DOWNGRADING of France as a triple A credit rated state can usher in a new phase in the eurozone crisis.
President Nicolas Sarkozy has strutted the world stage purporting to be the foremost EU statesman as part of Franco German leadership, along with Angela Merkel. This Merkozy double act, with their endless bilateral summits, pretended that France had equal economic credibility with Germany. That facade is now over. The exposure of French banks to Greek debt default and their dire national debt/GDP ratio meant a false picture was presented by the Elysée incumbent. Sarkozy is living on borrowed time. Opinion polls predict defeat in the forthcoming presidential race in May.
Contagion of the eurozone crisis has shifted from peripheral states to core countries, leaving only Germany, Netherlands, Finland and Luxembourg uncontaminated. The short-term impact of the Standard and Poor’s downgrade may mean more costly bailout finance as €180 billion of the European Financial Stability Facility (EFSF) is underwritten by France and Austria. However, the impact on EU politics has beneficial upsides for Ireland. We need to fast forward on the political isolation of Germany and Merkel. Since the December summit, German technocrats continue their preoccupation with new intergovernmental constitutional law. The third draft of their quasi treaty text seeks to enshrine fiscal rules in our Constitution. A debt/GDP ratio ceiling of 60% (ours is currently heading for 120%) is required. No future ESM cash will be payable unless we comply.
Dictatorial preoccupations from Berlin are fine as regards future best behaviour of fiscal discipline for members of the eurozone club. They don’t face up to the reality that German banks made abysmal lending decisions and German banking regulators failed to curb their credit splurge. Merkel can’t accept that the liquidity problems of European banks and sovereigns are actually symptoms of underlying insolvency. Permanent solutions involve restructuring these unsustainable loans and quantitative easing of monetary policy to provide growth in the eurozone. Sarkozy, EU commissioners Barroso and Ollie Rehn failed to shift Germanic intransigence and must pay the price of destroyed personal credibility.
Simultaneously, the Athens arithmetic is moving towards an endgame. Negotiations between European banking consortia and the Greek government were suspended late last week. A second Greek bailout of €130bn is dependent on an agreed outcome of 50% private bondholder write-offs. The next tranche of €14bn in cash flow depends on these talks.
Greek banks require further recapitalisation of €40bn. The new technocratic administration realises if they are to default, they may as well do it properly, with 100% abandonment of repayments.
Meanwhile, Spain teeters on the edge. The newly elected Rayjoy government have introduced an austerity plan of €15bn, with €9bn of cuts and €6bn of tax hikes. Unemployment stands at 22% (a mere 14.4% here). There are no growth prospects. Their banks require an extra €50bn recapitalisation. Along with Italy, they must refinance €200bn of sovereign debt in coming months. Despite the removal of Berlusconi, Rome is paying 7% for ten-year bonds. Elsewhere, outside the single currency, the Danish government refused to fully redeem bank bondholders — imposing steep hair cuts. Hungary’s state finances are a basketcase, resulting in blatant debt repudiation. Bizarrely, we paddies will fully honour Anglo bondholders with 100% repayment on January 25 of €1.25bn. To do otherwise would of course be “ludicrous ”.
The demise of Sarkozy can’t come quick enough. He is the strongest proponent of both the financial services ‘Tobin’ levy and tax harmonisation to prevent peripheral states incentivising inward investment. Primary pillar of his re-election campaign was that he alone could protect France’s primary currency rating. Hopefully he is a busted flush. We need to usher in a new era, which squarely confronts Germany with burden sharing rather than business as usual. The ‘grand bargain’ was austerity and discipline in exchange for common Eurobonds and an EU Treasury Department. This political integration model creates as many obligations on participants as opportunities.
Declan Ganley has ventured forth with ideas of how to meet these challenges. He now suggests a new political European architecture. The proposal for a United States of Europe (USE) is modelled on the US. The direct election of an EU president would match President Obama’s executive authority. The American cabinet structure, appointed by the president, mirrors the revised EU commission as an executive arm of a centralised government. A Senate, upper house, with each individual state having four members is not dissimilar to Capitol Hill in Washington. The whole project involves federalising all eurozone sovereign and banking debts to procure write-downs. An anglophile emphasis is advocated through using English as the official EU language.
Underlying core thinking is based on the fundamental problems being lack of democracy, accountability and transparency at the heart of EU failings. The presumption is that the Lisbon Treaty already surrenders sovereignty from states to the centre. Common foreign policy would seek to prevent the Balkanisation of eastern states within the EU. The belief is that the status quo is so unsustainable that it’s inevitable that the EU will implode and fall apart. All of this represents a complete volte-face from the Euroscepticism of Libertas. A polarised picture of either USE or disintegration is equally unappealing. History reveals a different context.
Prior to the eurozone crisis, the EU project has been an outstanding achievement. The Single European Act created successful mobility of capital, labour and goods in a union of 440 million people since 1992. The European Court of Justice and multiple directives have provided benchmarks in human rights for citizens. It is erroneous to throw the baby out with the bathwater. Fixing the fault lines of the currency can be done without sacrificing historical, cultural diversity of identities in each member state. It would be better to have a two tier currency with markers manoeuvrability, rather than a colonised centralised unitary state. We must distinguish between what works well in Europe and the current national self-interest and self-serving politics of Merkozy. A debt crisis at sovereign, corporate and individual levels requires straightforward debt restructuring.
nThe sad passing of John McCarthy requires public acknowledgement. His outspoken advocacy for rights of mental health patients transformed him from heckler to keynote speaker. He believed those who suffered mental illness were not mad and that medication wasn’t always the appropriate response. His hallmarks were sincerity and humanity. This gave him enormous credibility and dignity. His countless acts of private generosity and selflessness went unrecorded. It was my privilege to interview and know him. This proud Cork man knew the real intrinsic value of life was not materialism, but the quality of human relationships and family. His poetry and writings live on and stand as a testament to his noble integrity. May he rest in peace.
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