ECB's Draghi hails note deal
European Central Bank President Mario Draghi testifies before the Committee on Economic and Monetary Affairs at the European Parliament in Brussels today. Photograph: Eric Vidal/Reuters
European Central Bank president Mario Draghi said today the promissory note deal was a "positive" step for Ireland, despite reservations from Germany’s Bundesbank.
The accord, which will see the promissory notes exchanged for long-term bonds held by the Central Bank, will ease Ireland's borrowing needs by up to €20 billion over the next decade.
Speaking at a meeting of the Economic and Monetary Affairs Committee of the European Parliament this afternoon, Mr Draghi said the deal will be reviewed by the ECB in its annual assessment later this year. Mr Draghi said the disposal of the bonds in a way that ensures "compatibility with financial stability" would be "crucial" to Ireland’s restructuring.
He said the opportunity has "not necessarily" passed to object to Ireland's deal. "We will assess the compliance with Article 123 at the proper opportunity," Mr Draghi told European lawmakers in Brussels today, referring to a prohibition on central banks financing governments. "If it does not" comply "we will see what legal remedial action needs to be taken," he said.
Former ECB executive Jürgen Stark has joined Bundesbank criticism of Ireland, describing the new promissory note arrangement as a clear breach of the bank’s prohibition of monetary financing. Dr Stark’s criticism follows fresh criticism from the Bundesbank in its monthly report yesterday that the deal underlines “increasingly stronger and more problematic inter-linkage between monetary and fiscal policy in the European monetary union”.
These arguments reflect a long-term fear of German monetary hawks that the ECB, in its efforts to assist in resolving the eurozone crisis, has broken its own rules, compromised its
independence and made itself beholden to politicians.
Dr Stark said yesterday the arrangement with Ireland was a further demonstration of “the ECB’s new understanding of crisis management”.
“The ECB’s contractual basis and core mandate shift further into the background,” he wrote yesterday in “Die Welt” daily.
Earlier, the Bundesbank said the involvement of the Irish Central Bank in the promissory deal is “problematic”. In its monthly report, the German central bank highlighted what it described as "the increasingly stronger and more problematic inter-linkage between monetary and fiscal policy" in the European monetary union.
"The European Stability Mechanism, which should be responsible in this regard, has been established to provide any help to individual member states in servicing debt," it said. It highlighted what it described as "the increasingly stronger and more problematic inter-linkage" between monetary and fiscal policy in the European monetary union. "The European Stability Mechanism, which should be responsible in this regard, has been established to provide any help to individual member states in servicing debt," it said.
Meanwhile, Minister for Social Protection Joan Burton dismissed suggestions that the deal is in danger of unravelling, saying it was “generally recognised” that the agreement was helpful to Ireland and the European Union. She also reiterated that savings from the deal should be availed of this year despite resistance from the troika to any such move.
The Government is facing resistance from the troika against any move to use gains from the Anglo Irish Bank promissory note deal to soften next year’s budget.
“I think the troika, no more than myself, must be very, very aware of the difficult news that unemployment in the euro zone countries is at 11 per cent and overall in the EU at 10 per cent. They are shockingly high figures, and in Ireland it’s 14.6 per cent,” Ms Burton said in Dublin this morning.
"The critical thing is the promissory note deal gives Ireland a small bit of extra leeway in relation to helping people get back to work and I would like to see the Budget framed in the context of helping people get back to work, and we have that bit of extra leeway from the promissory note deal.”
The troika has taken a disapproving view of claims on the Labour wing of the Coalition that the Government should ease the deficit-cutting plan. Many at the top of Fine Gael favour waiting longer, prompting expectations in Government circles that the clamour to allocate gains from the deal will dominate the budget debate in coming months. Concern is building within the troika that early moves to relieve pressure on the budget could damage the push to regain access to private debt markets.
There is further concern that talk of extracting early fiscal gains from the deal might hinder the effort to prise longer bailout loan maturities from other euro zone countries. In addition, there is anxiety in the troika – comprising the International Monetary Fund, European Central Bank and the European Commission – that such talk could weaken the Government’s hand in the Croke Park public sector pay talks.
Asked whether legal uncertainty around the deal made planning more difficult, the Ms Burton replied: “I don’t believe there is such uncertainty. I understand that there are concerns in certain quarters and that a number of people have expressed their view… but we have a point of view as do most countries across the EU in relation to the crisis – and the existential crisis for the EU of so many people in so many countries being unemployed.
“I think it is generally recognised that the deal for Ireland has been helpful for Ireland. It’s positive and it’s promising… and I expect what the ECB will be looking to is to how Ireland actually benefits then from the greater flexibility and the greater room for manoeuvre that the deal gives us.”
Ms Burton was speaking in Dublin this morning at a forum to discuss a planned review by her department of employment support schemes. The Department plans to increase the number people on such schemes by 10,000 to 85,000 this year.
The Government is obliged to cut the deficit by €3.1 billion in 2014 and €2 billion in 2015, a total of €5.1 billion. Following the arrangement with the ECB to replace the promissory notes with long-term bonds, the Government believes it has scope to reduce the €5.1 billion by €1 billion in the two years. “This doesn’t go down at all well,” said a European source in Brussels familiar with the rescue programme. “It doesn’t send the right signal to the other member states.”
Although Minister for Transport Leo Varadkar took an opposing view to Ms Burton in the Dáil debate, Tánaiste Eamon Gilmore said on Friday the deal will bring “a tangible benefit for people” in the next budget.
However, the European source said Dublin remains within a formal “excessive deficit procedure” with the EU authorities, under which the Government is obliged to use windfall gains to pay down debt.
“The council decision is still binding on Ireland,” the European source said in reference to the deficit-cutting plan agreed with the council of EU finance ministers.
Citing an expression made famous by former finance minister Charlie McCreevy, the source said suggestions that the gains would be used immediately to ease the fiscal adjustment were redolent of the “if I have it, I’ll spend it” mentality.
Such claims could be read as a sign Ireland was not willing to help itself. This was particularly so when the troika was urging other euro zone countries and non-euro EU members to help Ireland further by lengthening the duration of rescue loans from the European Financial Stability Facility and the European Stability Mechanism. The source said additional measures might be required to ensure a smooth exit from the bailout programme after the summer.
The source also said the troika and market investors saw that Ireland’s primary budget deficit was still very high, and added the pace of fiscal consolidation set out in the current plan was “if anything too gradual”. There was an argument that Ireland “should have done more, earlier” to tackle the deficit.