Wednesday 20 February 2019

How to dodge EU 'bullies' – keep a grip on finances

Never forget this: The EU project is not about fairness, it’s about politics
Never forget this: The EU project is not about fairness, it’s about politics
Richard Curran

Richard Curran

I remember interviewing the late Brian Lenihan at the Department of Finance in early November 2010. After the interview we chatted and he asked how I thought the markets had received news that some holders of subordinate bonds in Irish Nationwide were going to sue the State because the bank was about to impose haircuts on them.

Russian billionaire Roman Abramovich was one of them. "Imagine the size of the mushroom cloud that would go up if we tried to impose losses on senior bondholders," Lenihan told me.

It was a vivid choice of phrase that reflected his concerns of the possible chaos for Ireland if every cent was not paid back, albeit on dead banks.

It was eerily similar to the phrase used by former ECB governor Jean-Claude Trichet when speaking to the new finance minister, Michael Noonan, a few months later. Trichet told Noonan down the phone that not paying out on senior unsecured bond holders would see a bomb go off, not in Frankfurt but in Dublin.

The circumstances around the taxpayer-funded payout on billions of euro to bondholders will receive close scrutiny at the banking inquiry. Trichet won't be showing up.

But in the meantime, a former adviser to the European Commisison president has said that Ireland was bullied and treated outrageously by the EU and the ECB in particular.

A new book by Philippe Legrain claims that massive mistakes were made by the European powers in handling the euro crisis. He believes bank bondholders should have shared in the losses.

He also says that Ireland's enthusiasm for the euro, as a small country, allowed this bullying to take place. Legrain believes that if Ireland had played hardball with the ECB, the bank in Franfurt would have blinked.

He is saying that if Ireland had gone ahead and imposed losses on unsecured bondholders in Anglo Irish Bank and Irish Nationwide Building Society, and possibly some of the others, that the ECB would not have withdrawn its emergency bank funding which at its peak was around €135bn.

The official view from Brussels and the ECB is straightforward. Ireland created its own banking crisis. The scale of that crisis created a problem for the euro and our European partners were patient and generous in lending us badly needed funding. The ECB kept cash in our ATM machines while the European Commission oversaw part of the €65bn troika bailout.

Legrain, who was an economic adviser to EU Commission president Jose Manuel Barosso, has a different perspective. He believes that bondholders should not have been paid in full and that Europe's response across the eurozone was based on a misunderstanding of the problem at heart.

He believes bank debt should not have been imposed on taxpayers. It is true that billions in bank bonds were held by German and French banks. Legrain believes it was imperative for the Germans and French to ensure they got paid in full.

He firmly believes that the wider European response to the crisis pandered to the approach preferred by the Germans.

What is extraordinary is that Legrain held these views, having worked inside the EU Commission and close to its president. This gives them considerable weight.

Barosso was the one who enraged Irish people last December when he said that Europe was a victim of the Irish banking crisis and that we created our own crisis here.

The European Commission came out fighting last week in relation to Legrain. It has claimed that Legrain was not involved in operational decision-making and its strategy in the crisis was not aligned with the view of any one member state.

Trichet has pointed out that the Irish bank guarantee was put in place without consulting the ECB or anyone else for that matter.

Yet, there is a context for all this. Days before the bank guarantee in September 2008, Trichet tried to phone Lenihan, but didn't get him on the phone as he was at a Fianna Fail fundraiser at Gowran Park racecourse. Lenihan has said that Trichet left a message for him that he should "save your banks at all costs".

Even long after the guarantee we had chances to claw back some of the bank bondholder money. When it became apparent that property developer loans were going to sink the banks, we could have reneged on part of the guarantee as it applied to Anglo and INBS.

In early 2011 when Michael Noonan took over as Finance Minister he wanted to impose losses on unsecured senior bondholders. Trichet warned of the bomb going off.

Legrain is right that Ireland was bullied. But he isn't necessarily right about what other options we had. We will never know what the response of the ECB and EU Commission would have been if Ireland had gone ahead on a solo run imposing losses on bank bondholders.

Even if the ECB blinked eventually, what level of financial chaos would have ensued while the poker game was being played out? What finance minister would have taken such a risk with €135bn in liquidity funding at stake? Could we honestly say they were acting responsibly if they had taken such a risk, especially if it didn't pay off?

Legrain also believes that Ireland should use its leverage from now on to get some of that money back.

He suggests using referendums to vote down new EU treaties that require unanimous support. This leverage would make the bigger powers like Germany and France sit up and take notice.

However, does this mean that Ireland's European policy should be completely dominated by this one issue? Should we vote down treaty changes that we think might actually make sense, until we get some of this money back through a writedown on debt?

Surely, that wouldn't make sense. The better our economic performance now, the weaker our position on why we should get a debt writedown. Should we sabotage our own economic performance to improve our case? That would be nonsensical.

We have learned the EU project is not about fairness. It is about politics. It is not about collegiality and partnership, it is a business relationship. These have been expensive lessons for everyone.

But equally, we have to realise that the best way to improve your leverage in Europe is to keep your own house in order.

  • 'European Spring: Why our economies and politics are in a mess and how to put them right' is by Philippe Legrain. He tweets as @plegrain

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