Sunday 22 January 2017

Emmet Oliver: EU approach to euro crisis has been ponderous and now lacks any logic

Published 13/01/2011 | 05:00

As everyone knows, the response of the EU to the sprawling European debt crisis has been plodding, confused, complacent and hugely ineffective. Now it is just illogical.

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Apparently, German political opinion is split over what to do, but most agree on two things -- the solution cannot involve permanent "transfers'' of money from strong countries (like Germany) to weak countries (like Ireland and Greece), and cannot involve a new structure where eurozone countries not only share a currency, but also borrow together.

While German economists (and German Chancellor Merkel) like Otmar Issing know what they are against, they appear to know little about what they are for.

One moment they want to expand the EU's €440bn rescue fund, the next they don't.

One moment they want the ECB to provide liquidity to peripheral countries and their banks, next they want it reduced.

One moment they want to strictly enforce EU budget rules, the next moment they don't.

Such indecision and vacillation leaves the door wide open to speculative traders, with hedge funds around the world able to merrily short European bonds and play the credit default swap (CDS) market with wild abandon.

But more than that, a lot of the commentary from Germany now lacks any financial logic.

Mr Issing, for instance, this week railed against deficit countries (yes that's us) not getting their house in order, and said the EU project could collapse if richer countries were seen to be transferrring wealth to weaker countries -- without those recipient countries suffering any penalty.

But it is the EU that has set the average blended interest rate for Ireland at 5.82pc, a rate that is hugely above the current rates paid by this country.

Issing says Germany needs to make sure that transfers to countries like Ireland don't become "permanent'' -- loans should remain loans and every cent should be paid back.

But does he not realise that charging such a rate, far from sending out a signal, actually makes it even more difficult for deficit countries to get their house in order and pay the money back?

Citi economist Willem Buiter went further this week describing the 5.8pc rate as "an invitation to sovereign default''.

Senior bond default

"It makes no sense as part of a package that is meant to avoid sovereign default,'' he said of the rate. He says the Irish government should now throw caution to the wind, and threaten to default on senior bank bonds -- and in that way bargain the rate down.

One suspects nobody in Brussels cares much about the structure of the rescue package here, but when Spain and presumably Portugal come knocking on the same door within months and weeks respectively, the crazy logic of these arrangements will then be obvious to everyone in Europe.

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