Is the post-1945 European order coming to an end?
ANALYSIS:European leaders and the ECB seem incapable of getting to grips with this long-running crisis. The price for such indecision will be high
EVER FAILED. No matter. Try again. Fail again. Fail worse. Paraphrasing Beckett, that great purveyor of despairing angst, is an irresistible response to yet another failed meeting of EU leaders in Brussels. The only thing not to cause utter dejection yesterday was the market reaction – if it was not uniformly positive, it was certainly not negative. But don’t expect that to last.
Despite everything – the length of time the crisis has gone on, the barely calculable costs of failing to resolve it, and the clarity that exists on what can meaningfully be done to bring it under control – the response at the summit once again fell far short of what is required.
Add to that the constitutional uncertainties created by yesterday’s deal, the not inconsiderable rancour among leaders and the appearance that one of Europe’s three most powerful states appears set to disengage and move towards isolationism, and the picture could hardly be bleaker.
As has been clear for a very long time, the only hope of containing the crisis and restoring stability is the creation of a fiscal union and a step change in the response of the European Central Bank (ECB). Neither looks any closer now than before.
The EU leaders’ communiqué published yesterday contains no substantive advance on previous commitments. The focus – at all times – is on fiscal discipline.
Much better management of public finances, domestically and in a co-ordinated fashion among the euro member states, is vital, and a vital interest of Irish citizens and taxpayers who have suffered two entirely separate budgetary crises in a generation.
It has become fashionable to say that the crisis was not caused by budgetary mismanagement. That is not true of Greece, Italy and Portugal. It is only partly true in Ireland’s case. If successive Irish governments had saved rather than spent windfall revenues from the property frenzy, things would be a lot better now. Ditto for Spain.
It is also understandable that the countries with good records on managing their public finances seek measures and structures to prevent those with poor records from future mismanagement, given the spillover effects in a currency union that are now so painfully obvious to all. Their emphasis on new disciplinary measures would be warranted fully if it was a precursor to the single most important step towards fiscal union – the joint issuance of common bonds.
Barring the printing of money, a eurobond looks to be the only conceivable way of funding troubled euro zone governments cheaply as they put their public finances back on a stable footing over the years ahead. But that is still no closer.
And it gets worse. The European Financial Stability Facility, the entity that provides most of Ireland’s bailout monies, is a busted flush. It will be in real trouble soon. Its cornerstones are the six remaining euro zone governments with triple-A credit ratings. With all euro zone governments at risk of having their credit rating downgraded by at least one agency as early as this weekend, its cost of borrowing is going only one way. There are negative budgetary consequences for Ireland if that happens.
The bailout fund and its successor, the European Stability Mechanism, could have been given banking licences this week. That would have allowed them tap the ECB for funds if private investors shunned their bonds. But that was rejected too.
The only immediate relief the commitment to more fiscal discipline could have brought was a stepping up of the response of the zone’s monetary authority. Mario Draghi, president of the ECB, hinted previously that he would deploy his institution’s powers in a manner proportionate to the scale of crisis if governments agreed more rigorous fiscal rules.
But even before EU leaders went into conclave on Thursday, he had rowed back, claiming he had been misinterpreted. Despite having the tools to act, he continued to talk on Thursday of not breaching the EU’s treaties, something no government is asking him to do.
Thursday’s announcements by the ECB were significant – but only for the banking sector. Since 2007, Frankfurt has been prepared to be radical when acting as a lender of last resort to the financial system. Its decision to lend to banks on a three-year basis – of huge benefit to the Irish banks – should help calm fears of a European bank going the way of Lehman Brothers and ease the worsening continent-wide credit crunch.
But Europe’s banks will not be stable until the sovereigns behind them stabilise. At this juncture, only the ECB can immediately break the cycle of cross contamination between banks and sovereigns.
What would a real solution look like? Switzerland is both a model for the euro zone and one which suits Ireland’s national interests. Confederal Switzerland’s fiscal union is of particular interest for Ireland as it shows how different rates of corporation tax among the constituent parts of a currency union are perfectly possible. Some Swiss cantons have ultra-low profit taxes and other have rates closer to the European average, depending on their individual objectives and values.
Nor does Swiss fiscal union mean its constituent parts cannot decide on how much they can tax and spend. Some cantons, mostly the francophone ones, are big spenders and taxers. The German-speaking cantons tend to be less expansive. There is nothing in practice or theory that says well-run fiscal unions cannot allow big variations in the size of government from one region to the next.
But the events of this week show that European governments are not remotely close to moving towards any real solution to the crisis. Nor do they have a model towards which they are working.
And with Britain putting the interests of its financiers ahead of its wider, long-term strategic interests, the crisis of the euro zone has spread to become a crisis of the entire European integration project.
For decades, the continent’s mechanism of interstate co-operation helped transcend historical grievances, reduced the inevitable frictions that arise from ever greater cross-border interaction and maximised the gains from such interaction. It was admired and emulated – from Mercosur in Latin America to the African Union and the Association of Southeast Asian Nations (Asean).
No more. Now, that model is failing. Outsiders look on aghast and deride the inability of Europeans to get to grips with the crisis. With each passing week it looks as if the post-1945 European order is coming to an end. There is neither a plan to save it nor a plan to replace it.