What's a Euro anyway?

Is a euro in a Cypriot bank, locked down by withdrawal limits and capital controls, the same as a euro in an Irish or French bank? 

Is a euro sitting in, say, a payroll account in Laiki with a balance of more than €100,000 (and subject to an unspecified “haircut” on Thursday ) the same an “Irish euro”?

They’re both euro, both promises to pay the bearer, but honestly, do you have a preference? Of course you do. You’d prefer your money to be outside Cyprus. You’d prefer an Irish euro to a Cypriot one. So they’re not the same. Do we even have a single currency now, then? What does the Euro mean?

And how did this happen? At least in part, it happened because all the finance ministers of the Eurozone sat around earlier this month and let the Cypriots leave the room with a proposal to make depositors pay for bank losses, including insured depositors with balances of less than €100,000. They rowed back on that part, but you can’t undo the damage of their having taken it seriously to begin with.  Imagine a snowed-in family just once agreeing “if we get really hungry, we can eat the rabbit”. You can take that back all you like – everybody knows the rabbit’s not safe any more. He’s not just a pet, he’s protein. Depositors aren’t just protected customers now, they’re also a source of money to save the bank. 

We sat back and let that happen – all the Eurozone countries did. We let deposits in Cyprus undergo that subtle shift in meaning. We let their banks be closed for ages, with devastating impact on small firms and families. We let their tax rate be changed. We let them hang out there, hoping it would save us, the rest of this uneasy union. Where does that leave solidarity, in this European Project under our presidency?

Just now, you’d prefer an Irish euro to a Cypriot one. Remember that feeling, because, as Martin Niemöller might have written were he more interested in money, and living in more peaceful times, “First they came for the Cypriots ...”

Sheila Killian

@islandtotheleft

The Unhelpful Mister Rehn

Tom McDonnell: Mr. Rehn's recent open letter on fiscal multipliers; the effects of discretionary fiscal consolidation; and the relevance of economic theory and evidence, was a truly dispiriting and perplexing intervention.

It is easy to understand why the handling of the Euro crisis has been such an unmitigated shambles with people like Mr. Rehn running the show. We deserve better.

The Commissioner is taken to task by Jonathan Portes here and by Karl Whelan here. Both contributions are well worth a read.

Confidence indeed.

Invoking Luther

Tom Healy: Writing in today's Irish Times Steven Ozment claims that German Lutheranism explains and justifies the stance of the current German administration. 'According to polls', writes Steven Ozment, Germans 'hold tight to their belief, born of staunch Lutheran teachings, that human life cannot thrive in deadbeat towns and profligate lands'. I am not convinced and while not an expert in Lutheranism I am not convinced, either, that Brother Martin of Erfurt would see justification for what is sometimes inappropriately referred to as the 'German view' on Europe and the 'German approach' to European integration and co-responsibility.

Nat O'Connor has already posted about a statement by Peter Bofinger, Juergen Habermas and Julian Nida-Ruemelin. In truth there is no one German view or solution anymore than there is an Irish one. If the current European crisis has exposed deep inter-country tensions and rivalries it has also shown up the underlying social tensions within countries and across the entire continent.  There are many incidents of 'profligate lands' and 'deadbeat towns' (One hopes that this is not a reference to NAMA land only!).

The diagnosis of the European political-economic crisis and the appropriates solutions depends to some extent on how one sees the problem. If you see it as the cartoon image of the irresponsible Irish or Greeks living off the hard-working Germans then the solution is one involving pain and redemption for the indolent and misbehaving. We all know where that mind-set and thinking in the 1840s led the official response to the famine in Ireland (the age of self-reliance, market freedom and work ethic etc).

 If, alternatively, you see the problem as one of systemic failure in the private sector aided by systemic failure in public regulation and governance then the problem shifts from one of national or sectoral blame-shifting to one of how we overcome the neo-liberal world order. If you want to put it in biblical terms - the wages of neo-liberalism is death - death of social cohesion, death of social justice and in the end death of civilisation. Yes, individuals are responsible - but systems and structures are also part of the problem I suggest.

The problem and challenge is now to create a stronger European dynamic and solidarity while retaining the principle of subsidiarity so beloved by the early pioneers of the European project. We must avoid lazy stereotyping of national groups (the profligate peripherals versus the disciplined core etc) as well as enlisting the backing of this or that figure from the rich and diverse cultural tapestry of Europe. Scandinavian Lutheranism could arguably have some connection to the civic values and practices of our Nordic neighbours at least in terms of cultural history and economic conditions.

I will conclude with a quote from one of the greatest thinkers and heroes of the last century, Dietrich Bonhoeffer - a German and Lutheran who was martyred in 1945: '“We are not to simply bandage the wounds of victims beneath the wheels of injustice, we are to drive a spoke into the wheel itself.”

