return sustained growth to the Eurozone or the Union as a whole.  They have decided to be by-standers in the fundamental challenge of job creation, putting their faith in the mantra that deflating economies through universal austerity and market reforms will magic growth in a manner unprecedented in modern history.

For Ireland this has many implications, none of which are good.  While the Taoiseach maintains his priority of putting public relations first, he has refused to address the absence of any real growth strategy at European level.  No economist in the Union or in any country has increased their growth and employment predictions arising from the Council’s agreements.  It hasn’t happened here and it hasn’t happened in any country.

While the Taoiseach has told us on a number of occasions that everything is looking up for the European economy the evidence is that the Eurozone is lagging dramatically behind other economies – including the United States and Britain, both of whom were hit as badly at the start of the crisis but are well ahead in terms of growth rates, employment creation and deficit reduction.

A restoration of confidence is important.  Everyone wants a broad and strong return to growth.  The problem is that every time the growth fails to materialise the hit to confidence is much more damaging.

While the communique repeatedly states that policies are working there was clearly also a decision to nod to the reality of the mountains of contradictory evidence.  Buried in the middle of the communique is the statement that the recovery is modest, uneven and fragile”.

ECB President Draghi has gone even further, saying that he is extremely concerned about whether growth targets will be achieved and that he believes that deflation is a real risk.

While we have seen positive signs here and the government is in full campaign mode to claim credit for everything, the situation is equally fragile.  A two-tiered recovery is the best that it can be described as. 

SMEs continue to find credit difficult to obtain, regional disparities are growing and the government has missed every growth target it has set since taking up office.

In spite of these warnings what we got was another summit without the urgency or ambition required to address the serious flaws in the work of the Union and their deep impact on its citizens. 

Leaders have declared themselves “out the gap” and are now mainly focused on finding ever more creative ways of exaggerating the impact of the decisions.

The Taoiseach has once again delivered a complacent report from a European Summit. He has fully subscribed to the new orthodoxy that everything is working and no major changes are required. 

He has also signed up to an agreement which has explicitly ended any prospect that stimulus funding would be available through the Union or from most national budgets. He has not referenced this but it is there in the final conclusions.

The length and depth of the crisis which has hit most of the Eurozone was not caused by the absence of stronger controls of national budgets.

Even the principal architect of the Euro Jacques Delors has said that the root cause of the crisis felt in Ireland and elsewhere is to be found in fundamental design flaws in the Euro. 

These involve the lack of a banking union, the limited mandate of the ECB and the absence of central funds to help countries stimulate their economies.

 

Banking Union

At the summit leaders signed off on the final elements of what is called a banking union.  It is no such thing.  The toxic link between financial debt and sovereign debt has absolutely not been broken.

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 most important final agreement for a ‘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 will initially be more about coordination than common supervision, but the ECB has the potential to push this further. 

Ireland should join the ECB in calling for the removal of any opportunity for governments to interfere in oversight matters that should be independent.

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 because markets know that states will not allow their banking systems to collapse.  This will not be available.

The Bank Resolution Fund which the Taoiseach signed up to 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 European banks.  It is so small that the Commission is trying to stop it being used for as long as possible.

Ireland should not have agreed this as a final deal.

At a very minimum we should have put on the table the need for the funds available for safeguarding the banking system of the Euro to 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.” 

How can he claim to be happy with this deal?  It is not what was promised and it does not provide long-term stability for the financial system of the Euro.

The most significant thing to come out of the summit for Ireland was unplanned and it was the confirmation that the Commission is no longer supporting retrospective bank recapitalisation for Ireland. 

Taking his cue from the Taoiseach’s regular partisan comments that the origin of all problems lies with his political opponents, President Barroso stated that everything was Ireland’s fault and no help should be provided. 

This is the logical outcome of the government’s strategy on putting all its efforts into claiming credit for outcomes rather than pushing to influence them. 

Nowhere on the public record do you find the Taoiseach stating clearly that the justice of Ireland’s case requires further significant relief from bank-related debt.

With the exception of one comment in Paris a year and a half ago he has never set out the case that the scale of the debt taken on by Ireland directly relates to the failure of wider European policies.

As independent commentators uniformly agree but our government will not admit, if the current EU policies had been in place four years ago there would never have been bailouts in Ireland, Portugal and Spain.

