Stark warning Ireland needs to speed up austerity effort to ensure bailout success
INTERVIEW:Jürgen Stark’s abrupt exit from the powerful executive board of the European Central Bank sparked turmoil in the euro zone last Friday. Hours before his resignation was made public, he was interviewed by ‘The Irish Times’ in his Frankfurt office and made the case for public service pay cuts in Ireland to bring the public finances under control
JÜRGEN STARK seems like he hasn’t a care in the world. He is within hours of his resignation from the European Central Bank but gives nothing away, as he argues for cuts in Irish Civil Service pay to help bring the public finances under control.
This is toxic politically and would blow apart the Croke Park deal, which compels the Kenny administration not to cut public pay or make compulsory redundancies.
Yet Stark, who has an uncompromising attachment to balanced budgets, insists the Government must quicken the austerity effort to ensure the bailout is successful.
“I think the Irish Government has the chance to surprise the market positively,” he says.
“A very clear mandate was given to this Government by a broad majority of the Irish electorate so I think this Government really can do more, because it seems to me that the large majority of the people is behind this approach.”
We are sitting in his 34th floor office in the ECB’s Eurotower building in downtown Frankfurt. Books line the wall, a potted palm plant stands on the wooden floor.
Stark sees over-indebtedness as a moral problem and, by reputation, is something of a rottweiler when it comes to fiscal correctitude.
Still, aggression is absent as he calmly explains why Ireland should swiftly increase its dosage of austerity. Although he is soon to depart the ECB, his views on Ireland reflect the bank’s position.
“WE KNOW THATafter a certain period of time there is always a risk of reform fatigue,” says Stark.
“The Government should be even more ambitious in cutting the public deficit ratio, which is still at double-digit level.”
The debt crisis in the euro zone is into a dangerous new phase. Italy and Spain came close to the abyss last month and the ailing Greek bailout is again under threat.
The turmoil is stretching Europe to its limits, yet Dublin is increasingly winning plaudits for its execution of the bailout plan and notional Irish borrowing costs have eased. Stark warns, however, that sentiment could suddenly turn against Ireland. To guard against that, he says the Government should proceed further, faster down the path of fiscal recovery.
“The spreads of Government bonds over German bonds have come down. This is a positive sign, but it is not a given that this downward trend will continue.
“Ireland needs to rebuild confidence in financial markets. This requires a lot of hard work and also tough decisions, which have to be well communicated to the public.
“Without the support of the public and without strong political leadership, there is a risk that the programme gets off track and that Ireland fails to restore confidence in financial markets.”
The ECB is one of three institutions in the “troika” overseeing the Irish bailout, the others being the European Commission and the International Monetary Fund. Although each of the troika’s quarterly reviews of the programme has been positive, the view in Frankfurt right now is that Ireland needs to do more.
IN THIS ANALYSIS,the December budget provides a pivotal opportunity for the Government to prove its determination to see the rescue through.
As it stands, Minister for Finance Michael Noonan is obliged under the bailout to target a reduction in the budget deficit to 8.6 per cent of GDP.
This will require a cutbacks and tax increases of at least €3.6 billion, though more may be needed in light of stubbornly high unemployment and lower growth projections for the world economy.
Stark believes Noonan should pursue a bigger cut in the deficit anyway, saying the ECB’s governing council wanted a faster recovery plan when the bailout deal was done last November. “We were in favour of more ambitious targets.” Crucial here, he says, are “adjustments” in public pay, wage conditions more generally and social welfare entitlements.
This is code for cuts, hardly the stuff of popularity for a Government still basking in a post-election afterglow.
But Stark throws down the gauntlet to Dublin, saying the “frontloading” of difficult decisions would be good for the economy and good for the Government’s political standing with its sponsors in the euro zone. The preferred timeframe is the looming budget for 2012 and budget 2013.
“We fully appreciate what the Government has already done in correcting public wages,” he says.
“However, if you compare the wages in the public sector with the wages in the public sector of other countries in the euro area, together with Greece, Ireland is still ranking top. Public wage increases since the start of EMU [Economic and Monetary Union] have by far outpaced productivity gains. This needs to be corrected.
“It gives a signalling effect so that also private sector wages adjust to help restore competitiveness and it supports fiscal consolidation. I think also from a political point of view – which in principle I have no comment – one needs to consider that other countries of the euro area provide financial support to Ireland in which the wages of the civil service are significantly lower.”