A Path out of the Euro Crisis?

Tom McDonnell: Eurozone level policy making has been nothing short of disastrous and there is little sign of any change. Spain is moving closer by the day to a full bailout and faces into a half decade of stagnation and high unemployment.

In this context, INET's Economic Council has released a timely policy document "Breaking the Deadlock: A Path out of the Crisis" intended to chart a way out of the Euro crisis. The council argues that unless decisive action is taken the euro will continue to drift toward a breakdown of incalculable cost. You can read the council's proposals here.

MOU for Spain

Tom McDonnell: The Spanish Memorandum of understanding is here. EL Pais has distilled it down to 32 key points here. Eurointelligence helpfully translates these points here. The average maturity of loans will be 12.5 years.

Spain is required to introduce legislation to apportion losses to several classes of shareholders and subordinated bondholders by late August 2012 and to legislate for a bad bank before the end of Autumn.

Bad news for Ireland as it looks like all the risks will remain with the Spanish sovereign. Spanish 10 year bonds were at the unsustainable rate of 6.91% as of this morning.

Can the Eurozone be saved?

Tom McDonnell: Spanish 10-year bonds are now over 7.1%. It looks like there will be a Spanish National Asset Management Agency (SNAMA) set up as a bad bank to deal with the bank losses. Those who dont learn from history...

Meanwhile Henning Mayer has a sobering but well worth reading post on the future of the Eurozone here.

Europe's crisis: market competition instead of social bonds

TASC today issued a new discussion paper by James Wickham in which he argues that the elites dominating Europe have abandoned any commitment to 'Social Europe' and have instead turned European institutions in what he terms 'market-making' mechanisms. A PDF of Europe's Crisis: Market Competition instead of Social Bonds is available for download here, and a digital version is available here.

Stiglitz on the Euro deal

Paul Sweeney: We need vision and leadership in Europe. The lack of this leadership among the Europe elite/authorities, of which its citizens are fully aware (and will punish them for it), finally appears to have forced this “leadership” to realise that there was a threat unless it acted decisively. It appears that some major decisions may have, at long last, been made at the 20th summit last Thursday which could get Europe moving again and may give hope to Ireland – if executed.

However, as the Irish government leaders have admitted a lot more needs to be done, around the opportunities provided in the deal for this country. Ireland did get a leg up, but as Joe Stiglitz says here, the deal will not stabilise the euro. Much more needs to be done, overall. I think we are in an era where the role of the state and states acting together makes markets. This is an era of real political economy at work. At present, markets, in crisis due to governments’ continuing indecision on the rules governing them, are causing chaos. This is understandable.

I don’t blame “Germany” but I blame those conservatives who are in power in Germany. They are wedded to 1930s economics.

Euro Crisis, Causes and Solutions

Tom McDonnell: Despite the developments at last week's EU summit we remain a long, long way from a successful resolution of the Euro crisis. My own thoughts on what should be done are in this TASC discussion paper.

I welcome any comments or feedback.

Reflections on Greece

In a commentary written yesterday, Paul Krugman noted that the "Greek election [...] ended up settling nothing. The governing coalition may have managed to stay in power, although even that’s not clear (the junior partner in the coalition is threatening to defect). But the Greeks can’t solve this crisis anyway. The only way the euro might — might — be saved is if the Germans and the European Central Bank realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation. If not — well, Greece will basically go down in history as the victim of other people’s hubris".

You can read the rest of his piece here. Comments?

Remote scenarios?

Consider the following scenario. After a victory by the left-wing Syriza party, Greece’s new government announces that it wants to renegotiate the terms of its agreement with the International Monetary Fund and the European Union. German Chancellor Angela Merkel sticks to her guns and says that Greece must abide by the existing conditions.

You can read the rest of Dani Rodrick's post on 'The end of the world as we know it' over on Social Europe Journal.

Guest post by Arthur Doohan: It's the economy, stupid

Arthur Doohan: "...most of the people ...were unhappy… Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn't the small green pieces of paper that were unhappy." - Douglas Adams.

Or to put it another way, there is nothing wrong with the Euro as a currency and plenty wrong with how much debt we expect our economies and our households and our taxpayers and our citizens to bear.

As a medium of exchange and a unit of account the Euro has been a complete success. As a store of value it is facing some challenges.

These challenges arise from the fact that we Europeans have misvalued our property assets by a considerable margin and the wealthiest of us are trying to get the poorest to bear an unfair share of the burden of those mistakes.

The property mis-valuation occurred at a time when the German economy was in the doldrums, post re-unification and post the 'DotCom bubble'. German bankers and bondfund managers were getting very little return on their Euros in the German economy. It was perfectly natural for them to seek investment opportunities abroad, especially as the newly minted currency made it easier to measure, price and transact business opportunities.

