A lot done, more to do: EU in 2013

In the fourth year of Europe’s debt saga, EU leaders must still settle some of the most fundamental questions raised by the debacle. The ordeal continues, even if the ECB’s bond-buying policy took some of the sting from the crisis after September.

This year ends with the EU at something of a crossroads. For all the failings in their response to the Greek debt explosion in 2009 and what followed, EU leaders still managed to prevent the euro splintering. That’s no small thing. There were many perilous moments when break-up seemed a real and growing threat.

Still, the prevailing atmosphere is one of acute uncertainty. The EU powers have yet to provide a convincing long-term plan to heal the abundant frailties of the euro’s weakest members or to secure the currency’s long-term survival. That is the challenge they must still overcome.

As the German chancellor, Angela Merkel, faces an election in September, concern surrounds her narrowing scope for manoeuvre and her habitual caution. As she has done since the beginning of the imbroglio, the chancellor will set the pace on the depth of Europe’s response.

At issue in the months ahead will be the scope of new efforts to deepen the economic alignment of the euro-zone countries.

Doubt persists as to the form or timing of the “banking union” initiative. Whether it meets the objective of severing the link between bank and sovereign debt may depend on whether any bank debt is mutualised. Merkel and her Dutch and Finnish allies are opposed. No change is likely before the German election.

Further doubt surrounds Britain’s place in the union, the prospect of a tricky referendum on its place in the EU and the growing risk that it might leave altogether. This is to say nothing of deepening tensions in the strained alliance between Germany and France, for decades the unyielding motor of European integration. On top of all that, events in countries such as Italy, Spain and Greece could disrupt the relative calm of recent months. What happens next in each could be pivotal. Will Silvio Berlusconi return to the fray in Rome? Will Madrid need a full-blown bailout? Can Athens execute a €13.5 billion austerity plan?

Irish prominence

The danger for Ireland in this is that any resurgence of the crisis could compromise the effort to break free of the bailout next year. Both in its domestic and European policy, that remains the Government’s priority (see panel). While the six-month rotating presidency of the EU will give heightened prominence to the Coalition come January, its main task will be to steer numerous pieces of complex legislation through ministerial councils.

At the top of the in-tray is the still-unresolved seven-year EU budget from 2014 onwards. A special budget summit in November broke down without a deal, so it now falls to the European Council president, Herman Van Rompuy, to push for compromise. For the Irish presidency, the lack of an early agreement delays the preparation of 68 items of European legislation needed to give effect to the new EU budget. This serves to complicate the challenge facing Taoiseach Enda Kenny.

For the EU, the very lack of a budget deal stands as a further damaging example of Europe failing to agree on essential political questions when the pressure is really on. If this was merely a repeat showing of the tensions seen in the debt drama, the budget story illustrates how deep the schisms now run.

When the British prime minister, David Cameron, found a friend in Merkel in his push for a hearty dose of budgetary restraint, three powerful forces were evident.

First the growing clamour from Tory eurosceptics for Cameron to call a referendum on Britain’s membership. Cameron would prefer a vote to loosen ties to the union while remaining inside. Either way, momentum now favours a moment of truth for Europe with a doubtful British electorate.

Second was Merkel’s determination to do all in her power to keep Cameron on side and to avoid isolating him in the summit chamber. In the febrile Westminster debate, in which the EU has few champions, isolation for Cameron would only magnify the risk of an eventual exit.

Third was the sense that the chancellor was willing to leave French president François Hollande to himself as he tries to cultivate a new political alliance with “southern” countries such as Spain and Italy. This was but a further reflection of a divide between Merkel and Hollande. She favours fiscal rectitude as the panacea to the crisis while he promotes economic growth over austerity. With unity between France and Germany the essential precondition for European progress on anything, this augurs badly. “For the last 20 years, all summits were precooked by Germany and France. That’s just about gone,” says a senior European figure.

Eyes on the prize: Ireland's struggle to return to the markets

The Irish Government faces a moment of truth in 2013 as it strives to break free of the EU-IMF bailout and regain access to private debt markets.

Although the Coalition continues to win plaudits in Europe for its unswerving execution of the rescue programme, it remains to be seen whether it can definitively convince international investors Ireland is worthy of confidence. Crucial here is Dublin’s campaign for bank-debt relief from its European partners, which may make the difference between a smooth return to markets or rejection, as well as whether the euro-zone atmosphere is calm or not.

The stakes are enormous. Success would enable the Kenny administration to declare the restoration of Irish economic sovereignty after the shrill indignities of foreign intervention under Fianna Fáil and the Greens. That is a glittering political prize, even if the coarse economic diet of swingeing cutbacks and grinding tax increases is unpopular. The inexorable seepage of national policy discretion under the fiscal treaty and other new European laws means economic sovereignty is a much leaner in any case.

Failure to win investor support would mean more emergency aid, eroding Government credibility further. So the drive to shake off the “troika” shackles is the Government’s top priority. If Ireland’s EU presidency carries prestige after humiliations, the real benefit is the scope it gives to demonstrate competence and professionalism to the world.

The rescue loans run out next autumn, but Ireland will still run a very large budget deficit – and big debts mature in 2014 and 2015. The reality is the countdown has already begun. The NTMA made a tentative return to markets in 2012, and declining bond yields mark a reduction in national borrowing costs. They are highly positive developments, but do not necessarily mean the Government will be able to stand without crutches. A debt relief deal remains elusive.

Goodwill towards Ireland has yet to translate into a firm arrangement to recast the Anglo Irish Bank promissory note scheme or for the ESM fund to shoulder debts for AIB or BoI. The political and legal difficulties are legion but EU leaders recognise Ireland remains the only prospect they have of an early exit from the bailout zone. This plays into Kenny’s hand, and he knows it.