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Saturday, June 30, 2012
Enda Kenny has warned taxpayers not to expect an immediate budget dividend, despite what the Taoiseach hailed as a "seismic" EU bank debt deal.
The agreement came after Italy and Spain effectively held the EU summit to ransom by insisting they would block a key €120bn growth initiative unless Germany gave ground to ease the crippling costs of their borrowing.
While many details have still to be worked out, the dramatic dawn deal will see Brussels permit rescue funds to be used to stabilise bond markets without forcing extra austerity measures and sovereign debt onto countries in crisis.
The move should allow Ireland to reorder its massive €31bn Anglo payments and slash the national debt by at least some 20%. It also opens the door to taking the €24bn put into recapitalising the banks off the Government’s books also.
The breakthrough greatly reduces the likelihood of Ireland needing to apply for a second bailout next year as debt will reach more than 120% of GDP, generally considered unsustainable.
Markets reacted positively to the news as the cost of Irish bonds fell markedly on the news, at one stage going lower than Spain’s.
However, Mr Kenny insisted the deal would not affect this year’s budget, which will see tax hikes and spending cuts amounting to €3.6bn imposed as planned, as deficit-reducing targets must be met.
Finance Minister Michael Noonan was more positive, suggesting that future budgets could be significantly less stringent due to the deal.
Tánaiste Eamon Gilmore was also upbeat, describing the deal as a "major game-changer" that would pave the way to Ireland borrowing on the open market.
The deal means the EU bailout funds can lend directly to banks without putting the taxpayer on the hook for their debt — something Ireland was denied and which has been blamed for spreading the crisis in the eurozone.
However, it could be at least six months before this comes into play as the ECB takes over supervision of all the eurozone’s big banks. Eurozone finance ministers, including Mr Noonan, will work on the details at a meeting on July 9.
The summit also opened the door to possibly the biggest change in the make-up of the EU since its formation with a commitment to full political, fiscal, and banking union that will also include eurobonds and countries sharing debt.
They laid the groundwork for the banking union with the decision that the ECB should supervise the eurozone’s main banks, while a different format will be found for smaller banks.
The roadmap and headlines for a fiscal union should be finalised by October, and will see Brussels take greater control of national budgets as it moves closer to issuing eurobonds as countries share responsibility for one another’s debt. At the same time, they will move ahead with plans for political union that could see a federation with greater co-operation on a wider range of issues including foreign and security policy.
All this will take about a decade and require changes to the EU treaties and to the Irish and German constitutions that will entail referenda in both countries and possibly others. It will also lead to Britain having to take decisions on where it stands on Europe, as it is in danger of becoming more isolated.
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