What was not perfectly natural was for them to forget the rules of prudent investing, to mimic what US and UK banks were doing and to ignore what external advisors were telling them. But as the erstwhile chair of Citigroup, Chuck Prince so neatly expressed "You've got to keep dancing while the music plays!"

That the regulators in the EU and domestic economies also abandoned their responsibilities and let the music play at an ever faster tempo at the same time is perhaps just another case of hubris in the postpartum roseate glow of the newly arrived Euro. But that does not excuse their trying to shift the blame for the coming of Nemesis.

The Euro was and is well designed. It is a fine piece of engineering, built largely by the French and the Germans, who know a thing or two about building. But the Euro is the financial equivalent of a car, not a plane or other anti-gravity device. By refusing to use it in the way it was intended to be used and by refusing to keep national debts and deficits in check by the fines and other mechanisms built into the Euro design the politicians and bureaucrats have made fools of themselves and a mockery of the patient efforts of two generations of statesmen.

What they have done is the equivalent of driving it off a cliff. What they are doing now is the equivalent of trying to ……well, actually I don't know what they are trying to do because they keep changing their minds. First, it was guarantees, then it was bank recapitalisation, then it was austerity, after that it was a 'unique bond transaction with retrospective contract changes' and now it seems we are to have 'austerity with growth'….

If a country has too much debt or is paying its civil servants and other non-exporting workers too much in salaries and benefits then changing currency in order to partially writedown those debts and reduce those costs is the equivalent of shooting yourself in the foot in order to learn to hop.

The point that I wish to get across is that the fault is not with the Euro and is entirely with what burdens our economies are trying to carry. Abandoning the Euro does not solve Greece's problems or anyone else's. It most cases it will make them worse because the dislocation effects of the 'defenestration' and because of the knock-on effects in the wider EU.

The borrowers are being made to suffer because of the mistakes and the greed of both the borrower and the lender. This is business and it turns out to be 'bad business. There is no moral superiority of the lender over the borrower. Both are equal parties to a contract, willingly if stupidly, entered into. Making Greece jump through hoops to save the blushes of greedy bankers and feckless regulators and stubborn politicians will be fun while the 'wheels are still turning'

If Greece abandons or is forced out of the Euro the debts of Greece will still be denominated in Euro's and the only thing that will have been achieved will have been to make it harder for Greece to get Euros to pay us with.

Returning to my car analogy I will close with another Douglas Adams quote about going over a cliff….

"It's not the fall that will kill you, it's the landing…."

European Monetary Union: Doomed to fail or just another stepping stone?

Tom McDonnell: With talk of a Greek exit from the Euro now being treated seriously it can be informative to consider past experiences with monetary union. The normal fate for currency unions has been eventual failure and dissolution, and the history books are full of examples of such failures. By and large having some pre-existing form of centralised political union in place appears to greatly improve the chances of a monetary union succeeding. Classic examples of resilient monetary unions include the USA, the UK and in some respects even the former USSR.

Nineteenth century Europe had the Latin Monetary Union (LMU) based on the French franc and centred on France, Belgium, Switzerland and Italy, as well as the Scandinavian Monetary Union (SMU) between Sweden, Denmark and Norway. Both the LMU and the SMU broke apart because there was no central institution to enforce common monetary policy and because of divergent fiscal policies motivated by domestic concerns.

Perhaps the most famous example of a de facto currency union was the gold standard which developed internationally from 1870 onwards. The gold standard was a system of fixed exchange rates based on convertibility to gold at set prices. The system came under severe pressure following the stock market crash in 1929 and finally came unravelled in the early 1930s when virtually all countries abandoned gold convertibility.

The outlines of a new international monetary system based on the convertibility of certain national currencies into United States dollars was agreed in July 1944 at Bretton Woods. The US dollar was itself backed by convertibility into gold, and this meant all participating currencies were indirectly pegged to gold and therefore to each other. Under the Bretton Woods system countries could devalue their currencies under certain agreed conditions. The Bretton Woods system began to fray in the late 1960s as the United States became increasingly unable and unwilling to sustain the dollar's exchange rate with gold. Eventually dollar convertibility was terminated by the United States in 1971.

The currency instability of the 1970s prompted a series of attempts to stabilise exchange rates in the European Economic Community (EEC). The first of these was the ‘Snake in the Tunnel’ system designed to peg the EEC currencies to one another within narrow bands. The Snake in the Tunnel system had broken down by the mid 1970s. The next major attempt at monetary coordination was made in 1979 with the launch of the European Monetary System (EMS). The EMS was based on a system of narrowly fluctuating exchange rates known as the Exchange Rate Mechanism (ERM). In practice the Deutsche Mark quickly became the anchor currency of the EMS and the system was characterised by repeated devaluations by member states.

