Brendan Keenan

Saturday 26 July 2014

Brendan Keenan: Questions about the future of EU lurk beneath debt-crisis talks

Published 06/09/2012|05:00

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A news story, I was told by my first chief sub-editor, should be written in such a way that, if he decided to cut it all except the first paragraph, the reader would still get the essence. (Oh yes, and in not more than 40 words).

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I fear I have lapsed from this gold standard many times down the years, but the president of the European Central Bank, Mario Draghi, clearly never espoused a career in the popular press at all.

The item which made the headlines from his recent article in the German newspaper 'Die Zeit' was in the last three paragraphs -- although one also learnt down the years that it is often better to read official releases from the bottom up.

The item in question was the idea that the ECB should buy the debt of countries where the interest rate (yield) on such debt is much higher than economic conditions in the eurozone as a whole would warrant.

Mandate

This latter, somewhat obscure, point is the one on which everything hinges. A majority of the ECB's governing council takes the view that trying to reduce the differences in government bond yields comes within the central bank's legal and political mandate, and does not break the ban on creating money to lend to governments.

Their argument is that the ECB's mandate of creating a single monetary policy for the single currency is thwarted when yields are below 2pc in Germany and more than 6pc in Italy. They have even extended this idea to retail rates, which perhaps should have received more attention than it got.

French central bank governor Christian Noyer chose Dublin to give the example of an Italian bank raising its rates, just as the ECB was cutting its official rate. With equal delicacy, when in Rome he could use the example of AIB raising its mortgage rates as ECB rates and bond yields fell.

The banks in question have good reasons for raising rates in their current stressed circumstances. The implication of the comments from Mr Draghi, Mr Noyer and others, is that the ECB has a role in reducing the stress on both governments and banks.

A minority of governors disagree. Unfortunately, the minority includes the German governor. There are reports that Jens Weidmann may even resign if the bond buying goes ahead. His predecessor Axel Weber is believed to have had similar reasons for quitting. But Mr Weidmann might be more specific about it, provoking a major crisis.

So today's ECB meeting may not be the great breakthrough that some expect, and more hope for. There are plenty of reasons to expect more prevarication.

Verdict

A verdict on the existing rescue mechanism is awaited from the German supreme court. And the question of what the governments whose debt the ECB might buy should do in response remains unresolved.

It still appears to be the case that such countries (which in the first instance means Spain) would be expected to borrow from the existing bailout fund and engage in a more formal corrective programme than the voluntary ones already in place.

It is not clear that Spain is willing to agree to this. Today will also see a meeting between Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy and this "bailout lite" idea will top the agenda

So perhaps I have been a little harsh on the ECB sub-editors. The line in the first paragraph -- "to have a stable euro, we do not need to choose between extremes" -- may indeed be the essence of the thing.

Mr Draghi was arguing that the euro can be saved without having a full political union. That is a more important point than buying government debt -- which may prevent imminent collapse but cannot provide long-term stability.

The ECB considered the article important enough to provide an English translation, but balked at rendering "Schicksalsgemeinschaft" -- which is the German word for what the eurozone should have been, but isn't.

Mr Draghi's definition of this concept is a high degree of joint decision-making among member states, backed by strong democratic underpinnings. Political union might follow one day, he says, but is not required for the minimum pooling of sovereignty needed to save the euro.

His list includes "true oversight over national budgets" and centralised banking regulation and supervision, which would include the power to close troubled banks in member states, whatever their governments might think.

So far, so good, one might say. But the real question mark over the euro is not about fiscal balances or bank regulation. It is how countries with different levels of productivity and accumulated capital, both human and physical, are to share a common currency, without large transfers between richer and poorer

Mr Draghi deserves credit for touching upon the question, but touching upon it is all anyone dares do. His article shows why. It calls for political underpinning of the idea that "it is neither sustainable nor legitimate for countries to pursue national policies that can cause economic harm to others". But he also says that countries must be competitive and able to generate growth and employment without excessive imbalances.

Debate

These two statements open up a debate which makes arguments over bond-buying look like minor quibbles. Finding a workable definition will in the end decide whether or not the euro survives in its present form.

Does seeking competitive advantage in wages, working conditions or taxation constitute "economic harm" to others? Do imbalances include German surpluses as well as Spanish deficits? The Irish will try to draw a line in the sand on the first question, despite their weak position; the Germans will definitely draw one on the second, and defend it with all their might. Yet, so far I am aware, no serious analyst believes the deficit countries can return to growth and stability under the existing regime or current proposals.

Mr Draghi quotes the "father" of European union, Jean Monnet, saying that co-ordination "promotes discussion but it does not lead to a decision".

The fundamental discussions have barely begun. The decisions which now cause so much controversy, whether austerity programmes or bond purchases, are no more than stopgaps to buy time for such discussion -- if anyone really wants to have it.

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