Thursday, August 25, 2011
DEEP divisions are at the heart of prevailing paralysis in the eurozone.
Cracks can no longer be papered over. Europe lacks leadership. Procrastination, indecision and inertia from the top table of prime ministers and presidents have allowed markets to dominate muppets.
When Spain and Italy accompanied peripheral states of Greece, Portugal and Ireland, in requiring centralised support to finance their sovereign bonds, it was clear that the euro was unravelling. This presented a stark choice — construct a federal fiscal union or allow the break-up of the single currency. Solutions are well-established. These are neither palatable nor acceptable to paymaster states. At the heart of the problem lie 91 European banks. Recent stress tests maintain that they need €2.5 billion of recapitalisation. Markets believe, when adjustment is made for sovereign bond liabilities, that €112bn is actually required. This black hole is central to sharp declines on stock exchanges last week, where 20% was wiped off their value. Paranoia now grips the interbank lending market, with banks placing deposits with central banks and federal reserves, rather than each other. These were precisely conditions that led to the credit crunch and Lehman’s collapse in 2008. When denial becomes the central tenet of policy, expect disaster.
Eurocrats at the centre of decision-making (eg Rehn, Barroso and Juncker) believe in a clear set of new structures and policy instruments that can consolidate and defend the EMU. This starts with converting the EFSF into the European Stability Mechanism (ESM), with increased resources initially from €440bn to €780bn, with ultimate capacity of €2 trillion. This liquidity would become finance through Eurobonds, a standard form of finance for all 17 member states. This will allow pooling of GDP/debt ratios, currently averaging around 60%. The quid pro quo would be an integration of fiscal policy, leading to the establishment of a centralised EU Treasury Department. This would effectively oversee and control budget deficits and borrowing requirements.
On the opposing side are states, who perceive that they would be left to underwrite perceived indolent, reckless, irresponsible and spendthrift mendicants of the Eurozone. Germany, Netherlands, Finland, Austria, Slovenia and Slovakia are already seeking to obtain bilateral collateral from Greece in return for €109bn of bailout funds, agreed in July. They fear losing their Triple-A credit rating. They promise voters and coalition government partners that they will oppose writing a blank cheque to protect the euro. It’s not that Angela Merkel and Nicholas Sarkozy don’t get it, they do. And there are resisting it steadfastly. Their top line rhetoric maintains they would do everything to protect the euro, while they effectively veto Eurobonds and avoid mega recapitalisation of their banks. If this stand-off exacerbates, an unprecedented crisis will ensue.
This political polarisation leaves the ECB holding the baby on an interim basis. Their mandate to buy sovereign bonds in secondary markets, since the EU Council summit on July 21, resulted in €22bn of support in one week alone. This is unsustainable for any indefinite period. John Claude Trichet has no mandate for quantitative easing. His anti-inflationary policy of raising interest rates resulted in zero growth and stagnation. He seems preoccupied with reaching the landing strip of retirement in October. The ECB governing Council is deeply divided as to its role and level of intervention. They pretend that the top 25 banks under their supervision have sound balance sheets. Leadership resolution will not come from this source.
For Ireland, we must accept that we are a pimple on the backside of global financial powers. Our credibility must be restored by bringing the current budget deficit back into balance. The spectacular collapse of our banks and subsequent nationalisations has left us teetering on the brink of bankruptcy. Recent spin about us being best placed for growth represents yet another false dawn. Prospective budgetary austerity will smother domestic demand for the next two years. Credit finance remains unavailable to indigenous business. Recovery is dependent on export led growth from markets that are now flat-lining. Avoidance of double dip depression is the key obligation amongst our customers.
What is our optimum political strategy in Europe? Abandoning the euro at this time would be done from a position of maximum weakness. Our financial institutions and Exchequer are utterly dependent for liquidity and solvency on the EU, IMF and ECB. This bailout bubblewrap is our only remaining source of cash flow. Only option is to make the euro currency survive and work well. We have to be strongest advocates of Euro Bonds, expansive ESM and a new EU Treasury Department. The stability and strength of an indestructible currency, competitively valued, provides the best circumstances for economic recovery. We may as well make a virtue of centralised economic governance that requires single digit percentage budget deficits and sensible debt ratios. These are a pre-requisite to returning to the markets for sovereign finance. This positive approach to federal fiscal union does not detract from the ultimate necessity for multilateral sovereign default to ensure sustainable levels of debt repayment nationally. Nor does that mean that we cannot articulate concerns about the proposed "Tobin Tax".
This financial transaction levy could undermine our IFSC, unless it’s global in application. Dublin, London and Luxembourg are all vulnerable to lateral movement of financial service business outside the EU, if there’s a zero charge elsewhere. Sweden suffered acutely when they introduced a 0.5% surcharge in 1984. This proposal should be placed firmly on the agenda of the G20 states as a common measure arising out of the credit crunch, to recapitalise financial institutions. An Irish acceptance of the Euro Plus pact is not equivalent to adopting the latest Franco/German diktat from Paris. The grotesque self-importance of opportunist Sarkozy knows no boundaries. Hopefully, he will be discarded by the French electorate in next year’s presidential poll. Renowned Gallic public and private sector inefficiency offer little to the rest of Europe. His repeated attempts to undermine our corporation tax regime are unnecessary and distasteful. Our empathy and loyalty must lie with fellow member states, the commission and other EU institutions that believe in mutual respect and interdependence of each country. Sarkozy is the best recruiting agent for euro scepticism, which would gladly replace the E in EU, with the next letter in the alphabet.
We have more at stake than any other participant in ensuring that the euro infrastructure is reconstructed. Any new treaty is likely to require approval by referendum. As before, we could be the Achilles heel in endorsing a new pact by plebiscite. We must participate in a coalition of the willing to persuade Europe’s superpowers they would be confronted with the same problems as Switzerland. The Swiss franc has drastically appreciated, due to a flight of capital to safety. They may now seek to lock on a set value to the euro. A two-tier euro could result in a 30% currency revaluation for Germans and Dutch. Benefits they gain from collective competitiveness must lead to underwriting consolidation rather than meltdown.
© Examiner Publications (Cork) Limited, City Quarter, Lapps Quay, Cork. Registered in Ireland: 73385.