Post-reunification expansionary fiscal policy designed to support the rebuilding of the former East Germany, combined with the Bundesbank's ultra-tight monetary policy, forced other countries to keep interest rates at extremely high levels to support their currencies and prevent capital outflow to Germany. A number of European currencies came under speculative attack and Sterling’s membership of the ERM was suspended by the British Government in September 1992. Italy withdrew the following day and the ERM was effectively dismantled in 1993 when the fluctuation band for national currencies was extended to 15 per cent. As with previous failed attempts at fixing exchange rates, the system was undermined by conflicting policy goals in the different countries and by the inability of member countries to harmonise monetary and fiscal policies.

Despite these setbacks, the push for monetary union continued as it was claimed that unpredictable exchange rate fluctuations were incompatible with the EU's fully open and competitive internal market. This perspective drove European Monetary Union (EMU) and policies aimed at convergence between the various EU economies in areas such as inflation and fiscal discipline. These policies were intended to create the conditions for a viable currency union. One lesson drawn from the ERM experience was that systems of fixed exchange rates will eventually buckle under the strain of divergent domestic policies and objectives. Thus, in preference to yet another system of fixed exchange rates, the decision was made to pursue a single currency as well as a single monetary policy under the control of an independent central institution. Eleven national currencies were made convertible to the Euro at established rates in 1998 and the Euro was officially launched the next year, with monetary policy and enforcement falling under the authority of the independent European Central Bank (ECB).

It remains to be seen whether this latest experiment in monetary union will succeed. It is now clear that EMU has major fundamental design flaws and if history is a guide then the odds of success do not look great. On the other hand, Europe's persistence with the idea of monetary union suggests that mistakes will be learned and the attempt renewed.

The real question is whether the mistakes will be learned in time to prevent the currency union from imploding.

Euro crisis solutions: An ongoing debate

Tom McDonnell: The Irish body politic and especially its commentariat will no doubt spend the next few weeks obsessing and navel gazing over the fiscal compact and its perceived impact on Ireland. Yet in truth the real debate that matters is the one going on at the Euro zone level. The institutional and policy architecture of the Euro zone is deeply flawed at a structural level. These flaws have been cruelly exposed by the response to the debt crisis and by the failures leading up to the banking and debt crisis. How Europe now decides to respond will decide the future shape of the Euro zone and it is in that intellectual space that Ireland must begin engaging in.

There are a number of useful 'non-official, non-Irish' resources on the Internet for those interested in the debate:

The Eurointelligence feed (newsbriefing@eurointelligence.com) is probably the best free daily resource on the Euro crisis that is out there. It combines news and media reports from around the Euro zone with high quality analysis. See here.

Over at VOX EU there is a lively debate going on about the merits, or otherwise, of austerity. See here.

The Social Europe Journal is another site worth a visit for its analysis of the crisis and for a constructive, albeit damning, critique of current policies.

Well worth a look at from time to time are the CEPS, Project Syndicate and Breugel websites while John McHale helpfully adds a few additional links here. Yanis Varoufakis provides the perspective from Greece here.

Across the atlantic Paul Krugman and the idiosyncratic Brad DeLong regularly provide external and often scathing perspectives on the official response to the Euro crisis.

Finally, the Financial Times and the Guardian usually conduct rolling live blogs whenever the latest Euro zone drama erupts.

This is just a small selection. We are in the midst of a multidimensional crisis with multiple targets. There can be no silver bullet in such a scenario. Nevertheless there are viable solutions out there that can, taken as a package, ensure the viability of the Euro zone over the medium-term. And not just a Euro zone where unemployment and poverty concerns are seemingly always secondary to concerns like narrow price stability.

Some of these solutions will undoubtedly be politically difficult. Ultimately Europe's leaders will need to decide what their vision for the Euro zone is, what is sacrosanct, and what is negotiable. Indeed they should be obliged to articulate their vision. This would bring a degree of much needed clarity to the discussion.

Germany in and with and for Europe

Nat O'Connor: As noted in an earlier post, it is useful to see that there is lively debate going on in Germany about Europe and alternatives to austerity. This is an important counterbalance to the 'Austerity Germany' we see presented in much of the media, which creates the illusion that the German people are united in a desire to punish Ireland and other peripheral EU states for our economic and fiscal woes. On the contrary, Helmut Schmidt makes a major contribution to the debate by pointing out Germany's benefit from ensuring solidarity between the centre and periphery of the EU.

Helmut Schmidt was the Social Democratic Chancellor of West Germany from 1974 to 1982. In a key speech to the German Social Democrat party conference in 2011, he outlines the importance of Germany's integration with the other countries of Europe and proposes "radical regulations" for the EU's financial markets as well as the "financing of growth-enhancing projects" to help EU member-states achieve balanced budgets.

