Monday 19 March 2018

Uncertainty over future national funding will convince electorate to ratify treaty

AS Greek accountants and IT staff busy themselves in preparation for the supposed return of the drachma, and the Spanish banking system creaks under the weight of huge property losses, the silence emanating from the European core is deafening to say the least.

The ECB's universally lauded double LTRO offering has stabilised a very nervous European banking system for the time being.

The question still remains as to why, in a bid to throw some kind of lifeline to struggling eurozone peripheral homeowners and workers, the ECB has not been more expansionary in its monetary policy.

At the very least why has it not cut the main refinance rate from the existing 1pc to close to 0pc and leave it there for an extended period much in the same way the US Federal Reserve has done?

This would go some way in attempting to promote growth, cut unemployment and help with debt burdens. The answer seems to be an irrational fear of inflation.

The ECB was born of the German Bundesbank. They are one and the same creature in all things inflation-related.

The ECB's rigid inflationary mandate of protecting price stability and ensuring inflation containment at all costs has resulted in some of the strangest and most laughable rate decisions in recent times and this irrational inflationary obsession permeates the very heart of the ECB decision-making process.

Recently, the 'Financial Times' published an article by Bundesbank president Jens Weidmann entitled 'Monetary Policy is no Panacea for Europe'.

The timing of the article was very telling. The day after the French put a new left-leaning president in power and the Greek electorate voted against draconian austerity measures, Mr Weidman reminded his errant neighbours that it is "vital that there be no ambiguity about the temporary nature of unconventional measures" that the ECB has taken. He also alluded to the fact that the ECB will be ready to act (hike interest rates) if and when upside risks for eurozone inflation increase.

Are these the thoughts of a concerned European or a very concerned German?

The German hang-up with inflation is understandable. Tales of hyperinflation nightmares that followed the two World Wars have been passed down through generations.

Inflation is the bogeyman in the German wardrobe and that bogeyman was realised with banknotes denominated in trillions of marks in the early 1920s.

German inflationary concerns still abound today with nearly two million public-sector workers having recently received pay rises of over 6pc.

We now find ourselves in a two-speed Europe where peripheral eurozone citizens are being subjected to higher unemployment rates, drastic pay cuts and tax increases while nearly seven million German workers are due to negotiate pay rises within the year.

German pay rises

Why are German workers looking for and receiving pay rises? Because Germany is working and it may be growing again. After a particularly shaky final quarter of 2011, German exports are on the up again and industrial output is increasing significantly.

The eurozone debt crisis has handed German corporates a gift in the unlikely form of lower exchange rates. While exports to mainland Europe have stagnated, German exporters have been able to tap into the booming Asian and Antipodean markets.

Euro exchange rates against the major Asian and Antipodean currencies are anywhere between 20pc and 40pc lower than they were four or five years go.

These huge savings have fed into the bottom line of German corporates resulting in higher profits which in turn equate to higher-than-expected tax revenues for the German government, which now puts them in a position to pass this on to German workers via pay increases.

A combination of pay increases and rate cuts would be the very worst case scenario for a Germany petrified of any inflation.

So, as good Europeans, who are obeying all the troika's rules and paying all the bailout bills, approaching the fiscal compact referendum in just over a fortnight, are we justified in asking why we should sign away parts of our sovereignty to a core European powerbase that really doesn't care too much whether or not we're part of the overall union?

There is the argument that just deserts were served and we weren't responsible enough to balance our own books.

There is also the stronger argument that after our public finances blew up, we came clean, took the pain, humiliation and bailouts, and swiftly implemented a working austerity plan that is being held up to the rest of peripheral Europe as the example of how to do it.

Non-ratification of the treaty, from an economic perspective, would mean that Ireland would be unable to tap the EU's new permanent bailout fund if we needed to.

We would be unable to go to the international bond markets to borrow because yields would be insanely high, defaulting on loans would be next, exit from the European Union, exit from the EMU and back to a 'new Irish pound' with wild fluctuations in value.

We would, however, have full sovereignty and control over our own finances and maybe in time, similar to some Latin American defaults, the economy could return to some semblance of normalcy.

While any population is reticent to sign away any sovereignty, it is that huge level of uncertainty surrounding the 'in time' quotient that I feel will push the Irish electorate to ratify the treaty.

Justin Doyle is head of interbank foreign exchange, Investec Ireland

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