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Who to blame for crisis of leadership

EUROPEAN leaders have made such a cock-up of their economies that the Americans have flown their reinforcements in.

US treasury secretary Timothy Geithner held crunch talks with EU finance ministers in Poland last Friday in a desperate attempt to quell the European debt crisis. International leaders now realise the crisis could not only destroy the eurozone — it could also poleaxe the global economy.

Europe has been told to get its act together before it drags everyone else down with it. The performance of some European players since the crisis broke about two years ago has been appalling to say the least. We rate the performance of the key players. GERMANY 0 OUT OF 10 If anyone is to blame for bringing the eurozone to the brink of collapse, it is the German Chancellor Angela Merkel and her economic advisers. “Merkel, together with the German economic establishment, is responsible for the European debt crisis deepening to the point where the euro could fall apart,” said Simon Tilford, chief economist with the London-based think tank, the Centre for European Reform (CER).

The main reason for this, according to Tilford, is their dogged insistence that fiscal ill-discipline and poor competitiveness are at the heart of the European debt crisis. Their refusal to back down from that argument has made it impossible for German and other European leaders to resolve the debacle. “The debt crisis is largely a result of the huge capital flows from some eurozone countries to others,” said Tilford. “To believe (as the Germans do) that we can slash public spending and all rely on boosting exports to drive economic growth and resolve the debt crisis is mercantilist.”

At key stages of the debt crisis, Merkel has choked moves that would help alleviate it. In mid-July, she blocked plans for an emergency European summit, despite intense pressure on EU leaders from the IMF to strike a deal. The summit was eventually held in late July. Last March, she ruled out the possibility of the Irish Government being able to renegotiate a lower interest rate on its €67.5bn bailout deal, even though the interest Ireland had to pay under that deal would clearly cripple its economy and taxpayers. Under new European Commission plans to slash the bailout interest rate, Ireland will now save about €1bn a year in interest. Although these rate-cut plans have yet to be approved, had Merkel not shot down the prospect of a cheaper bailout deal six months ago, Europe could have dealt with that issue back then — and would be busy resolving more pressing issues today.

Merkel isn't the only top German official who has refused to play ball with Europe. Earlier this month, Jürgen Stark, a top German official in the European Central Bank (ECB), resigned. Stark had opposed the ECB's decision to buy Italian and Spanish bonds — a step that had been taken by the bank to halt the debt crisis. His resignation sent the single currency to its lowest level in six months. Last February, Axel Weber pulled out of the race to take over from Jean-Claude Trichet as head of the ECB.

Weber, who was an ECB governing council member and head of Germany's Bundesbank at the time, is believed to have pulled out because he did not agree with ECB emergency efforts to prop up the euro. As Germany is one of the biggest players in Europe, such intransigence has rocked confidence in the eurozone and sent stock markets reeling. “Germany has played to its electorate and looked after its own interests,” said Alan McQuaid, chief economist with Bloxham Stockbrokers.


1 OUT OF 10 French President Nicolas Sarkozy morphed into Merkel's poodle as the debt crisis rolled on. He too blocked Irish attempts to get an interest rate cut on the bailout deal and, like Merkel, tried to bully Ireland into giving up its low corporation tax rate in return for any renegotiation of the deal. “Germany and France have not done anyone any favours,” said McQuaid. “But there's a sense that the French are more willing to support peripheral countries than Germany is.”


3 OUT OF 10

The flawed reasoning of the ECB boss Jean-Claude Trichet has turned him into the king of U-turns. His obsession with inflation has blinded him to some of the more pressing problems facing Europe. Last July, Trichet raised the ECB's key lending rate for the second time this year in a bid to curb inflation across the eurozone. He also hinted that further rate hikes would be on the cards. His decision to increase interest rates this year exacerbated the problems of countries already struggling with debt and jeopardised the mortgage markets in Spain and Ireland. The penny finally dropped with Trichet earlier this month when he vowed to stall any future rate hikes — a promise which arose from concerns about the increasingly precarious eurozone economy.

