We took a hit for the team, now Germany owes us an orderly break-up

By Ivan Yates

Thursday, November 17, 2011

"WE require a head — yours or Harry’s".

These are words purportedly used by Rúairí Quinn, back in November 1994. The circumstance was the Labour Party ultimatum to then Taoiseach Albert Reynolds in the wake of the delayed extradition of a paedophile priest. It resulted in a change of government, without an election. Recent extraordinary political developments in Rome and Athens remind us of that regime change here. The significant difference is that these power-plays came from outside sovereign states of Italy and Greece. Europe is sleepwalking into a crisis where democracy is replaced by "technocracy".

George Papandreou and Silvio Berlusconi undoubtedly have their failings and critics. As their feet were put to the fire, they placed austerity programmes before their parliaments. Before departing, they secured a majority for implementation. Long after their decapitation, fundamental problems will continue. Whether these debt-ridden states can restore growth through fiscal contraction remains open to serious doubt.

The narrative of the eurozone crisis has changed. Previously, resolutions were relatively straightforward; a credible debt default/restructuring for Greece; consequent recapitalisation of European banks’ balance sheets; creation of a European Financial Stability Fund (EFSF) of trillions of euro to firewall insolvency/illiquidity. All are key components of achieving market acceptability. ECB activity in secondary sovereign bond markets was emerging.

Germany’s domestic political power-play has overtaken orderly European evolution of the single currency. Angela Merkel’s Christian Democrats and coalition partners want the ECB to replicate the Bündesbank, with a low inflation, hard-currency monetary policy. Consequences for other 16 Eurozone states seem irrelevant. They conveniently forget that 65% of Germany’s exports are into the eurozone. Unlike China, who retained €2.4 trillion in foreign reserves, Germany lent their cash in a splurge of EU consumer, corporate and household credit. This bubble consumed more German goods and services. These cheap loans were gobbled up by European banks to provide cash for overvalued assets. Germany can’t face prospects that it won’t get repaid.

As each new act in this drama unfolds, markets sussed two essential underlying truths. Firstly, national debt levels in EU states exceeding 100% of GNP are unsustainable in a scenario of no growth. European Union monetary affairs commissioner, Ollie Rehn, fears economic stagnation for at least a few years in Europe. Lack of increased consumption and output ensnares economies into a spiral of ever increasing fiscal austerity, de-leveraging of debt repayments by households and contracting bank credit. In this context, debt servicing is unrealisable. Secondly, competitiveness has consistently been attained through currency devaluations for peripheral states. An overvalued euro prevents currency adjustments for those countries that cannot keep up with Germany’s competitiveness.

Denial of these facts continues in Frankfurt and Berlin. Every remedy, other than ECB intervention and the creation of euro bonds, is pursued — regardless of decimation of founding principles and ideals of the EU. Original notions that Europe was built on the concept of equality between sovereign states are discarded. EU institutions such as the commission are sidelined and are only of marginal relevance. Germany is openly seeking to reform the ECB governing board by scrapping the one state/one-vote structure, replacing it with a population weighted decision-making basis. As Europe’s paymaster they want a veto just for themselves.

Mario Monti and Lucas Papademos fit the bill perfectly. They are unelected civil servants, with backgrounds as commissioners and central bank governors. Despite the latter successfully cooking the books for Greece, as the then governor of the Bank of Greece, when euro replaced drachmas in 2002.The short-term domestic euphoria of change could be short lived, when voters realise their country altered administration at the behest of Germany. Citizens of Europe did not sign up for colonisation. Creditors have responsibilities as well as rights. Creating a German hegemony has never received any imprimatur from electors. Ultimately Germany’s resolution of the eurozone crisis depends on a plebiscite.

The endgame for Merkel and Sarkozy envisages a new treaty. The architecture of Lisbon Three (or whatever grandiose new title it will have) may become apparent at the December EU summit. Member states can choose if they wish to retain membership of the euro. They could continue to participate in the core currency or premier tier, provided they relinquish more sovereignty. Having already ceded control of interest rates and monetary policy, they will now have to surrender budgetary and fiscal control to an EU Treasury Department. One could describe this as a permanent troika structure. They are too diplomatic to spell it out. This would mean annual prior approval of detailed annual expenditure and revenue plans by Brussels.

The fundamental flaw in this draft new treaty is that it magnifies Europe’s democratic deficit. It must be ratified by parliaments and peoples through legislation and referendums. Voters are now sadder and wiser. They realise that the EU worked well in so far as creating the second-largest integrated global consumer market. The principles and practices of freedom of capital, goods and labour created new wealth. The next step of integration (of which 10 of the 27 states did not sign up to), has proved profoundly problematic. The single currency cannot be held together with divergent interstate levels of competitiveness, unemployment and fiscal deficits.

In order to allow the centre to hold, the cure became worse than the disease. Italy, Spain, Portugal, Greece, Ireland and perhaps more states require deviation from "a one size fits all" integration. Founding fathers of Europe dreamed dreams arising out of world wars and unspeakable carnage. Peace is now a given. Collective policies such as the CAP ensured food security. Harmonisation works for defeating crime, achieving consumer rights and environmental protection. Uniformity in areas of taxation does not provide competitive flexibility required for weaker states to have niche advantages. A changed landscape raises pivotal questions about Ireland’s path.

As the second most openly traded economy in the world (after Hong Kong), we are crucially dependent on the eurozone — but also the US and Britain. Enda Kenny’s chat with Merkel yesterday should have included reference that the Irish taxpayer cannot sustain €73bn of bank bailouts. These liabilities became our obligations on foot of Germany’s insistence on 100% bond redemptions. This preserved the euro. We took a hit for the team. If the choice is between an orderly or disorderly break-up of the eurozone, we must obtain the former. Not all Europeans can hack being best Germans in class. Our government cannot continue the pretence of denying inevitability of EU Treaty reform. Leadership requires a new course, as markets have decreed a fracturing of the single currency.

This appeared in the printed version of the Irish Examiner Thursday, November 17, 2011