Europe's reaction to crisis perplexing and unfocused
ANALYSIS:The full detail of the bailout was not made known because it has not been finalised, writes DAN O'BRIEN,Economics EditorIF LAST evening’s announcements in Brussels and Dublin were designed to restore calm and shore up the euro, they will fail.
The European response to the crisis over 26 months has often been too little and almost always too late. Yesterday’s meeting in Brussels focused on the Irish crisis and future crises after 2013 when the current temporary bailout arrangements (now being used by Ireland) expire.
The focus on distant potential crises, combined with inadequate levels of detail on the on-going Irish crisis in yesterday’s statements (particularly in relation to banking) and the complete ignoring of the brewing Iberian crises, suggests that Europe is again behind the curve.
The cavalier demeanour of the president of the euro group of 16 finance ministers, Jean-Claude Juncker, at a press conference in Brussels reinforced this sense. He spoke about his need to leave early because he had a meeting with Libya’s dictator, Col Muammar Gadafy. The euro is facing an existential crisis and one of its key figures was more concerned about keeping an appointment with a barely relevant figure than in explaining what he was doing at an emergency meeting of finance ministers. This is farcical.
The full detail of the bailout was not made known because it has not been finalised. These details will be set out in a Memorandum of Understanding (MoU), to be published before December 6th/7th when European finance ministers next meet. One of the key players in the bailout discussions said that the compressed nature of the talks prevented the finalisation of the MoU. Yesterday’s announcements must therefore be seen as a holding position, released in order to give something to the markets before they open this morning.
Of what was revealed yesterday, there was little that could be described as radical or surprising. The interest rates on the different aspects of the package were neither penal nor generous. Senior bank bondholders will not take losses. Billions more will be poured into the banks to further recapitalise them. The €15 billion budget adjustment was confirmed, albeit with an apparent extension of the timeframe by one year to 2015. The Government – regardless of which parties form it in the future – will be subject to the same quarterly scrutiny of MoU implementation as the Greek government does. The corporation tax rate is safe, at least as long as the budget targets are met – if they are not, the member states which want it raised may well come back for another bite at it.
The National Pension Reserve Fund will effectively be liquidated. This should come as no surprise. A country that is being bailed out by others cannot expect to keep a pot of gold stashed away – that would be akin to going to family members seeking financial help while keeping a fat savings account untouched.
The most important aspect of last evening’s announcement was that the European Central Bank (ECB) will continue providing short-term funding at 1 per cent to the Irish banking system.
One of the four men from the three rescuing institutions to give a press conference in Dublin last night was from the ECB. He responded to a question on the bank’s stance towards Ireland. He described his institute’s funding of the Irish banking system as “exceptionally large”. This proved, he said, that Europe is standing behind Ireland. Crucially, he reassured that that funding would “go down over the medium term”.
In other words, the ECB is not about to turn off the liquidity tap, despite precipitating the Irish bailout two weeks ago. Then, it appeared to signal that it no longer wished to act as lender of last resort to the Irish banking system. Now it is saying that all will continue as it has heretofore. This means that there is no huge circle that has to be squared in bank funding immediately. The actions of the ECB grow more perplexing by the week.
Incidentally, nothing quite symbolised this State’s loss of sovereignty than the press conference at which the ECB man spoke along with two IMF men and a European Commission official. It was held in the Government press centre beneath the Taoiseach’s office. I am a xenophile and cosmopolitan by nature, but to see foreign technocrats take over the very heart of the apparatus of this State to tell the media how the State will be run into the foreseeable future caused a sickening feeling in the pit of my stomach.
Hard detail of what Patrick Honohan of the Central Bank described last night as a “rapid reconfiguration and downsizing of the banks” was limited and nothing radical was unveiled. Shock and awe on the reform of the banking system last night – such as, for instance, the merging of some/all of the banks into stronger European banking groups – might have given reassurance that the European authorities are taking measures proportionate to the magnitude of the crisis. There was nothing of the sort.
There will be new stress tests, looking at what Olli Rehn called the “most severe case” for the banks’ loan books and Nama will be extended in scope so that all of the land and development loans remaining in the two big banks are carved out and transferred to the agency.
These measures, and others outlined last night, are not mistaken or wrong-headed, but they appear inadequate to achieve their desired effect – the restoration of confidence in the Irish banking system so that it can function and fund itself in a normal fashion.
The response to the Irish banking crisis reflects a wider underwhelming European response to the deepening euro zone crisis. This is the most serious situation the EU has ever faced. The future of the euro is now in real question. The coming week may well determine what that future will be.
If the position of the Iberians deteriorates, much more will need to be done, including radical measures by the ECB which it appears unprepared to try under any circumstances.
If contagion spreads across the Mediterranean to Italy it is not clear that anything done would be sufficient to halt the slide towards the abyss. Sometimes the centre just can’t hold.