Paul Sweeney: Economics editor, Martin Wolf, writes in the Financial Times: “I find it unforgivable that the last Irish government guaranteed bank debt so insouciantly and that the rest of the European Union has supported this decision. For a sovereign to destroy its own credit, to save creditors of its banks, is plainly wrong. It does not make it better, but worse, that it is doing so largely to protect financial systems in other countries.”
He is so right. The question remains, will the new Government seriously address this problem with our EU member state partners. It will test the mettle of the Union and of the meaning of partnership. Wolf points out the in the context of the Eurozone, Ireland’s problems are almost small. The full article is here.
18 comments:
Given that Ireland has not contibuted one red cent of net contribution to the EU coffers since joining and that Ireland is in this mess primarily due to woeful and abject governance, can anyone think of some good reasons that the new government might advance to persuade their core EZ counterparts to persuade their voters, living in well-governed countries, to consent to use some of their tax Euros to reduce Ireland's burden?
Plausible reasons (not that I necessarily agree with them all) are:
Damage limitation - make a deal that prevent messy default scenarios. Certainty about staunching wounds may be better than future shocks to EU financial systems.
Save EU ambition - admit some of the flaws in the euro rules and regulations, and swallow some costs, in order to keep continuing integration of Europe on track and avoid a lost decade of resurgent national self-interest and destructive competition between member states.
Foster co-operation - give some assistance to peripheral countries as part of an exchange that will lead to more pooled sovereignty on economic matters.
Compete globally - avoid the loss of a decade in strengthening the overall euro economy and currency, in the context of increasing global competition from nacent industrial powers (China, India, etc.)
Long-term profit - calculate the cost of helping Ireland et al, and compare it to the long-term benefit to the EU economy if our economies are functioning well. Maybe develop a mechanism, like some kind of EU-level tax, that will help extract some of that benefit back to EU coffers.
@Nat O'Connor,
This is excellent grist for the mill. Either you've being giving this some thought or you have a lightning brain to respond so quickly and comprehensively to my question. Though, like you, I wouldn't necessarily agree with all of them, this, I think, is where the public debate should be focused. As well as examining governance and structural economic reforms that would be first and foremost in our own intersts, but would also help to convince our EU partners of our bona fides.
This mess is fundamentally a problem of governance - at the national, EZ and EU level. Capitalism, by its nature, will exploit any failures of governance to make profits, to protect profits and to minimise losses. It is very difficult to impose losses retrospectively on private firms. Failures of governance, unfortunately, always come back to bite voters and the politicians they elect. Ireland took a huge positive step on 25 Feb. We need to push on from there.
Wolf is really on ball recently - pluggin him on Irisheconomy.ie
Given the dominance of centre-right governance throughout the EU, the formation of a centre-right/centre-left government in Ireland and the requirement to resurrect the principles of "competition, co-operation and solidatity" and which the EU was founded and developed to address the current Euro crisis, this thoughtful speech by David Miliband on the prespects for the progressive-left in Europe should be of interest here:
http://www.newstatesman.com/uk-politics/2011/03/centre-parties-social
My only quibbles are that he mentions 'capitalism' only once (and that in the context of posturing by Pres. Sarkozy) and that he fails to address the baleful influence of the Neocons and their powerful and influential fellow-travellers.
Paul Hunt said...
"Given that Ireland has not contibuted one red cent of net contribution to the EU coffers since joining and that Ireland is in this mess primarily due to woeful and abject governance, can anyone think of some good reasons that the new government might advance to persuade their core EZ counterparts to persuade their voters, living in well-governed countries, to consent to use some of their tax Euros to reduce Ireland's burden?"
We may not have contributed directly but what about the value of our fishing rights?
How many Euro's are in existance... 2 trillion? A small bit of QE is necessary and we should have got the Stability fund free having already paid off bondholders since 2008 with our own funds whereas they should have taken a hit of at least 50%.
@Whassup,
We can't claw back what was negoiated away as part of the continuing pooling of sovereignty that is the essence of the EU. In the same way as it is damnably difficult to impose losses retrospectively on private sector investors when the legally-binding mechanisms to impose those losses did not exist when the investments were made.
The better governed core EZ countries are managing, fudging, hiding or deferring attending to their proportionately smaller bank losses.
There's a lesson there somewhere.
Paul Hunt said...
"@Whassup,
The better governed core EZ countries are managing, fudging, hiding or deferring attending to their proportionately smaller bank losses."
The European Bank's losses are also smaller because they took no hit on their Irish ventures but the Irish citizen is now left to carry the can that was kicked down the road until the "Germans" got paid off.
Core EZ bank exposure (why does this always have to be about the Germans?) to the domestic Irish bank blow-out is, and has always has been, very small when compared to their US sub-prime generated losses (and to losses generated by some bank subsidiaries playing in the 'Wild West' of the IFSC). Irish bank supervision and financial regulation was an Irish responsibility, not a European responsibility. But it is now their problem and how they deal with it will be on their terms.
Paul Hunt said...
(why does this always have to be about the Germans?)
German in this context is a generic term for ECB/Bundesbank hegemony that is deployed against non-core EU nations to protect themselves.
The ECB has a lot to answer for...but at least they pulled the plug on Fianna Fail!
You seem to fail to recognise that this 'ECB/Bundesbank' hegemony you describe is being deployed, not out of malice towards the peripherals, but to repair the damage done to the 'Rhineland Capitalism' model in the traditional economic heartland of Europe by the frenzies of Neocon-inspired global financial capitalism. And the problems in the peripherals are hindering this repair work. Ireland got caught up in this frenzy more than most and the damage has been more severe here. We, unfortunately, have to shoulder much of the repair before we can convince the centre to cut us some slack.