The Foundation for European Progressive Studies (FEPS) has recently republished this speech in 15 other European languages in order for Schmidt's message to be widely heard across Europe. An online, English version of the speech is here.

Born in 1918, Schmit takes a long view of the challenges of the 21st Century, as well as the failures of the 20th. He notes that there has been conflict between the centre and periphery of Europe since the Middle Ages - and it most often ended in war. The founders of the European Coal and Steel Community were explicitly motivated to bind Germany into an integrated Europe and to avoid further conflict.

At the same time, Schmidt argues that German strategic interests are also better served by integration into Europe. By 2050, European nations will each constitute "just a fraction of one per cent of the world's population." ... "That is why the European nation states have a long-term strategic interest in their mutual integration."

Schmidt points to recent German budget surpluses as a "very undesirable development". ... "as in reality all our surpluses are the deficits of other countries." (There is a lesson there for those who claim that Ireland can restore its economy on the back of exports alone).

Schmidt supports some sort of fiscal transfer at EU level. In terms of contributions to the EU's budget, he notes: "It is a fact that, for decades now, Germany has been a net contributor. ... And of course Greece, Portugal and Ireland have always been net recipients."

Schmidt identifies the weakness of the EU's institutions in addressing the financial crisis. "Umpteen thousands of financial traders in the USA and Europe, plus a number of ratings agencies, have succeeded in turning the politically responsible governments in Europe into hostages." ... "In 2008/2009, governments the world over managed to rescue the banks with the help of guarantees and the taxpayers' money. Since 2010, however, this herd of highly intelligent, psychosis-prone financial managers has gone back to its old game of profits and bonuses."

He argues that the EU or Eurozone could and should "introduce radical regulations for the common financial market in the euro currency area. These regulations should cover the separation of normal commercial banks from investment and shadow banks; a ban on the short selling of securities at a future date; a ban on trading in derivatives, unless they have been approved by the official stock exchange supervisory body; and the effective limitation of transactions affecting the euro area carried out by the currently unsupervised rating agencies."

Various other policies are also required, including "monitoring mechanisms, a common economic and fiscal policy as well as a series of tax, spending, social and labour market reforms in the different countries." However, despite the need for closer coordination in a range of area, Schmidt argues that the EU will not become a federation any time soon.

"A common debt will be inevitable too. We Germans should not refuse to accept this..."

"We should also avoid advocating an extreme deflationary policy for the whole of Europe. On the contrary, Jacques Delors is quite right to insist that a balancing of the budgets should be accompanied by the introduction and financing of growth-enhancing projects. No country can consolidate its budget without growth and without new jobs. Those who believe that Europe can recover solely by making budgetary savings should take a close look at the fateful effects of Heinrich Brüening's deflationary policy in 1930/32. It triggered depression and intolerable levels of unemployment, thus paving the way for the demise of the first German democracy."

In short, Helmut Schmidt's speech is a reminder that, taking the long view, not only are there alternatives to austerity - but austerity on its own is not a solution at all. Solidarity and leadership are needed to bring about recovery, led by an integrated EU, with centre and periphery working together for their mutual benefit.

Guest post by Arthur Doohan: Loose lips sink ships

Arthur Doohan: The "grown-up's" will remember the opening sequence to the 'Mission Impossible' TV series, where the tape self destructs a few seconds after being played.

I have sad news for you. That technology has not been perfected.

So ... There is no way for Draghi, Barroso, Van Rompuy or Merkozy to make your Euro notes or those in the bank's ATMS disappear in a puff of smoke.

As we teeter on the brink of a possible debt crisis, there is a lot of loose talk flying around about the death of the Euro and about Ireland being thrown out of the "Euro". Such talk is ill-informed, ignorant and, at a time of distress and fear, it is scaremongering, if not actually amounting to "shouting 'Fire!' in a crowded cinema".

Money is …..whatever people deem it to be. In the past money has been: cowrie shells, temple vouchers, unopened packs of "fags" and bits of metal. Today, money is mainly electrons, some paper and a few bits of base metal "dressed as lamb". We worked hard, jointly with our European partners, to re-denominate our money into a jointly held and managed currency called the Euro.

And now, there is nothing, NOTHING, that can stop the Euro being our currency.
Firstly, we are an equal partner in the Target2 payments system that the ECB uses as a clearing house for the Central Banks of the Euro-system to make and receive payments. Further, no authority in either the EU or the ECB has said that anyone can or will be kicked out of the Euro. There is no process for so doing and there can not be under the current treaties. Again, with respect to the currency, there is, quite deliberately and by design, no way of telling a Greek from an Irish from a French Euro.

