Ecofin pushes back debt repayments

Mon, Apr 15, 2013, 06:00

A report to the Dublin meeting of European finance ministers (Ecofin) on Friday warns productivity in the EU has been falling since 2007, and reminds ministers of labour market inflexibility and of their slowness to react to the economic cycle. The Brussels-based Bruegel think tank points out that 30 years ago the output of the pre-2004 EU countries was 15 per cent higher than that of the US. It is likely to be 17 per cent lower by 2017.

“Much of Europe suffers from a mutually reinforcing interaction between limited productivity gains, protracted deleveraging, weak banking sectors and distorted relative prices,” the study said, calling for bold measures to boost growth. Minister for Finance Michael Noonan, who chaired the talks, said the study triggered a “very positive discussion”. No change of direction, though.

But clearly the productivity message struck home. The meeting demonstrated a productivity rare for such ministerial outings, a tribute no doubt to Mr Noonan’s chairmanship, with a welcome willingness to seriously dig in to and make decisions about a range of current challenges before they become crises.

From an Irish and Portuguese perspective, extending the maturity of loans by up to seven years is particularly welcome. The move, which affects some €40 billion in Irish loans from the EU, should allow challenging repayments due in coming years to be pushed back, and will marginally cut interest due. Above all, it sends a signal of debt sustainability to markets on the part of both countries that should allow them to meet targets for a return to private funding of debt at reasonable rates.

The meeting also agreed to a German reopening – many thought the issue settled – of the issue of the legal basis of the banking union, notably the transfer of regulatory powers from national central banks to the European Central Bank. The Germans continue to insist, against the legal advice of the European Commission, that treaty change will be required to transfer further competencies, and ministers have promised to look carefully at the issue.

But are the depressingly familiar German playing of the constitutional court card – and German chancellor Angela Merkel’s encouraging words about treaty change possibilities to British prime minister David Cameron over the weekend – more than a negotiating ploy?

Come June’s summit, and a return to discussions about retrospective bank recapitalisation, a revisiting of last June’s “commitment” that the European Stability Mechanism could invest in bust banks, Dr Merkel, it is believed, may be willing to trade. The deal: an abandonment of retrospective recapitalisation, which Germany hates, in return for an end to talk of treaty changes, which the rest of Europe hates. For Ireland, however, it’s Hobson’s choice.