So what exactly does he want? “What I say in a nutshell is that there is scope, further room for adjustment and to be more in line with the wages in the public sector in the euro area as a whole.”
Stark won’t be prescriptive as regards the scale of pay cuts he would like to see, but agrees with the interpretation that he would rather such moves came sooner than later. “It is an element of frontloading, exactly,” he says.
“The lower the deficit, the earlier the debt-to-GDP ratio will decline and the Government will be less dependent on the financial markets for refinancing the debt. So it’s as simple as that.”
Stark also expresses concerns about the extent of the Government’s effort to overhaul the State’s wage-setting mechanisms in the private sector.
In essence, he wants greater scope to cut pay. This is particularly difficult for Labour in Coalition, but proponents of the notion say it would serve to protect existing jobs and foster new ones.
“One issue that was addressed by the troika is downward wage flexibility in Irish employment contracts. Some progress has been made. However, this is a field in which there is also scope to be more ambitious,” he says.
With all of that in mind, does Stark believe social welfare payments should be cut too?
“This is up to the Government to decide and up to the parliament to agree in the end. It’s not up to the central banker.” Despite his caution, Stark says welfare entitlements should be examined.
“Reform of the welfare state is, by the way, an issue for pretty much every euro area country. Also Germany, France, Italy have ageing populations.
“I think it is obvious that the social security system and pensions system, healthcare, unemployment benefit schemes have to be adjusted. They have to be under scrutiny.”
THERE IS NO little frustration in Frankfurt at the Government’s continued push to impose big losses on some senior bond investors in Anglo Irish Bank.
In defiance of Dublin’s effort to raise the question again, ECB president Jean-Claude Trichet said last Thursday that he was not for turning. Stark echoes that sentiment. Burning bondholders is a “non-issue” in the bank’s eyes, and the Government’s priorities must lie elsewhere.
“I’m as surprised as the president that this issue seems still to be on the political agenda.
“Our position has not changed, for good reasons. The Irish Government has to consider what it means to be a member of monetary union, to participate in the single market, so whatever is decided in this context – to burn senior bondholders – has an impact on other market segments and on other regions in the euro area.
“This has to be considered. So Ireland is not autonomous in taking this decision and needs to consider the overall context.”
So is he saying this debate should be closed definitively? “Concentrate on the items that have to be on the top of the political agenda, to reform the Irish economy to bring the deficit down and not to bring up issues that in our view are non-issues.”
In the course an hour-long interview with The Irish Times on Friday morning, Stark gives no sense that he has been considering his own personal position in the bank or has any reservations about any of its policies.
At a press conference the day before, Trichet gave an impassioned defence of the ECB’s response to the financial crisis when questioned about blunt German criticism of its extraordinary interventions in sovereign bond markets.
Asked whether Trichet spoke for all in the ECB, Stark pointed out that the bank’s president was also its chief spokesman.
His anxiety about the bond-buying policy is widely held to be behind his resignation, which was announced less than four hours after this interview.
However, he describes as “absurd” and “inappropriate” political claims in Germany that the initiative has reduced the ECB to a pan-European bad bank.
“Those who criticise us and say that the ECB has become a bad bank forget that we are taking responsibility and repairing mistakes made at the level of the banking system.”
STARK SAYS HE cannot confirm an intervention by the ECB to buy Italian and Spanish bonds, but accepts that market sentiment towards these countries has changed. The bank sent messages to Rome and Madrid when they came under market pressure last month, he says.
“From Ireland you know that when a government has lost confidence it takes a long period of time to restore confidence.
“For this reason in our view it was necessary and appropriate that the Italian government and parliament took action and implemented the measures to bring down the government deficit.” The crisis demands early corrective action from all countries affected by the crisis, he argues.
“We have seen in the case of Greece and Ireland that there can be a sudden stop, that governments don’t have access to capital markets anymore to finance their budgets. This can happen for larger, advanced economies too.
“In the current situation no countries are really protected, they have to be ahead of the curve and convince the market it is worth investing in the country and that public finances are sound.”
Stark appears unperturbed by increasing talk about the possible expulsion of Greece from the euro zone, raised last week by Dutch prime minister Mark Rutte.