Secondly, when Argentina defaulted on her US dollar debts it did not stop the dollar being a valid currency in Japan or in the US. It did not stop the majority of Argentinian business being conducted in US dollars. It weakened the Argentinian Peso and made the overall debt burden greater. But that can't happen to us because our debts are denominated in our own currency (the Euro). Even if Ireland decided to default on some of her sovereign obligations, it would make no difference to your usage of the currency or to a German person's usage of it or to the French Government's usage.

Finally, the concept of 'leaving the Euro' is often referred to as some form of solution, as if our troubles would be over if we cast off the yoke of Euro-usage. Nothing could be further from reality and the truth.

If we left the Euro we would have to 1) print and distribute a new currency, 2) institute capital controls (in a vain attempt to stop money leaving the State, and which might now be un-Constitutional), 3)attempt to establish and then defend a value in Euro terms for this currency (with all the interest rate volatility that implies and requires), 4) institute import and export controls in order to prop up the capital controls (with all the extra costs and delays for business that implies).

Further, just who would be leaving the Euro? Probably just the State in terms of redefining exactly what 'legal tender' would be for tax and contract purposes. But the State could not seize the Euros in your bank account and force them to be changed to 'NewPunts' or whatever. So we would become like Argentina with a weak official currency for State and tax related transactions and civil service pay and an external currency (Dollars for them, Euros in our case) for 'real stuff'.
And what would we get in exchange for all that trouble? Only the opportunity to say 'We can't pay you back everything we owe you'.

I am not recommending, in this post, any particular course of action. I just want to see an end to the loose talk and the propagation of fear, uncertainty and doubt as a means for ill informed politicians to bludgeon people into agreeing with them. I have in mind particularly suggestions that our ATMs would 'run dry' if there were to be a default.

To suggest that anyone in Europe would attempt or even think of stopping Irish citizens from buying their daily bread in reaction to a problem created by Irish politicians is to display an ignorance of how such systems work, and to the people and the Commission of the EU.

The Euro is not the problem. The Euro works, and works tremendously well as its endurance of the upheavals and stresses of the last few years have shown.
The design of the 'Growth and Stability Pact' is not the problem. Since it was never enforced (and Germany was the worst and longest rule breaker) it cannot be said to have failed and all of the debt problems we now have are the exact things the GSP was designed to prevent.

The problem is the level of debt some countries are carrying. This is an old problem, and the old answer was always a currency devaluation. Since we all have the same currency now we can't do that. But a debt 'haircut' amounts to the same thing.

So, can we please take a haircut now before we all go bald?
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring

Oireachtas Committee on European Affairs

The Oireachtas Committee on European Affairs met yesterday to hear briefings on the International Agreement on a Reinforced Economic Union. TASC's Tom McDonnell was one of those invited to address the Committee, along with Dr Alan Ahearne, Professor Karl Whelan and Professor John McHale. Tom's presentation is available here, and there is also a thread on the hearing over on Irish Economy. Comments?

Euro lacks a government banker, not a lender of last resort

This article by Thomas Palley, of the New America Foundation's Economic Growth Programme, was published in the FT Economists' Forum on December 9th

Sinéad Pentony: It crunch time (again) for the Eurozone, so this article by Thomas Palley is timely, as he articulates the causes of the Eurozone debt crisis and the solutions that are needed, differently from many of the other voices in the debate.

Palley argues that the euro has a lender of last resort – the ECB – but what’s lacking is a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. Thus explaining why the US and UK can borrow at lower rates than countries such as Spain, which has a similar deficit and debt profile, but its under speculative attack.

Palley points the finger at the “euro’s neoliberal birthmark”, which laid the foundation for a diminished role of the state and enhanced power of the market. He goes on to argue that previously, national banking systems were masters of the bond market, but the euro’s architecture makes bond markets masters of national governments – and this is the problem that must be solved through the creation of a government banker.

Delors has had far more to say!

Manus O'Riordan: “Euro doomed from start, says Jacques Delors” was the front page headline of Britain’s “Daily Telegraph” on Saturday December 3, dutifully regurgitated on RTE news bulletins throughout the course of the day. But this was a gratuitous eurosceptic editorial embellishment of the story underneath penned by deputy political editor James Kirkup, whose opening sentence fell somewhat short of such a joyful dance of death: “The euro project was flawed from the start”. Still less did such a headline accurately reflect the text of the Delors interview with Charles Moore printed on page 4 of that paper. While undoubtedly a eurosceptic himself, Moore accurately described Delors as follows:

“Mr Delors, who was President of the European Commission from 1985 to 1995, is the only foreign bureaucrat ever to have become a household name in Britain. In 1988 he enraged Margaret Thatcher by coming to address the British TUC on the joys of the European ‘social dimension’. Her famous Bruges speech later that month was her attempt to stand against the tide of European integration that he represented. It was Mr Delors whose report produced the plan for what we now call the euro… (but) the Delors version of what that co-operation should produce (included) the harmonisation of most taxes, plans to deal with youth and long-term unemplyment, and the social dimension for which he always called.”

