WORLD VIEW:A grand bargain on economic governance seems unlikely, giving scope for negotiation
‘EUROPE WILL be forged in crises and will be the sum of the solutions adopted for these crises.” This remark in Jean Monnet’s memoirs remains relevant for understanding the euro zone’s current troubles which bear so heavily on Ireland after last week’s elections.
Today, Enda Kenny is in Helsinki and Eamon Gilmore is in Athens meeting leaders of their respective political groups. In resolving this crisis much depends on the solidarity available from these groups as they forge a coalition programme and formulate a strategy to renegotiate the EU-IMF deal. It is a real test for the centre-right and centre-left families that cross-cut the EU’s normal politics conducted between governing leaders – and for those on the more radical left and right.
Germany dominates the European People’s Party group of which Fine Gael is a member, along with existing right-wing governments in most of the member states. But in neither case does Angela Merkel’s government command a majority for its solution to the euro zone crisis. This makes her less determining or dominant than is usually assumed. The competitiveness pact she proposes assumes the crisis is a problem of sovereign state indebtedness to be solved by a stringent programme of fiscal retrenchment and stronger rules against future overspending.
That was formulated on the assumption that the euro zone crisis as a whole is like the Greek one which triggered it last year and which has had such a profound impact of Germany’s political consciousness. Hence the insistence on punitive interest rates to dissuade Greece, Ireland, Spain and Portugal from repeating such “sins” of moral hazard. But if, as is more and more argued, the euro zone’s problems do not arise from state indebtedness but from a weak and overleveraged banking system, the German solution will not repair it. Ireland’s crisis arises from private not public debt, which taxpayers are being asked to pay by socialising private risk.
The German approach therefore looks increasingly like a policy mistake imposing an unacceptable burden on peripheral member states to resolve a common European problem – and one that intimately concerns German banks. Ireland’s bank guarantee, on this analysis, avoided something like a contagious European bank collapse, as Patrick Honohan and John Bruton said this week. This deserves recognition as EU leaders argue about increasing the European Financial Support Fund agreed last May.
There are clear divisions between officials in the European Commission and the European Central Bank who resist any suggestion of shaving bank bondholders for fear of creating a contagion, and Merkel who is willing to see that happen after 2013. Irish negotiators should seek to exploit these, along with other indebted states. The fund will have to be increased substantially, even doubled, if it is to deal with banking problems as distinct from state indebtedness. A banking crisis will not go away, although it can be postponed by piling the cost on peripheral states.
It seems unlikely that a grand bargain dealing conclusively with economic governance and the fund can be reached. This would give more scope for political bargaining about the Irish debt burden if the opportunities are taken to exploit alliances and formulate alternative demands.
This week the German Social Democrat leader Frank-Walter Steinmeier told the Financial Timeshe has a very different perspective. "It may be a crisis programme," he said, "but if it is, then it is for another crisis than the one we have. Not a single element is appropriate to end this European crisis, which is not so much a currency crisis, but rather one caused by economic instability in big parts of Europe."
Steinmeier supports cautious moves towards creating a Eurobond system, which would collectivise the risk at EU level. The German right rejects this vehemently and it will be interesting to see whether the Social Democrats withstand the pressure of public opinion as the prospect opens up that they might win the next elections. A Eurobond solution would be in Ireland’s interest; why has it been so little discussed here?
Just as Enda Kenny must exploit differences in his political family to get a solution to the crisis that better suits Irish interests, so Eamon Gilmore should seek commitments from his social democrat partners about an alternative strategy. What do the French Socialists have to say about it, for example, as Sarkozy looks increasingly weaker?
By the same token larger issues will be thrown up in a longer time span, including Ireland’s corporation tax. It is surely time to lift the taboo on discussing this policy as if it cannot be changed. Given the amount of indebtedness we face is there not a rational case to bargain an increase in it against a reduced burden, even to take the initiative on that? Have the research and sums been done on this and the alternatives assessed? Why should capital taxation pay so little towards Irish fiscal consolidation?