Friday 22 February 2019

Fiscal treaty is really about a new regime to rescue euro

'And what then?" my old religion teacher used to ask, as he would take one through one's plans for life, right up to the inevitable conclusion. "And what then?" he would grin.

Would that the conclusion of the European crisis were so inevitable. At least we would know how to prepare.

We do know that efforts to bring it to an end, and restore belief in the single currency, will continue and probably intensify. This makes the "what then?" question highly pertinent.

By this, I do not mean the increasingly tiresome issue of whether and how Ireland might access rescue funds in the event of a No vote. It is an important question, but it is not the most important one.

The most important one is whether we are up for a rescue of the single currency, and a new regime to put it on a sustainable footing, with all that that will entail.

A Yes vote will be a signal that we are -- but, since it looks like the question is not going to be asked, most Yes voters will not know what they have done.


This is on a par with previous referendums, but with a twist of its own. Past form is that the No side says passing the treaty will be very bad for the country, while the Yes side -- which always includes the Government -- says it really makes no difference, so one might as well avoid trouble and pass it.

Subsequent history tends to show that both sides get it wrong, although the No campaigners are perhaps more likely to have believed what they said.

Dire consequences do not follow, but the treaties turn out to have been really quite important after all. Some have even done Ireland quite a bit of good.

The difference this time is that the Government and its supporters say this treaty is important, as well as bringing benefits.

But the only benefit argument that has made any impact is getting access to a second bailout via the ESM (European Stability Mechanism).

And what then? The availability of rescue funds is a consequence of the treaty, not part of its substance.

One of the few references I have spotted to that substance was during Leaders' Questions in the Dail last week, when Taoiseach Enda Kenny quoted Article 1, which seeks "to strengthen the co-ordination of economic policies and improve the governance of the euro area".

That, not bailouts, is what it is about, and there is every reason to have a vigorous debate on what it might mean.

The suggestions which are being heard with increasing force about improving euro area governance are dramatic indeed.

The latest come from Central Bank governor Patrick Honohan. What he said on Tuesday is not new, but it is significant coming from a member of the ECB Governing Council

Some of the suggestions, if adopted, may require further referendums. While the bailout weakens Ireland's political position, the government should certainly start thinking about how it would want the euro area to be governed - not watch silently while others decide

Of course, that assumes that we want to remain in the euro area. The catch is that we can't make a rational choice about that until we know how it is going to be governed.

As of now, all the arguments seem to me to be comprehensively in favour of Irish membership of the single currency, but the single currency is going to have to change, and that could change the argument.

There is already a widely-agreed wish list as to how it might change in practical terms. The list was set out in some detail in the recent financial stability report from the IMF.

The main points are a eurozone banking regime; a bigger rescue fund; an easier monetary policy from the ECB; and a looser fiscal stance from the stronger eurozone countries.

That's for the short-term, although it should all be music to Irish ears. This is particularly true of the banking ideas, for the country with the weakest banks in the zone.

The IMF suggests that rescue funds could be used directly to provide capital for banks which cannot raise it in the markets. There seems little doubt that the fiscal treaty represents a necessary step towards the creation of such a system.

A stronger regime of fiscal supervision is required politically before any of this would be possible for the creditor countries, especially Germany.

But that does not mean it will happen. Instead of a first step, it might be the last -- at least until the next crisis -- as governments sink back into customary complacency, even though they know that the next crisis could be terminal.

The failure at EU-27 level to agree on new rules for the banking system is not encouraging - especially since the reasons for the failure appear to be the old ones of governments falling back on the defence of their national interests, even though the flaws in the banking system threaten all their interests.

For longer-term stability, the IMF, like others, believes that even trickier political stuff will have to be done.

This includes some collective borrowing, whether by 'eurobonds' or some other system, which implies some kind of eurozone central treasury.

A new banking regime would not only regulate and supervise, but provide deposit insurance backed by eurozone funds.

That would be of enormous help to banks where, for very good reasons, confidence is in short supply.

Bank restructuring rules could also impose losses on bondholders without threatening the entire system. The deadly connections between banks and governments -- which is arguably the most dangerous aspect -- would be broken, or at least greatly reduced.


Interestingly, the IMF says it is time to spell out whether such a radical overhaul of the euro area is intended, especially by Germany.

And the election of Mr Hollande in France will intensify that debate. The debate may not, however, go into the areas which also matter most to Ireland, with its atypical economic profile in the eurozone.

The proposals do not cover the democratic changes which ought to accompany such new 'federal' arrangements, or a new relationship between national competences and eurozone rules. That is for another day.

The trouble with having voted No so often when it did not matter, is that we may not recognise the moment when it does.

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