As for the euro being “doomed”, Moore’s eurosceptic report of what Delors actually said is far more circumspect: “So will the euro survive? Mr Delors does not, of course, deviate from his belief in the European single currency. He is also very conscious of the danger of someone in his position saying anything that might help to destabilise the situation. I am struck, however, by his downbeat interpretation of events… ‘You must be very vigilant to make sure that you do come out of a crisis in a better state … I am like Gramsci (the Italian Marxist philosopher): I have pessimism of the intellect, optimism of the will’.”

Not that Delors is or was ever a Marxist. He suggested to Moore a different combination of factors to explain Thatcher’s antipathy towards him: “I think for Mme Thatcher I was a curious personage: a Frenchman, a Catholic, an intellectual, a socialist.” And it is undoubtedly his own brand of socialism, so firmly inspired by a radical interpretation of Catholic social policy, that explains some of the language he employs to assess responsibility for the failure to act in the face of the enormity of the current political and economic crisis: “He thinks that ‘everyone must examine their consciences’. He identifies ‘a combination of the stubbornness of the German idea of monetary control and the absence of a clear vision from all the other countries’.” But Delors also goes on to firmly finger British Government hostility, no less than that of the current German government, as a key factor obstructing the development of eurobonds: “Mr Delors adds that Britain, though not in the euro and therefore not ‘sharing the burden’, is ‘just as embarrassed’ as the Europeans by the financial crisis. ‘I can see Mr Cameron’s worries’, he goes on, ‘It is a big worry for the British if we can create and trade eurobonds in Paris and Frankfurt’.”

Since I first became a member of the Workers’ Group of the European Economic and Social Committee in October 2010, my reports published on SIPTU’s “Liberty Online” have constantly emphasised the critical need for a eurobonds initiative. (See here for the first and here for my most recent report on December 1). The politics of it all, of course, boil down to issues of EU governance. On this, Delors has had far more to say than featured in the “Daily Telegraph” interview conducted by Moore on November 30. For, exactly one day previously, on November 29, Jacques Delors had addressed us on the crisis at an extraordinary meeting held by the EESC Workers’ Group in Paris.

Delors criticised France itself for having insisted on a merely symbolic Stabilty and Growth Pact (whose terms, in any case, both France and Germany had themselves violated), while ignoring the need to both monitor and regulate the snowballing of private debt. He railed against what he called “the dictatorship of the instantaneous”, warning that “without memory, there can be no future”. He recalled that at the outset of the euro project, meaningful meetings of the euro group of 17 member states had preceded economic meetings of the 27 EU member states as a whole, but that this practice no longer had any substance. The Community method had been replaced by the inter-governmental one, and he maintained that Angela Merkel’s token gesture of support for a so-called “Union” method of governance would amount to little more than a continuation of the inter-governmental method with just an add-on of Council President van Rompuy. Delors maintained that for a European Commission to be up to the job, it had to take risks, and not just earn cushy salaries. It should even be prepared to resign if necessary. As an illustration of the type of confrontation required, he recalled his own spats with Margaret Thatcher during the UK Presidency, as she had always made a point of addressing him as “Mr”, in order to underline her contention that the office of Commission President should be one of no consequence. But when she sought to obstruct the development of the Erasmus programme, he told her he would publicly inform their joint press conference that only a UK veto stood in its way, and she backed down.

Delors denounced the retreat from Social Europe, arguing that there could not be a valid EU democracy without the twin pillars of representative government and social dialogue. He maintained that the euro crisis was being availed of in order to effect what would amount to a social counter-revolution. Welfare rights that had been pillars of Western European society since the immediate post-War years were being called into question, as were established systems of collective bargaining. Member states were being told to unravel sectoral agreements. But unemployment would have disappeared long ago if the “solution” was to be found through differentiated firm-by-firm wage setting. The call for “decentralisation” was a strategy designed to weaken trade unions, pure and simple. Neo-liberalism only measured “value creation” through stock exchange quotations. But how could markets could deliver without regulation? The spirit of so-called “free competition” was polluting everything, from the economy itself to educational systems. If social dialogue with unions disappeared, European democracy itself would end up blunted.

