ANALYSIS:The ECB's demand it be protected from the 'Irish problem' has brought this crisis to a head with remarkable speed, writes DAN O'BRIENEconomics Editor
IN SOME respects, the past week has been the most extraordinary in Europe since the financial and economic crises erupted 26 months ago. It has unquestionably been the most extraordinary week from an Irish perspective when both economic factors and the political history of this State are considered.
Seven days on from this sudden shift, which culminated in a bailout being rammed down the Government’s throat, it is worth attempting some stocktaking: what happened, why it happened and what it all means.
As anyone who has cast even the most cursory glance in the direction of the curious beast that is the EU will have observed, differences in the interests of its members and institutions – and how these are resolved or not – characterise it. It is, first and foremost, a giant dispute-resolution mechanism.
But grinding out resolutions, through bargaining and negotiation takes time. The EU, therefore, was not built for speed, which explains why it usually flounders in fast-moving crises – from the Iraq invasion to the Greek meltdown.
That events have moved with such speed in the past week is just one reason why current happenings are so extraordinary. When Central Bank governor Patrick Honohan spoke yesterday of “tens of billions of euro” in emergency backstops being needed to shore up the banking system here, one can see why such rapid action appears to have become unavoidable.
Frankfurt last Friday is the starting point for the current chapter in the crisis. Then, the European Central Bank (ECB) took off on a solo run, having decided that it would force the hand of Ireland and the other European actors on the “Irish problem”.
This illustrates, among other things, how the EU is not at all the monolith that Eurosceptics often like to portray it. It is, in fact, the exact opposite – a hydra-like creature, whose different heads are sometimes at odds with each other and not always pointing in the same direction.
This last point was reinforced by a source who informed The Irish Times that at the end of last week neither Herman Van Rompuy, the president of the European Council, nor José Manuel Barroso, his counterpart at the European Commission, had Ireland on their radar screens.
That the leaders of the two most important Brussels-based EU institutions were uninformed of the ECB’s intentions is further evidenced by Olli Rehn’s words and demeanour while in Dublin just days earlier. He gave no hint that a bailout was remotely imminent then, or that he viewed the banking issue as a significant threat to the four-year budget plan he was working on with the Government. His profession of relative ignorance on the state of the Irish banking system two days ago in Brussels would appear to confirm that.
While it has not been possible to confirm the trigger for the ECB decision to demand that it be protected from the effects of the Irish problem, it is very clear that the monetary authorities in Frankfurt believe the euro zone’s fiscal authorities (ie the governments) must do the heavy lifting. From its own institutional perspective, this is understandable. But in the wider euro zone scheme of things it is less so. It is the role of a central bank to provide liquidity, even emergency liquidity when financial systems appear fragile. That is why one of the functions of central banks is to be the “lender of last resort”.
In cases where they make loses as a result of this last-resort lending, or for any other reason, and are at risk of insolvency, it is for the fiscal authorities to step in and support them with capital injections.
Such an outcome would be disastrous for any central bank, not least because seeking money from the fiscal authorities would compromise its independence. In this case, it is even more complicated, as big losses would require support from all euro zone governments, thereby distributing the losses of the Irish banking fiasco across Europe. The fund that Honohan spoke of yesterday looks very much like an insurance policy for the ECB, albeit one that is intended to be paid in full by Irish taxpayers.
It is hard to avoid the conclusion that we are now at, if not beyond, the limits of European solidarity.
From a purely tactical perspective, however, the ECB has played a very astute game. Just six days after it let it be known that it would no longer tolerate the current situation, its officials are billeted in Dublin.
However humiliating it is to be rescued in this way, the intervention will have an upside if it results in a much more aggressive approach towards the banks, with a full clear-out of bubble-era senior management and board members and the sort of radical restructuring that was anticipated after the guarantee was introduced. That never happened because the Government didn’t have the stomach to exercise lawful and proportionate authority vis-a-vis the people who crashed the banks and then repeatedly lied to it.
What of the cash cost of the bailout to taxpayers? Among the few laudable and proactive initiatives taken by a Government that has lost all its remaining credibility and legitimacy was the appointment of the properly qualified Honohan to head the Central Bank, and the appropriately detached Matthew Elderfield as Financial Regulator.
It was reassuring to hear both men say they do not expect additional losses on top of the gargantuan sums revealed on September 30th. It can only be hoped that they are correct, both for the sake of taxpayers and for future prospects of having more of their ilk in positions of influence (if they have got it wrong, the case for outsiders will be greatly weakened).
A final question, and the one that is now the most important for Ireland and the rest of Europe: will the aggressive intervention in Ireland halt contagion that threatens to sunder monetary union? That is far from clear. Portugal is fragile and it would not take much now to push it into the bailout club with Ireland and Greece. And then there is Spain. A Greek-style surprise, with revelations about the size of its deficit, is a concern. That could break the euro.
This all has a very long way to play. It will be crossed fingers all the way.