“Heads of state and governments have no intention to expel a country. At the summit on July 21st they gave clear signals to support member states in trouble based on conditionality – conditions defined and spelled out and implemented, to be financially supported,” he says.
“Conditionality is what counts, as solidarity must not be overstretched. Solidarity never can be a one-way street.
“What is needed at this point is to demonstrate solidarity with the single currency and to comply with the rules to allow monetary union to function smoothly.”
Stark, who is often portrayed as the arch-German anti-inflation hawk, has scant regard for those who say the relentless drive for austerity in Europe will not work.
“What is the alternative approach? To continue with high debt ratios, to increase debt even further, running the risk of losing access to financial markets, to put a heavy burden on future generations?” he asks.
“I think from a moral and ethical point of view, also from a political point of view, and from a point of view of inter-generational justice, this is impossible and not feasible.
“There is a need for adjustment, an urgent need for adjustment, in particular taking into account the decline in population in the number of people in advanced economies so we put an ever heavier burden on future generations and this is not acceptable.”
JÜrgen Stark omnipresent in all major German policy decisions
THE DEUTSCHMARK had vanished four years before Jürgen Stark arrived in the ECB in 2006. But for the moustachioed, bespectacled civil servant, his mission in Frankfurt was to act as the executor of the marks economic legacy of fiscal solidity and price stability.
As head of ECB economic analysis and statistics, he gave countless interviews and speeches urging greater fiscal discipline in the euro zone. Behind closed doors, he voted against ECB sovereign debt buy-ups, warning they undermined the banks credibility and independence.
As tensions grew on the ECB board, prompting the departure of Bundesbank president Axel Weber, Stark saw himself as the last defender of German-style Ordnungspolitik: allowing free markets operate within a clear regulatory framework.
Born in 1948, Stark’s career was shaped by the values of modesty, austerity and thrift he learned while growing up in postwar Germany.
After deciding against taking over his fathers vineyard in the Rheinhessen wine region, he studied economics. Completing his doctorate in Tübingen, near Stuttgart, he was exposed to the tensions of student revolution. Rather than join in he finished his studies and, as he said later, became more serious – read conservative.
He joined the Christian Democrats (CDU), rose quickly through the ranks of the Bonn political establishment and began work at the economics ministry. From 1988 he served four years at the Helmut Kohl chancellery and, from 1992, at the finance ministry.
In these years he was a Zelig-like omnipresence in all major German policy decisions. He helped crunch the numbers for unification in 1990, co-drafted the Stability and Growth Pact and assisted in fighting off the French to guarantee the political independence of the new ECB in the tradition of the Bundesbank, where he served for a time as deputy president.
When scandal forced out Bundesbank president Ernst Welteke in 2004, the Social Democrat government did not ask Stark to succeed him.
Just two years later, however, the CDU were back in power and Stark was nominated to join the ECB’s six-strong executive board as its de facto chief economist.
He had almost three years in his non-renewable ECB term left to run. Of late, he suggested he would like to see more of his wife and two children and his Baltic Sea holiday home.
After catching chancellor Merkel off-guard with his surprise resignation, he knows not to expect any more phone calls from Berlin. DEREK SCALLY
Divisions exposed: ECB under pressure
THE EUROPEAN Central Bank attributed Jürgen Stark’s resignation to “personal reasons” but his departure reflects divisions at the top of the bank over its interventions in bond markets.
The policy saw the bank buy Irish bonds last year but it was always controversial and led to the defection of former Bundesbank chief Axel Weber in February. The initiative intensified last month when the bank started buying the bonds of Italy and Spain. Stark opposed the decision, as did Weber’s successor Jens Weidmann.
In spite of private reservations, Stark never wavered from his public support of ECB president Jean-Claude Trichet. Such backing was crucial as Stark was seen as a bulwark representing instinctive German scepticism about the ECB’s expanding remit and its ever-increasing financial exposure to the weakest euro zone countries and their banks.
With political leaders divided over their response to the crisis, the ECB has made use of its operational independence to make extraordinary interventions in financial markets. This has cast the Frankfurt-based bank as one of the last lines of defence against the relentless turmoil in sovereign bond markets.
At a time when the crisis is escalating rapidly, the internal tensions exposed by Stark’s resignation may curtail the ECB’s room for manoeuvre.