Prospect of early debt relief breakthrough seems remote

Thu, Sep 13, 2012, 01:00

EUROPEAN DIARY:Europe is in a tiresome back-slapping groove in which praise is routinely heaped on Ireland as the bailout class star pupil, writes ARTHUR BEESLEY

THE CONSTITUTIONAL court in Germany has given Europe a fillip with its go-ahead for Berlin’s participation in the ESM fund. Together with the European Central Bank’s new bond-buying plan, this stands as limited good news for Ireland at a time when the deadline for a bank debt deal is slipping.

For once, the debt mess does not seem to be worsening by the day, but the euro zone is still in a dire place and a clutch of slippery questions must soon be settled. Uncertainty surrounds Greece, Spain and the banking union initiative.

Yet more issues arise when it comes to the debate on the currency’s long-term future.

This is the backdrop against which Michael Noonan is meeting his counterparts in Paris, Berlin and Rome en route to a gathering of all European finance ministers tomorrow in Nicosia.

Despite the promise in July of a debt relief agreement next month, the target now seems to be receding.

Noonan argued in Paris yesterday that it might be more advantageous to wait until Spain concludes a rescue agreement in Europe for its banks.

That’s fair enough, as far as it goes, but it still raises inevitable questions as to what exactly is in store and when. The sense of urgency in Dublin is not replicated elsewhere. Ireland is simply not a priority case right now.

This is unfortunate. When Noonan pushed for an early deadline during the summer, his objective was to achieve clarity over the bank debt situation in time for the Budget in December.

Infighting and agonising within the Government over the next round of cutbacks illustrates just how difficult a prospect that is.

This presents an obvious test for the Fine Gael-Labour coalition, but Europe is stuck in a tiresome back-slapping groove in which praise is routinely heaped on Ireland as the star pupil in the bailout class. It’s as if the relentless spin that things are improving has led to a perception – a misperception really – that the Irish problem has been solved. If only.

For the moment, however, Ireland remains stuck in a holding pattern behind Spain as its prime minister, Mariano Rajoy, tries to plot a way out of his own fiscal mess.

Top European officials would prefer if a reluctant Rajoy signed up to a formal policy programme to take advantage of the ECB’s largesse.

The signals from Madrid are mixed to say the least, though, with the prime minister fearful of the damaging political stigma attaching to intrusive policy oversight by the EU and the International Monetary Fund.

In short, Rajoy is in no rush, but the longer he waits, the longer it will be before the ultimate structure of the Spanish banking rescue is determined. That, in turn, will have an important bearing on what is eventually done for Ireland.

Why so? In spite of the Government’s tight fiscal position, all the current chatter points to a “sequencing” arrangement in which Europe deals first with the Spanish banks and thereby sets a precedent for Ireland.

That means any arrangement on direct ESM equity stakes in Allied Irish Banks, the Bank of Ireland and Permanent TSB could be quite some time away.

With the ECB refusing to budge on the dreaded Anglo Irish Bank promissory notes, the prospect of an early breakthrough would appear to be remote.

Tension between the European Commission and Germany over the scope of the ECB’s new powers to supervise euro zone banks presents a further problem. Few serious observers believe the new regime will be up and running by the end of the year.

No matter when any deal is done for Ireland, execution must await proof that the new system is working.

The argument over the precise form that the new banking union will take is but one element of the EU’s seemingly never-ending institutional debate.

Already there is talk of a fresh go at treaty change to solidify the euro’s foundations, something that would follow a previous amendment of the Lisbon Treaty and the fiscal treaty, which went to an Irish referendum in May.

Addressing MEPs yesterday, commission chief José Manuel Barroso went further still by calling on the EU to transform itself into a “federation of nation states”.

What he means precisely is open to debate and conjecture but the clear implication is that member states would transfer more and more power to the EU.

Barroso said he did not have a “superstate” in mind, rather a “democratic federation of nation states that can tackle our common problems, through the sharing of sovereignty in a way that each country and each citizen are better equipped to control their own destiny”.

This he characterised as the essential destination for Europe as it struggles to overcome the crisis. Getting there, however, is highly problematic.

In political real time, consensus on the best way forward is as elusive as ever.