Europe letter: European Parliament could further Irish case for debt relief

This week the European Parliament, often dismissed as the weak younger sibling in the European Union family, took momentary control of the debate on the euro zone crisis, usually the sole preserve of the European Commission and Council.

At its plenary session in Strasbourg, some of the senior figures in the crisis were summoned before the economic and monetary affairs committee, headed by the formidable British MEP Sharon Bowles.

EU commissioner Olli Rehn, former European Central Bank chief Jean-Claude Trichet and European Stability Mechanism head Klaus Regling were questioned by MEPs as part of their inquiry into the workings of the troika, ahead of the MEPs' visit to Dublin today.

How far the inquiry can change the practices of the troika is debatable – cynics point out that the legislative power of the European Parliament is limited and the troika arrangement is likely to stay until at least the end of the Greek bailout – but the questioning of a system that has had a profound effect on the citizens of Greece, Portugal, Cyprus and Ireland is important nonetheless.

Starting point
If nothing else, the parliament's draft report on the inquiry, to be finalised in the next few months, provides a useful starting point for future analyses of the troika.

The report, and the accompanying questionnaire sent to the European Commission, European Central Bank and central bank and finance ministries of the programme countries, pinpoint a number of issues.

First, they question the “lack of transparency” in the memoranda of understanding drawn up between the troika and programme countries. Were formal documents clearly communicated in due time to national parliaments? Were the member states concerned given enough leeway to decide on the design of the programmes? What was the level of interplay between the troika and member states?

The parliament also queries the “over-optimistic assumptions of the troika”, which saw the EU-IMF team badly misjudge the level of growth experienced in programme countries. Implicit in this is the troika’s almost exclusive focus on austerity as a driver of economic growth. The parliament’s report specifically asks the troika to explain its analysis of the “interplay between fiscal consolidation and growth” , arguing that “too little attention has been given to alleviating the negative impact of adjustment strategies”.

It also points out that public debt-to-GDP ratios in programme countries (including Ireland) remain particularly high, despite the fiscal consolidation programmes.

The parliament also raises possible conflict of interest in the European Commission’s position as both the “agent” of member states and an EU institution. A similar charge is laid at the door of the European Central Bank, which was both “technical adviser” to the troika and creditor of the four member states.

The role of the ECB in particular is of interest to Ireland, which has consistently argued that the option of burning senior bondholders was not open to it, meeting particular resistance by Frankfurt.

Much of the impetus behind the parliament's inquiry is of course self-serving – as
members of the only directly democratically elected EU institution, MEPs enjoy criticising other EU bodies for their lack of "accountability".

With European elections on the horizon, troika-bashing is also a sure vote-winner in austerity-weary programme countries, whatever the political realities of having to adhere to a bailout programme. After all, Olli Rehn and Jean-Claude Trichet's defence of the troika this week – that the acute nature of the euro zone crisis necessitated a rapid and unprecedented response – is indisputable.

Nonetheless, the European Parliament visit to Ireland that begins today may also prove a useful tool as the Government continues its campaign to secure retroactive debt relief for its banks, with Minister for Finance Michael Noonan expected to set out the facts surrounding the June 2012 commitment by EU leaders to consider Ireland's case.

It may not have the legislative power to bring about fundamental change,
but the European Parliament may be able to exert a certain amount of "soft power" on decision-makers.

Direct recapitalisation
With a number of member states still staunchly opposed to the concept of retroactive direct recapitalisation, Ireland needs all the help it can get.

The parliament’s suggestion that the ESM treaty could possibly be changed to allow decisions to be taken by qualified majority, rather than by unanimity as is currently the case, in effect giving Germany a veto, also would have particular implications for Ireland, which is seeking the use of ESM money to retroactively directly recapitalise its banks.