Monday 22 July 2019

Brendan Keenan: Ireland an uneasy member among the rival euro clubs

I wouldn't belong to any club that would have me as a member, Groucho Marx famously said. Something similar might perhaps apply to Ireland's membership of the so-called 'Hanseatic league' of northern Eurozone states. Photo: Stock image
I wouldn't belong to any club that would have me as a member, Groucho Marx famously said. Something similar might perhaps apply to Ireland's membership of the so-called 'Hanseatic league' of northern Eurozone states. Photo: Stock image
Brendan Keenan

Brendan Keenan

I wouldn't belong to any club that would have me as a member, Groucho Marx famously said. Something similar might perhaps apply to Ireland's membership of the so-called 'Hanseatic league' of northern Eurozone states.

Groucho's joke was a brilliant swipe at the anti-Semitism which kept Jews out of gentlemen's clubs. In Ireland's case, the difficulty would be ungentlemanly conduct. The Dutch may have been tempted to reach for the black ball.

This particular club adheres strongly to the principle of tight budgets and the belief that stability and growth in the euro area depend on everyone maintaining fiscal responsibility. Ireland, as we know all too well, has form in this area.

The attraction for Ireland is that the group, which includes Baltic states, is associated more with free market policies and limited government intervention than the dirigisme associated with France. The attraction of Ireland for them is less clear, but the undoubted success of the Irish economy may have something to do with it.

Especially since Ireland appears, on the face of it, to be a prime example of the success of their ideas; where a return to balanced public finances, after the huge depressing forces of the austerity programme, was followed by strong economic growth.

On the other side in the eurozone panoply is what has already been dubbed the 'Club Med'.

This is a more motley group than the northern one, but it does lay a greater emphasis on government action to support demand and create employment, along with protective laws and regulations. They look to France as their standard bearer while the others look to Germany - at least to set a good example.

Maybe Finance Minister Pascal Donohoe's tough stance (so far) on the 2019 budget has something to do with membership of this new, and somewhat unsettling, club. More seriously, the issues involved go to the heart of the eurozone's dilemmas in trying to deal with the very real threats to its success, and even its existence.

Among those issues is that basic disagreement on how things should be done. It has resulted in a deadlock which means that nothing much is being done.

That was clear from last week's unconvincing meeting of minds between President Emmanuel Macron and Chancellor Angela Merkel.

Now an eminent group of economists from each persuasion has come together to advocate solutions which all could support.

One of the prime movers in bringing the 14 involved together, Prof Agnès Bénassy-Quéré of the Paris School of Economics, outlined their thoughts to the Institute for International and European Affairs (IIEA) in Dublin and made it clear they think the matter is urgent.

They see the whole Euro project increasingly challenged by populist and nationalist movements, and while they agree that the success of such movements has many causes, they argue that "a poorly designed fiscal and financial architecture" is an important contributor. After five years and many promises, the 'doom loop' whereby, as in Ireland, broken banks break their home government, remains largely intact.

Only the building blocks of a crisis management system are in place and there are no effective measures to enforce standards on national governments over things like, ahem, high debt levels and non-performing bank loans.

Nor is there any convincing mechanism for dealing with another national bankruptcy, whether caused by profligate governments reckless banks.

Supervision to prevent this happening has improved but it is not clear what could be done if a populist government threw over the traces.

The paradox here is that even those who suffered the most during the crash, the Greeks especially, showed no appetite to abandon the euro and return to national currencies. They felt that the single currency represented stability and a store of value which they had not enjoyed before.

The euro's policymakers can hardly rely on that attitude forever. Small countries know they are vulnerable but a larger one such as Italy, or even France, might succumb to the argument that national control of the currency would be better - although Marine le Pen quickly realised that such a moment has not yet arrived in France.

Tensions may subside with the eurozone finally in full recovery mode but another crash could re-ignite and intensify them. As the economists say; "The next euro area crisis may still be years away. But when it returns, perhaps on the occasion of the next cyclical downturn, it could come with a vengeance."

After the experience of 2010, investors, bankers and savers will be prone to panic at any signs of weakness among vulnerable member states. Strange as it may seem in such circumstances, the report's conclusion is that it must be made clear to all that next time, there will be no bailouts.

Bondholders must believe they will get burned, and governments that they will have to burn them, so that both take more care beforehand but - something not well understood in Ireland at the time - leaving things just at that would have consequences every bit as unpleasant as the bailout.

To avoid them, says the group, the eurozone must develop structures in which debt restructuring for a stricken economy becomes feasible without large collateral economic damage. The list of such structures includes ECB protection of viable parts of the financial sector, more predictable liquidity support when needed, and assistance to countries which do restructure their debts through a European Monetary Fund.

Just such a fund was on President Macron's wishlist but just before his visit Mrs Merkel told her party she would insist on treaty change before the existing stability mechanism (ESM) could become a monetary fund. That is as close to 'Never!' as you are likely to find.

The knot at the centre of the policy deadlock is the fear in one club that it will end up making permanent transfers of cash to the other. The report accepts that, without careful handling, the measures it advocates could indeed lead to such a situation.

A euro area capital budget of the kind suggested by Macron would be an invitation for national governments to neglect their own deficit responsibilities. A European deposit insurance system could be abused by governments to get favourable terms from local banks. An unemployment insurance scheme might reduce incentives for labour market reform. And so on. The economists believe there are mechanisms which can prevent at least large-scale perverse incentives from the structures required to make the financial system of the eurozone safer. With one welcome exception - simpler fiscal rules - they are all extremely complex and would require both agreement and determination among member states to put them in place.

At present there is neither. Until there is, the best plan for any individual country is to make sure it is a creditor and not a debtor if some new crisis does arrive with a vengeance. Ireland may have joined a creditors' club, but it still has along way to go to qualify as a full member. Unlike Groucho, it can at least try.

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