Micheál Martin TD, Leader of Fianna Fáil
Dáil statements on forthcoming European Council Summit
Wednesday 30th November 2011
A month ago the leaders of Europe emerged from another emergency summit and announced that they had taken steps which would finally contain the sovereign debt crisis. In only a matter of days this was shown to be nonsense. The crisis has dramatically escalated since then.
There is no longer any room for doubt – a failure by the leaders of Europe and ECB to change their policies will lead to the end of the Euro, probably within weeks.
This was seen as impossible at the start of this year but is the subject of urgent contingency planning in every country and every major international company.
The economic and social implications of the disintegration of the Euro are almost too big to imagine and would turn a crisis into a catastrophe.
The mistakes of the last year and a half have been enormous. Adherence to irrelevant fiscal and monetary orthodoxies has escalated the contagion every time it has been reasserted. Summit after summit we have heard about lines being drawn under the problem and about confidence being restored. Each agreement has failed because the fundamental policies underlying them have failed. This was debatable for a while but it is now almost six months since the need for a radical departure became crystal-clear.
But it is not too late to pull back from the brink. There is one final chance left to save the Euro and to prevent a failure of truly historic proportions. It is still entirely avoidable.
It is also not too late for the government to set out a policy and launch the diplomatic initiative which it has talked about for nine months but failed to actually implement.
The Council’s Agenda
The most incredible thing about next week’s summit is that there is still no indication of any specific proposals which will be on the agenda. Going by the words of Minister Noonan as he went into the Ecofin meeting yesterday, our own government has no idea what will be proposed. If it does, it is going to great lengths to feign ignorance about specific proposals and it is once again refusing to tell the Dáil about them.
Through a combination of half-rumours and speculation it is agreed that everyone knows how serious things are – but that’s as far as it goes. There are no papers in general circulation. There is no inclusive discussion or negotiation. Most of all there is no attempt to abide by the principle of solidarity which created and built the most successful multi-national organisation in world history.
What is deeply worrying is that nearly all public statements from participants have focussed on a fiscal reform agenda which is utterly marginal to the crisis in hand. Countries with a much worse fiscal situation than the Eurozone are in a much stronger position and no one is talking about them facing default or being pushed out of the market. Yes, there must be stronger fiscal rules – but anyone who thinks that these will restore market confidence is choosing to ignore reality.
The Core Problem: the ECB’s policies
As things stand there is one core problem which has brought Europe to the brink and which must be addressed if the Euro is to be saved – the ECB’s policies have destroyed market confidence in Eurozone sovereign debt.
This is not a matter of coming late to this issue, I have been raising it constantly over many months and Fianna Fáil tabled a motion specifically about reform of the ECB back in July.
Over the last two years it has steadily become clearer that the ECB, or at least the group which wields the most power within the ECB, wants to tackle this unprecedented crisis within rigid policies which were developed for a type of economy which no longer exists.
With an arrogance which is out of all proportion to the record of the Bank, the ECB has been absolutely steadfast in refusing to see how its policies are destroying the ability of countries to fund their public services.
The Lender of Last Resort
If the ECB were functioning properly, it would have long ago shown the markets that it was ready to buy sovereign debt at issuance – in other words to be the lender of last resort. Its potential resources would be unlimited and would cause bond yields to fall significantly. The evidence of the United States and Britain confirms this.
The actions of the ECB in the secondary market have actually made matters much worse. The repeated statements of how the funds available are limited have shown a half-hearted commitment. This bond buying has actually encouraged private sources to leave the market. They have been entirely rational in seeing an opportunity to secure their funds and avoid the escalating risk which is being driven by the refusal to enter the primary market.
It is the risk that countries may not be able to raise new debt to repay maturing debt which is driving rates up, and current policy is making this worse. It is highly likely that this avoidable dynamic helped push Ireland and Portugal out of the market in the last 12 months.
It is not by accident that countries have faced higher bond costs every time the ECB has reaffirmed its limited commitment to secondary bond purchases and outright opposition to purchasing them at issuance.
This morning’s reports from Ecofin suggest that the ECB is now in the ridiculous position of supporting a major fund to support countries but only if it doesn’t have to give the money.
With Italy, Spain and Belgium on the brink of being priced out of the market, and with the rating of all countries under threat, the ECB is on the verge of being a central bank which killed the currency it was established to run.
Immediate Action is possible
The Bank is quite right in saying that the legal basis upon which it is founded is restrictive. There is no doubt that it was set up to be vigilant against inflation and it was banned from buying debt directly from member states. Where the ECB and the handful of national leaders who are clinging to a ‘no change’ policy are entirely wrong is their claim that there is nothing more which the ECB can do.
Within their separate powers under the current treaties the European Council and ECB could tomorrow take action which would restore confidence in the Euro.
The Inflation Mandate
First of all there is the issue of the ECB’s inflation mandate. The fundamentalists argue that it can do nothing other than target inflation in the manner in which it is currently doing. This is just not true.