Like Merkel, Trichet shot down suggestions that the Irish bailout deal was open to renegotiation. He has also consistently refused to have bondholders share some of the cost of the various European bailouts — again something he was forced to row back on when the second Greek bailout was agreed last July. Some commentators however, believe that Trichet, who is due to step down before the end of October, has been in an impossible position since the crisis erupted.

“Trichet has done as good a job as anyone could have done when it came to marrying the various positions within the ECB,” said Tilford. “You can question his economics but he can't make the decisions for politicians.”

The reluctance of Trichet and the ECB to take certain steps to resolve the crisis, however, did nothing to inspire confidence in Europe. “The ECB has offered liquidity to the eurozone and bought bonds to support the system — but they have done so reluctantly,” said McQuaid. “This always made you feel like it could pull the plug anytime.”


2 OUT OF 10

European Commission President Jose Manuel Barroso has crumbled in the face of his more powerful European counterparts and, in doing so, has put the fate of the eurozone at stake. In early April, he expressed his support for a cut in the Irish bailout rate. It would be another four months — and largely at the behest of the IMF — before EU leaders would agree to cut that rate.

Barroso tried to save face for the Commission last week by hatching plans to further cut the interest rate on Ireland's bailout loan and move towards a proposal on eurobonds. This was a case of too little too late from the Commission president.


0 OUT OF 10

Last week, World Bank boss Robert Zoellick warned European leaders that they risked dragging down the global economy — as well as the eurozone — unless they faced up to responsibilities. “They have procrastinated for too long on taking the difficult decisions, narrowing what choices are now left to a painful few,” said Zoellick. Fianna Fail leader Micheal Martin has also criticised Europe, accusing EU leaders of pushing their own agenda.


4 OUT OF 10

We are apparently the poster boys of bailed-out Europe— consistently getting slaps on the back from the IMF and EU for sticking to the recovery plan we signed up to last November. Last Thursday, EU Economic Affairs Commissioner Olli Rehn said the Irish economy was “on target” and in the midst of turning around. At what cost however? With 3,000 Irish people leaving the country a month, emigration is at its highest level since the nineteenth century. About 305,000 people are out of work — 4 per cent more than at this time last year. More than half of the unemployed have been out of work for more than a year.

Not everyone thinks we're getting our act together. Earlier this month, Stark urged Ireland to cut public service pay in order to bring its public finances under control. Moody's downgraded Ireland's debt rating to junk status last July — a few days before IMF deputy director Ajai Chopra said Ireland had every chance of a full recovery if European leaders got their act together. They haven't though. Ireland still has its work cut out. Despite being on its knees financially, senior civil servants here are still retiring on packages worth €713,000. Public service pensions will cost the state almost €3bn this year.


6 OUT OF 10

The rating agencies had their big Doh! moment when they failed to spot the subprime crisis in the US and the debt crisis in Europe until well after the event. Apart from this, they largely seem to have done their job since the crisis broke — which is to tell investors what their chances are of getting their money back. Last Wednesday for example, Moody's downgraded the French banks, Societe Generale and Credit Agricole, amid concerns the eurozone debt crisis was deepening.

With international pressure on Europe to sort out its mess, the crisis clearly is getting worse — so you can’t blame Mooday’s for that. Ireland has been on the wrong side of rating agencies for a long time now — but justifiably so given that we can't afford to borrow money on international markets. Rating agencies have been criticised for the timing of some of their downgrades and for damaging various countries' chances of rebuilding their economy. Perhaps they have, but their job is not to rebuild economies. It is to steer investors clear of dangerous investments.


8 OUT OF 10

Bond houses, including the bond teams on international investment banks and the bond desks at Davy, Bloxham and Dolmen Securities, are among the few likely to have made money out of the debt crisis. They largely did so by investing in German, Dutch, Finnish, US and Austrian bonds.