McCarthy tells Fed of problems plaguing euro in attack on ECB
Published 02/12/2011 | 05:00
IRISH economist Colm McCarthy has launched a stinging attack on the ECB -- at a meeting organised by the US central bank.
Speaking at a symposium for the Federal Reserve of Atlanta, he said that, if the ECB were running the US system, American state governors would refuse to allow banks to be based in their states.
"Or decline to join the dollar area when invited," Mr McCarthy added.
But he quoted reports that US Treasury Secretary Tim Geithner supported the ECB position that all senior bank bondholders be repaid in full, and that IMF objections to this approach were ignored.
"It is unprecedented for bondholders in defunct banks to be paid by a country already in an IMF programme," Mr McCarthy said.
"The losers are, most obviously, the Irish taxpayers, but it should be clear that the holders of sovereign bonds are being treated badly, too.
"Forcing a government struggling to meet its sovereign obligations to pay billions of euro to people to whom it does not owe any money, weakens that government's capacity to meet its own sovereign obligations," he said.
The McCarthy paper argues that the incomplete design of the currency union, with free capital movement and trans-border banking, but no centralised banking policy, contributed to the Irish debacle.
"The absence of bank resolution and any centralised system of liability insurance threw the burden of bank rescue on sovereigns.
"Countries in currency union are vulnerable to sovereign default, since they must borrow in what is, in effect, a foreign currency. Resort to official lenders enjoying seniority (eg the IMF), combined with ECB insistence on sovereign repayment of bank senior bondholders in banks which were insolvent many times over, has destroyed confidence in sovereign debt.
"Central bankers invariably point the finger at the fiscal authorities when things go wrong and prescribe rapid fiscal consolidation.
"Whatever about Greece, the sovereign debt crisis in Ireland is the result of monetary rather than fiscal excess."
Treaty changes leading to a functioning monetary union are just as urgent as those for a fiscal union, he said.
"Closer fiscal union may prove necessary for political reasons if the eurozone is to survive. To avoid further sovereign debt crises, there is also a need for centralised bank supervision and resolution, as well as for a centralised system of liability insurance for banks," Mr McCarthy said.
He said the option of a smaller eurozone was impractical.
"Capital controls would not work; there would be little inflation tax revenue from a currency nobody wished to hold, and every prospect of financial disorder, fears of further eurozone withdrawals and economic dislocation," he said.