There were, however, other remarks of Delors that might put the frighteners on the present leadership of the Irish Labour Party. I must confess to having been flabbergasted when I heard Eamon Gilmore boast at the Desmond Greaves Summer School in August 2007 that “We’re the Party that gave you the 12.5 per cent corporate tax!” As the “Irish Independent” rather uncharitably reported: “Labour leader hopeful has his comrades up in arms… Down the back, a delegate interjected with a ‘Point of Order’ that Mr Gilmore should have given a different speech to one he would ‘give to the American Chamber of Commerce boasting about reducing corporation tax’.” Indeed, last week’s reports of the Tanaiste’s comments on Sarkozy’s Toulon speech hardly amount to an adequate response: "The position of the Irish Government is absolutely clear. We are retaining our rate of corporation tax… The President said last night things that the President and the French Government have been saying for some time. There's nothing new in that." But it is not on the French Right that he faces his toughest opponents on corporate tax, but the French Left. (See here for “Liberty Online” last June, where I argued that “while the bullying behaviour of French President Sarkozy should be steadfastly resisted, a more balanced examination and evaluation of corporate tax regimes cannot be kicked to touch ad infinitum”.)

Yet even I myself was totally unprepared for the vehemence of Delors himself on that issue. At the Paris meeting I expressed my total agreement with his emphasis on the need for cohesive action by the 17 member euro group in its own right, without being undermined by the UK. I further argued that the type of competitive devaluation that the UK had pursued in 2007-2009 was equivalent to imposing tariffs of 26 per cent and was incompatible with the concept of a Single Market. Moreover, it had a devastating impact on Irish manufacturing. Delors responded to me by agreeing that Ireland had very justifiable concerns about the stability of the euro/sterling exchange rate. But then he immediately proceeded to launch a blistering attack on Ireland for having vetoed any progress on tax harmonisation. He said that as Commission President he had alternated between “spoiling” and “teasing” Ireland in respect of regional and cohesion funds, in the hope of securing a breakthrough, but there was no give. Since Ireland had explicitly aligned itself with the UK in opposing any Treaty provisions on tax regimes, it became clear to me that Delors still viewed Ireland as somewhat of an Anglo-Saxon Trojan horse in the euro area. He was echoed on the tax harmonisation issue by French union speakers. The Irish Labour Party leader may have once said, without much success, “No!” to capitalist Frankfurt. But when Francois Hollande defeats Nicolas Sarkozy for the French Presidency, how long will the Tanaiste be able to continue saying “No!” to socialist Paris?
Manus O'Riordan was Chief Economist of SIPTU until 2012. He is currently a member of the Workers' Group on the European Economic and Social Committee. Manus O'Riordan is a member of the TASC Economists' Network

Sowing whirlwinds: European elites get the crisis they deserve

James Wickham: Europeans are getting fed up with Europe. Everywhere as the crisis deepens and as some experts demand closer European integration (‘fiscal union’, Treaty change, etc.), more Europeans are becoming disenchanted with the European project.The sociologist Neil Fligstein showed that European integration has had most support from the better off and the better educated.More generally, unlike the creation of modern Italy or even modern Germany in the 19th century, the European project was never a mass movement.

Today even some national elites are abandoning Europe.Certainly here in Ireland much elite opinion seems to be now more pro-American than pro-European, and anti-German jokes worthy of Biggles and the British Daily Mail appear to be normal in the media. Yet this is hardly an Irish peculiarity. Elite disenchantment is pervasive, probably a response to the growing popular discontent.

All of this arguably stems from two long-standing trends.In the past most Europeans have passively tolerated European integration.It was plausible that it had some connection to economic growth from which they benefitted; it sometimes delivered some small but tangible benefits in terms of ease of travel, rights to health services, etc; in some countries it brought better governance and more progressive social, cultural and environmental policies.And then of course some interest groups (e.g. farmers) gained, as did some regions.

The Maastricht Treaty even created some rights for us as European citizens.

But all of that is in the past. For the last decade the EU has been chipping away at the basis of its own popular support.It stands for the privatisation of state assets, and even more crucially, the marketisation of state services - the European Court of Justice not as enforcer of citizens’ rights but of the rights of the free market.If the European Social Model is built on national welfare states, then the European project is now about weakening these – and putting nothing in their place. Why on earth should anyone apart from neo-liberal thugs support it?

More recently another trend has surfaced.Central to the European project was the creation of European institutions (above all the Commission itself) which were to act for Europe as a whole.Although necessarily the big states might dominate Europe, such European institutions would ensure the smaller states had a disproportionate voice.Furthermore, European institutions could ensure that policy differences were not just between nation states, but between different European-wide interests.

Yet as the crisis has mounted, so European institutions have been sidelined. The member states have often ensured that European posts (such as above all the President of the European Commission) are filled by nonentities who can’t threaten them. Now European politics have collapsed to the level of 19th century nation-state realpolitik, with ‘Germany’ demanding this and ‘France’ demanding that and ‘Ireland’ protesting something else.In such a situation it’s hardly surprising that ordinary people understand the crisis in equally national terms (the nasty Germans want to boss ‘us’ around, the spendthrift Irish want to squander ‘our’ taxes, etc).

So why don’t progressives start calling for a new Treaty?One that links fiscal union to European democratic control? One starting point: a European President directly elected by all European citizens?