Sunday 25 August 2019

Thomas Molloy: Ireland may be on mend but Europe needs a cure

European Commission president Jose Manuel Barroso at a briefing yesterday after the European summit
European Commission president Jose Manuel Barroso at a briefing yesterday after the European summit

THE compromise reached in Brussels early yesterday contains some good news for Ireland but the agreement still leaves Europe a long way from a lasting solution to the underlying problems.

Once again, the continent's leaders have chosen to treat the symptoms of the debt crisis rather than the underlying causes.

This week's summit was already the 14th in less than two years to tackle the crisis; the punishment for once again dodging the underlying causes will be many more sleepless nights in the years ahead.

First the good news. The fudge strengthens our Government's hand when it comes to negotiations with Europe. We still do not have the details of how bank recapitalisation in other countries will be funded but whatever outcome is agreed, Ireland will be in a much better position to argue that some of the debts incurred rescuing banks such as Anglo should be paid by Europe's various rescue funds.

The Government has already been lobbying for this but the decision to eventually allow European money to underwrite some of the cost of saving banks makes it more likely that some sort of retrospective deal can be cobbled together for Ireland.

There had been fears that the markets would assume that what happens to Greece must inevitably follow in Ireland but trading in Irish bonds was remarkably calm yesterday which tells us that the capital markets have bought the story that Ireland will not follow in the footsteps of Greece.

Still, that fear now lurks in the minds of all investors and places an extra burden on Enda Kenny and Michael Noonan. The stability on the bond markets and effusive praise of both Germany's Angela Merkel and France's Nicolas Sarkozy underline that the Government's attempts to portray Ireland as the continent's comeback kid appear to be working.

Not everybody will agree, but there are also reasons to welcome the news that Noonan and his successors will have to submit budgets to the European Commission for approval before presenting them to the Dail.

This had already been proposed in the past as part of the curiously named six-pack reforms but was reaffirmed again yesterday. The Dail has not proved a particularly vigilant guardian of the people's interests when it comes to financial matters so it is reassuring to think finance ministers will now face real scrutiny.

Elsewhere in Europe, things are less rosy. While a 50pc write-off appears at first sight to be great news for Greece, it is still not enough. Greece, like Ireland, has borrowed heavily from the IMF and the ECB and this debt will not be written off. In fact, nearly 35pc of Greek bonds are in the hands of public institutions not subject to the mooted writedown.

As a result, Greece's debt will still be an unsustainable 120pc of gross domestic product in 2020 -- exactly the level of late 2009 when the country was forced to seek a bailout. This means that all the very real and painful austerity that ordinary Greeks are enduring together with a default will still leave Greece facing ruin.

Another reason for concern is that the new €1 trillion fund which is being created to reassure investors that Italy and Spain are safe is too puny.

The markets simply do not believe €1tn is enough to help countries such as Italy for any length of time and belief is important when it comes to rescue measures.

Plans to pump more money into Europe's banks also leave many questions unanswered. Most analysts said yesterday that it would cost more than the headline figure of €109bn touted by the European Commission.

Analysts were also annoyed that the stress tests that form the basis of the recapitalisation will once again be so broad that they cannot be trusted.

One of the biggest concerns is what has not been done. Europe's leaders have once again failed to clarify the European Central Bank's role in propping up the financial system.

Michael Noonan said yesterday that he would like the bank to be able to intervene like the Federal Reserve and Bank of England, but, like other European finance ministers, he seems reluctant to accept that this effectively means a federal Europe. In dodging the question, eurozone leaders have squandered a chance to fix the issue that investors care the most about -- who is the lender of last resort in Europe these days?

THE final reason for pessimism about this compromise is the reluctance of ordinary Europeans to shoulder more austerity. Italy's government appears, yet again, to be close to breaking point and trade unions have already called for action.

Here in Ireland, a recent opinion poll suggested that voters will reject more changes to the treaties in another referendum which will almost certainly need to be held sometime next year. Greece is in flames. Slovenia's government has fallen.

Across the water, the Tories are once again threatening to self-destruct over Europe. Germany's parliament is no longer benign and is interfering with European matters to suit that country's electoral cycle.

In short, there is every reason to believe that even this limited agreement could stumble when it comes to ratification. Of course, this is one explanation for why the agreement is so limited. Politics is the art of the possible. Still, it means that the compromise falls short of what is needed to put Europe back on a sustainable path. Without some sort of euro-area banking supervisory authority and a lender to back that authority in an emergency, we will continue to stumble from crisis to crisis.

Irish Independent

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