Saturday 20 January 2018

Emmet Oliver: Ireland should take European lecturing with a pinch of salt

Olli Rehn, a former Finnish footballer and MEP, flies into Dublin next week to meet the Government and presumably give his seal of approval to a dramatic four-year plan that will take €15bn out of the economy as Ireland clings to the hope it can reach a 3pc deficit by 2014.

Some newspapers here describe Rehn as the man who 'really runs Ireland' and his role in supervising the unofficial rescue of Ireland may prove crucial in the weeks ahead.

Rehn has an uneasy relationship himself with European principles and the common market, becoming somewhat notorious in Brussels in 2004 when he called for permanent restrictions on Turkish workers if their country entered the EU, a view which appeared to run counter to the free movement of labour within the European Union.

However, Rehn is the point man for the EU Commission and the Government would be well advised to listen to his counsel, whatever about their own private views.

Rehn is unlikely to be too moved by arguments against front loading the budgetary adjustment, seeing as outliers like Ireland, Portugal and Greece still have the potential to undermine the euro and call the bluff of European leaders by trying to tap the European Financial Stability Fund (EFSF).

Rehn's job, one presumes, is to keep Ireland out of the EFSF, shore up the euro and make sure the Stability and Growth Pact, the financial rule book of Europe, retains some measure of credibility.

Behind him stands French president Nicolas Sarkozy and an increasingly hardline German Chancellor Angela Merkel, who now believes bondholders should shoulder losses if countries get into trouble, not European taxpayers, i.e. German taxpayers.

It is all reasonable and sensible stuff, whatever about the timing of such comments. But there is a problem. When you are forcing obedience upon profligate rule breakers, your own record must be blemish free and that is where Germany and France fall down, badly.

For instance, both countries behaved shockingly when their own budget deficits breached the terms of the Stability and Growth Pact in 2003. (They are still in breach at present).

Unlike Ireland which has wisely not raised a single objection to being told to put its house in order, Germany in 2003 had nothing but contempt for the EU Commission when it said Europe's paymaster must stick to the rules.

"I can only advise the Commission to come out of its corner and stop sulking,'' was the terse response from the then German finance minister, Hans Eichel. The ECB, which also voiced concerns, was similarly dismissed.

France and Germany not only breached the rules and introduced loopholes to avoid any sanctions, they then cut taxes, defying the EU Commission and ignoring the views of smaller EU states.

Ollie Rehn's equivalent at the time, Pedro Solbes, warned that, once breached, the rules would have little credibility in future and politicians could simply circumvent the most basic budgetary rules, set up to give Europe what it hasn't had since World War II ended, i.e., sound public finances.

At that time politics trumped economics and it was a big mistake.

In fact, it could be argued that the breaches of the rules earlier in this decade, while far smaller and less grievous than Ireland's breach, planted some of the seeds of later budgetary crises, in the sense that rule breakers knew there would be few implications of letting their deficits get out of control (apart from bond market reaction) once France and Germany got away with it.

As Rehn and his officials jet in, this history makes it a little more difficult for Ireland to have a stick shaken in its face. Of course the adjustment should be made, but for good domestic reasons, not because of the flawed rules the EU Commission claims to operate by.

The other problem is that politics is set to trump economics again if Ireland does need to go to the EFSF. The rules of this organisation make it clear that the conditions attached to any loan to Ireland will be political conditions, not purely economic ones.

EU finance ministers and politicians will tell Ireland what conditions come with loan assistance, not economists or policy makers. That means 12.5pc corporation tax is likely to at least come into the debate and may be the pound of flesh Ireland must offer up.

Ironically, the Washington-based IMF are less likely to demand such flesh, as it would be largely irrelevant to its modus operandi, which is simply about bookkeeping.

While Ireland should do the right thing in December, it shouldn't do it just because its EU partners are going through a bout of self-righteousness.

Only sensible outcome with McKillen action defeat

Rule number one of banking -- the worst people to manage bad loans are those who gave them out in the first place.

That is the core belief at the centre of NAMA, at least in relation to the largest borrowers embedded in the Irish economy.

When loans are written down, written-off, enforced or impaired, don't bother asking those who advanced the funds originally.

For reasons of professional pride alone, banks who have sponsored customers for years are not minded to face reality when these borrowers no longer have any obvious means for repaying their debts.

Hence some other agency needs to take the place of the compromised bank (the original lender) and manage the loans with a fresh pair of financial eyes and with no ties to the decisions of the past.

This sensible idea could have been ripped asunder by the legal action taken by developer Paddy McKillen, who seemed to suggest he had a constitutionally protected right to continue his relationship with Anglo.

Thankfully the High Court saw it differently, describing as "fanciful'' the idea that previous banking relationships, like that between McKillen and Anglo, could remain undisturbed by the monumental scale and impact of the banking crisis.

The three judges who delivered the judgment also made a far more prosaic and obvious assertion about NAMA, if developers keep re-paying their loans, they'll be able to have positive banking relationships for many years to come.

Irish Independent

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