Paul Hunt said...
"You seem to fail to recognise that this 'ECB/Bundesbank' hegemony you describe is being deployed, not out of malice towards the peripherals, but to repair the damage done to the 'Rhineland Capitalism' model in the traditional economic heartland of Europe by the frenzies of Neocon-inspired global financial capitalism. And the problems in the peripherals are hindering this repair work. Ireland got caught up in this frenzy more than most and the damage has been more severe here. We, unfortunately, have to shoulder much of the repair before we can convince the centre to cut us some slack."
I "like" your use of the term "we".
You seem to be in favour of socialising Capitalist losses. We would have only had to deal with relatively minor fiscal corrections if we did not have to pay for irresponsible lending by both Irish and EU banks into the Irish economy.
We are dealing with people who fought two World Wars and lost because of their own intransigence - isn't that why the EU project began.
Do not let them think that they can steamroll us into submission for our own good when it is only themselves that they are concerned about.
The idea that EU taxpayers are bailing out 'Ireland', is a cardinal error, and leads to a series of further errors.
Wolf is correct.
The fact is that Irish taxpayers are bailing out EU banks (and increasingly US hedge funds). The State has increased its debts in order to make good the bad debts of EU banks.
@Whassup,
Raising Germany's part in Europe's blood-soaked 20th century history is not in the least helpful. For the last 60 years Germany has been a model modern democracy. Seeking to establish a link, as it appears you are, between Germany's behaviour now and its behaviour between German unification and 1945 provides no basis for engagement.
@Michael Burke,
The real problem is that the core EZ economies's bank debt exposures are manageable, while Ireland's aren't. How they are managing these debt exposures isn't pretty and, yes, compelling Ireland to bear a large share of the losses of its enormous bank blow-out is assisting their ability to manage these debt exposures, but I would contend Ireland's contribution is not significant. The extent of the debt exposure of core EZ banks (primarily in toxic/dodgy assets and trades emanating from the US sub-prime meltdown) has, to a large extent been 'warehoused.
The core EZ countries are determined to keep the lid on all of these exposures and to manage them down over time. Do I like this? Of course not. Do you have the ability to blow the lid off? Yes, we have, but we would need to think very carefully about going for this 'nuclear option'. The ultimate multilateral lender of last resort, the IMF, is locked into the current financing arrangement with the EU. The ECB is providing over €100 billion of bank liquidity support. If we were to opt for default now, there would be no one else to provide funds to cover the current deficit. Some people seem to think China might. I can't see it. Perhaps Venezuela might not that the price of crude oil has taken, but I think Comrade Chavez has other more pressing concerns. Perhaps some petrodollar Middle Eastern autocrat might be interested, but would be really want to go down that road?
Apart from having a rational engagement with our EU partners, I'm not aware of better ideas. But I'm open to suggestions.
Paul Hunt said...
@Whassup,
Raising Germany's part in Europe's blood-soaked 20th century history is not in the least helpful. For the last 60 years Germany has been a model modern democracy. Seeking to establish a link, as it appears you are, between Germany's behaviour now and its behaviour between German unification and 1945 provides no basis for engagement.
"Those who don't know history are destined to repeat it." Edmund Burke (1729-1797)
Please do not seek to denigrate my position by drawing your own inferences. Check out the Treaty of Versailles war guilt clause, reparations, hyperinflation etc... and tell me that our current treatment by the EU/ECB is unrelated to German historical experiences.
@ Paul Hunt
"The real problem is that the core EZ economies's bank debt exposures are manageable, while Ireland's aren't"
This is incorrect. Irish taxpayers are threatened with all manner of sanctions, because, it is said, that even a partial default will result in a collapse of the EU banking system. Given both the fragility of its balance sheet (which weak 'stress tests' only confirm) and the huge sums tied up in Irish banks (with the increasing proportion from the ECB, the CBoI and US hedge funds) - this judgement is probably correct.
That is, EU banks' debt is only 'manageable' if they both draw on the resources of the Irish, Greek and other states and lie about their own creditworthiness.
The second option has already been deployed here. The reason that Irish bank debt appears to be less manageable is because the first option is not open, for historical reasons.
As an aside, it is also incorrect to ascribe their weakness to US sub-prime exposure. A glance at either the annual reports from Deutsche Bank or Paribas shows their exposure to the bursting of the property bubble all over Europe, because they financed it, while in Britain a continuing source of weakness for RBS, etc, is their exposure to Irish property debt.
@Michael,
Thank you for engaging on these issues. While I might still quibble with some of your assertions, I think we can both agree that the EU institutions are holding the peripherals' feet to the fire to keep the lid on core EZ banks' (and other banks') exposures to their reckless financing of some peripheral sovereigns and various property bubbles - while also 'warehousing' exposures to other toxic/dodgy assets and trades.
I think we might also agree that, increasingly, Ireland's effective sovereign liability (for bank liquidity and resolution support) is to multinational institutions (ECB, EFSF, IMF). This is backed by short term bonds and promissory notes issued by government which in turn are backed by haircut property loans. This leability needs to be isolated, capped and managed down over an extended period as the underlying assets are realised.
EU politicians and officials are trying to hold the EU and EZ together in the face of a groundswell of popular support in the northern core EZ countries to cut the peripherals loose. With some structural economic and political governance reforms we would be welcome in this northern core. The question is: do we want to be in? I sense growing popular support for heading for the exit.
are we witnessing the dying days of a system based on fractional reserve banking?
http://www.positivemoney.org.uk/2010/11/ireland-welcome-to-the-death-spiral/
http://www.thinkorswim.ie/?p=1324
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