ECB forcing Ireland to pay the bondholders was like a hostage situation
Published 27/01/2016 | 02:30
The EU's Court of Auditors has come out very strongly against the EU Commission's handling of Ireland's bailout, particularly the way the EU Commission backed - without reservation - the ECB's insistence that Ireland pay all the senior bondholders of the banks.
It also, rightly, concludes that the great Irish economic crash was predictable and preventable and yet the EU Commission - rammed to the rafters as it is with well-paid experts and economists - didn't see the crisis coming.
The report states the obvious, yet the obvious should be stated again: the bailouts and all the other emergency measures taken were the consequence and not the cause of the crisis.
Had there been proper regulation, proper oversight and proper controls of the banks, the crisis wouldn't have happened in the first place - and obviously there would not have been any bailouts.
Clearly one set of problems stemmed directly from the pathetic policy in place since the introduction of the euro. In fact, the currency is the culprit in this sorry saga. The euro was sold to the people of Ireland and Europe as being essential for economic stability. In reality, the euro has presaged a period of profound economic and financial instability in Europe where booms have been followed by busts; countries have gone bankrupt; and "temporary" capital has flowed unchecked into the nooks and crannies of the eurozone, only to disappear in a heartbeat, leaving company coffers and treasuries empty. Maybe for the EU institutions the most worrisome aspect of the euro's short history is that its deficiencies have driven a deep wedge between the countries of the north and the south, and between the debtors and the creditors.
The result is mass disillusionment with the EU project and the emergence of nationalist politicians from Poland to Spain, Greece and France pushing for much less Europe rather than much more Europe.
The Court of Auditors report identifies (correctly) that the root of the problem was not the frantic period between 2008 and 2010; rather, the root lies in the previous five years of bad policy when all these imbalances were allowed to build.
This credible narrative echoes the great English economist and thinker John Stewart Mill, who observed that "the crisis itself doesn't destroy wealth, it merely evidences how much wealth has already been destroyed by incautious decisions taken in the so-called boom".
The Court of Auditors is highly critical of the ECB and the pressure it put on the Irish government to pay the bondholders. The ECB's argument - which never stood up - that "a bomb would go off in Dublin" if the bondholders were held accountable to the iron law of capitalism was an entirely bogus argument. It reveals a profound misunderstanding of capitalism, which is quite worrying.
This column argued all during this time that if banks make silly and greedy mistakes, then they should pay for them. Such is the iron law of capitalism. When you make bad investments, you lose. If someone else subsidises losses indefinitely and gives the bill for banks' bad investments to people who had nothing to do with those investments, then you are destroying the basic fabric of commerce.
In Ireland, there is sometimes a mistaken notion that arguing for "burning the bondholders" is in some way a leftwing or socialist article of faith, but it is actually the opposite: it is a free-market cornerstone! Without the risk of bankruptcy, you can't have capitalism. That's the rule.
The financial markets understood this rule all along which is why the bondholders of the Irish banks were, in truth, shocked to see even a portion of their money going back to them, let alone all of it.
The government's line in 2010 was that if we didn't pay the bondholders, the country would lose credibility. But what actually happened is this country lost credibility because we did pay the bondholders and not because we didn't!
In fairness, at the time, many of us citizens thought the State was being craven in the face of the EU but it is now clear that Trichet's ECB was prepared to let the Irish banks go to the wall, prompting a new bank run in 2010. This is like a hostage situation. The ECB was saying to the Irish government: you managed in September 2008 to prevent a bank run with the guarantee (which should always have been temporary and conditional) but now we are going to threaten you with another bank run - because we are still funding your banks and you must pay all the bondholders and add the cost to the national debt of the country.
So the implicit threat was: "We will close the banks, cause a bank run and you will be left to pick up the pieces politically, socially and economically."
This, it is now clear, was also the backdrop to the present Government's first few months in office.
This is where the Court of Auditors report gets very interesting, because it is pointing the finger at the EU Commission - the civil service of the EU - for going with the bullyboy tactics of the ECB. The ECB was overstepping its mandate in terms of driving the austerity agenda and threatening a country through the convalescent banking system. So it wasn't so much that a bomb "would go off" in Dublin but that a bomb would be set off in Dublin and the bomber would be the governor of the ECB.
As the EU institutions begin to worry about the long-term impact of the crisis on the overall project, each agency is involved in a battle for self-preservation. This is the opening salvo of an internal battle deep within the EU where, as always, the institutions seek to preserve their own prestige and power, while the citizens are left to pick up the tab.