Under Article 3 of the Treaty on European Union the ECB is also obliged to be concerned about the general economic objectives of the EU. These include the objective of high levels of employment and growth.
If it wants to be it can be flexible. It can be equally concerned about deflation. It can change its short and medium-term targets.
Funding sovereign debt is inflationary, but how this fits into a short, medium and long-term set of targets is flexible within the current treaties.
The Euro’s gravestone should not record “committed suicide in the name of an inflation target of below but close to 2%”.
The treaties do give the ECB independence and they do require the Council to refrain from undermining this independence. However those who have been actively attacking the idea of the ECB changing its policies have a freedom to speak which others should adopt.
Next week the leaders should assert the need for the ECB to recognise the wider economic part of its mandate.
Legality of Existing Bond Purchases
Some fundamentalists have questioned the legality of the current bond-purchasing programme. This needs to be addressed resolutely. Under Article 125(2) of the Treaty on the Functioning of the European Union the Council has the right to clarify certain matters in relation to actions of the ECB in cases such as this. This right should be used immediately to state that existing bond-buying programmes are fully legal within the current treaties.
The same power should be used to facilitate a mechanism to show that whatever amount is required to back up the issuance of sovereign debt will be made available. The ECB cannot buy the bonds directly but it can enable an unlimited fund which could do this. Whether it is through the IMF or another entity is now largely irrelevant. The October solution of touring the capitals of the world in a whip-around failed, so it is the ECB providing the funds or they will not be there. The ECB can leverage whatever amount it wants and the legal basis is there if it chooses to use it.
Any summit agreement next week which fails to include an immediate measure allowing effectively unlimited intervention in the sovereign bond market will mark the end of the Euro.
Fiscal Reform Agenda
The only thing which has been clear in the government’s approach to Europe in the last three months is what it is against. It is against treaty changes which have to go to a referendum.
What it has missed is the more important point – which is that the agenda of significantly increasing central control over fiscal policy is, at best, a longer-term issue which has nothing to do with addressing the crisis at hand. That most of the proposals would require treaty changes which would not be ratified is also true.
At the start of the year a new programme of fiscal coordination was agreed and has not yet been through even one cycle.
More fundamentally, the ‘fiscal union’ agenda is another example of a flawed proposal which does not deliver what it promises. A fiscal union cannot be solely about setting overall limits for everyone. A genuine fiscal union would involve a dramatic increase in the central budget and in the transfers from wealthy countries to poorer ones.
The budget currently under discussion for the European Union for the next few years amounts to 1% of Europe’s annual income. No country proposing a so-called fiscal union is proposing to increase the resources they give to the Union. Their proposal would effectively place a barrier to development on all poorer states – obliging them to accept limits but be given no opportunities to grow.
A measure which would genuinely promote confidence in the willingness of the Eurozone to coordinate fiscal policy would be a much larger, Eurozone-specific budget to fund cohesion and promote growth. It would also provide a serious incentive to comply with fiscal limits.
Since we last discussed a European summit the Taoiseach has ended his policy of not holding bi-lateral summits with Eurozone leaders. His visit to Berlin, as with most things to do with his government, showed a dedication to putting media spin ahead of hard substance. He disagreed with his hosts on a number of unavoidable matters and sent his staff out to talk up these disagreements just as he had done in March after a far from unusual discussion with President Sarkozy.
What the Taoiseach failed to do in Berlin was to set out a definite agenda or make a clear appeal to his hosts. He spent more time claiming credit for a budget he voted against than in actually providing specifics about urgent policies.
In contrast, Radek Sikorski, Poland’s excellent foreign minister used his visit to Berlin on Monday to speak with a directness and urgency which we should all applaud. Even though his country is not in the Euro, he spoke passionately about its future and appealed to Germany to show leadership.
The history of relations between Poland and Germany is a very dark one, so it is impossible not to be struck by his statement “I fear German power less than I am beginning to fear German inactivity”.
I have no doubt that the motives of Germany’s leaders are sincere. They have a profound attachment to a very specific view of the role of a central bank and of fiscal rules. No matter how sincere they are – they are wrong. The country which has done more than any to build up Europe and which has shown a deep solidarity within the Union now stands as its biggest threat.
Before next week’s summit the Taoiseach owes it to the people of this country to put aside the generalities and be open about what he will demand at this summit. Being against anything which requires a referendum is not a policy it is a political tactic.
President Van Rumpouy is due to propose reforms to the Union but Ireland has tabled no measures for inclusion. We need to be resolute in opposing an agenda of ‘fiscal union’ which is purely about control.
Much more than this we need to demand that the crisis at hand be tackled before any other issues are addressed.
Next week there will be agreement on effectively unlimited funding to buy Eurozone bonds or there will soon be no Euro.
The leaders of Europe have so far shown none of the required urgency, imagination or generosity required to tackle this crisis. For the sake of Europe and its citizens we must all hope that this will immediately change.