In June 2012 Minister Noonan was asked how much of the potential €60bn would come Ireland’s way for recapitalisation.  He replied “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.”

If we got the minimum then it appears that we asked for nothing.

The panic reaction of the government to the revelation that there is no campaign to relieve bank-related debt was aptly shown up in the interview which the Minister of State did from Brussels on the second day of the summit.

Amongst a claim of everything being grand and on track he even claimed that “the promissory notes have been ripped up”.  They have of course been converted into formal sovereign debt and all savings have gone to cover budget holes from lower growth and spending overruns.

 

Universal Austerity Confirmed

There are countries, such as Ireland, where the need to consolidate public finances is inevitable.  However there are others where there are alternative routes.  It is a major failing of the EU’s leaders that they have continued in a “one policy fits all” approach. 

This obliges even countries with significant flexibility to reject stimulus spending.  It ends the possibility of balances within the Eurozone going both ways in order to benefit the whole.

The inability of the EU itself to help states in trouble means that it is focused primarily on control measures.

Buried within the communique,that was issued after this summit is a very depressing confirmation that this failed policy is to be retained. 

It was agreed by the Taoiseach that all solidarity measures should be funded within the existing budget and that the main route to growth is the reform of the labour market and trade.

I can understand how Fine Gael would sign up to such a restrictive view of the economy; how this can be reconciled with “Labour’s way” I have no idea.

No matter what the Taoiseach says, an EU policy which actively opposes stimulus, pushes reduced spending and does not target regions most in need is not a policy for growth and jobs.

The failure to reform the Union, to make it more active and fit for the purpose of helping countries, will be recorded by history as a failure of leadership by this generation of EU leaders. 

December 2013 will be remembered as the time when the European Council ended its efforts to respond radically to the largest crisis in the history of the Union.

 

Defence

The citizens of Europe will be surprised to know that the bulk of time at this summit was spent on defence matters rather than social and economic issues.

The carefully worded conclusions from the summit do not contain any overt challenge to the neutrality of Ireland and some other member states.  They do, however, contain no proper acknowledgement of this either.

There are two significant points of concern which Ireland should have mentioned but does not appear to have done.

First of all, there are proposals to direct procurement and development activity into specific areas, in particular unmanned drones and air-to-air refuelling.  This is not a peacekeeping-focused agenda. 

These are areas which have nothing to do with the type of activities which interest Ireland and other countries who have no interest in planning for participating in international conflicts.

It is an agenda tightly focused on the interests of major defence contractors who do business with states who maintain a conflict-participation capacity.  Under no circumstance should Ireland support a direction of any common EU capacity to these areas.

Secondly there is the statement that the Commission will look for opportunities to target research funding from Horizon 2020 to defence-related areas.  This is absolutely unacceptable.

The research programme is already insufficient.  Through the efforts of our Commissioner it has been targeted on major economic, social and health challenges facing Europe.  No redirection to drone development or other defence priorities should be countenanced.

Before the summit the Taoiseach roared “nonsense” across the chamber when he was told that we do not trust Fine Gael’s policy of wanting to move away from the UN and toward Europe in relation to defence policy. 

He should take the time to read his party’s own policy published during his own leadership – and also the informed leaks from Minister Shatter to the effect that the UN Security Council should not be part of the ‘triple-lock’ underpinning our neutrality.

 

Eavesdropping

Much of the international coverage of the summit focused on revelations of American data collection and eavesdropping in Europe.  The Taoiseach’s reaction was disappointing .It is not enough to say that he “hopes” there was nothing impacting on Ireland. 

Equally his refusal to ask the British government for assurances that it did not intercept our communications during Northern negotiations is a disgrace.

 

Ukraine

The summit adopted quite general conclusions relating to Ukraine.  I support High Commissioner Ashton in her refusal to accept the demands of the Russian and Ukrainian governments.

There comes a point where the behaviour of certain governments can no longer allow business as usual to proceed.  Both the Russian and Ukrainian governments are members of the Council of Europe.  They have both signed the European Charter of Human Rights – and they are both regularly denying basic rights to their citizens.

The people being beaten on the streets of Kiev are there because they believe in democracy and human rights.  They are there because they see Europe as their best hope for stability and development. 

Europe must stand with them.

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