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Time someone else took the hits

Regaining financial control is possible now that Europe has bigger issues, writes James Fitzsimons

The prospect of stabilising the economy in 2012 is hopeless unless the EU comes to its senses and fixes its own problems. Greece is a hopeless case. Spain and Italy might have some early success in selling government bonds but it will be short-lived, while the EU banking model remains in tatters. We can't even be certain that the EU will give us the money we need to stay afloat. If Spain and Italy cannot source funds in the open market the EU will be put under more financial pressure than it can cope with. If that happens the US and even China will have to step in to prevent a total collapse. But at that stage the European banking model will have failed and even Germany will be in trouble.

Last year Greece and Ireland dominated the headlines. The Irish banking system has been propped up with the help of the ECB. But it is not stable. The plan was to focus attention on the peripheral countries while banks in other EU countries consolidated their position before the contagion was seen as widespread. By late summer the plan had failed.

When the major European banks reported their financial position to the ECB it was evident that 10 per cent were in dire straits and one-third were in trouble. This year the constraints placed on them and the amount of capital they are required to have relative to what they lend could break some of them altogether. We might not be hearing much about what is going on, but it is certain that a lot is going on behind the scenes. This is probably our last chance to show global financial markets that the powers that be have regained control. Based on the evidence this is not probable. The only question that remains is who will bear the losses that must inevitably come home to roost.

In Ireland the situation has largely been resolved. The taxpayer is picking up the tab for a large part of it. And for what we cannot afford to pay, the EU will lend us the money. There is nothing more we can do. We didn't stabilise the European banks. We didn't even fool financial markets into believing that we were the problem. Now it is up to the rest of Europe to convince financial markets it is safe to invest again. This won't happen until the losses come home to roost. Our Government needs to take advantage of this too.

We might have given away our sovereignty. But we haven't established our ability to repay. At the end of the day it may be the ECB that writes down our debts. At this time all we can hope for is to have the repayment pushed so far out that it wouldn't matter. But even the interest costs are too high to bear. Now that Standard & Poor's has downgraded France and Austria we can expect a year in which those who funded the madness face up to the problem.

Meanwhile, Angel Merkel's Germany rules supreme in the EU. It will give no leeway with peripheral countries that let their finances spiral out of control. Things are so bad now and the financial experts in the EU have lost so much financial credibility that it will not be restored easily. What happened in Greece and in Ireland could happen again unless the EU takes control of fiscal policy to stabilise the euro. I am not advocating this course of action as our way out, but global financial markets will not be reassured until they see a complete change of policy.

The technocrats are taking over in the EU, but it will take more than a facelift to restore our financial standing. The downgrading of France's credit rating will add to the credit squeeze in Europe. It suggests the French banks will incur extensive losses this year and there might even be a banking collapse. Combined with the financial pressures created in Spain and Italy the problem has moved to mainland Europe. It is a clear warning to those calling the shots that they cannot falter in their attempts to stabilise the euro. They will call for greater powers to control fiscal policy in the EU and in return we need to renegotiate our interest rate and national debt.

There is no basis for the recent claims that we can return to the money markets later this year. Likewise there is little point in seeking to borrow more in a second bailout. It is time we had our debt repayments brought back to manageable levels. We might have to open up our fiscal policy to EU scrutiny. We might even have to talk about the rate of tax for companies. But there is no reason why we cannot improve our financial position from what it is. After all, now it is a pan-European problem and we are only a small part of it. We should be undoing the austerity measures while others should be signing up to theirs.

We have lost the financial independence that we gained under the Celtic Tiger. But it can be restored again. Sooner or later Germany too will have to share in the losses created by under-regulated banks. They like the French and British banks are the other side of the balance sheet that has been ignored up to now. This year global markets will force the mainstream European banks to achieve financial stability or they will collapse. The next move is out of our control, but if we are poised to take advantage we can regain some of the control that we lost.

Half a trillion euro was made available to European banks in the week before Christmas. Even that is being kept for a rainy day. The banks won't lend and the money supply won't grow. Financial regulation in Europe has failed as it did here to create an efficient banking system. We may have implemented changes in the Irish banks and they may have been recapitalised, but they are still not lending. The reason is because there is too much debt that cannot be repaid for businesses and consumers. The banks are afraid to lend and consumers are afraid to spend.

While the Financial Regulator here ended the year with threats to banks which would not cut their interest rates or lend to those needing funds it amounted to nothing. Having waited for our bankruptcy laws to change and become more accommodating, those who can afford it are looking for solutions elsewhere. Maybe they would have paid something back if they got more flexible terms. Now the only option is to pay nothing. It might take another year or even two for businesses and consumers to re-establish themselves without any help from the banks or the regulator. And when they do it will be after they have walked away from their financial obligations.

Last year we learnt that export-led growth alone was not enough to secure our recovery. Already the prospect of rising unemployment is outstripping the possibility of growth. We may be open for business but we still cannot provide the funds to make it happen. Savings that sustained lifestyles are rapidly being depleted. Something positive needs to happen.

Taoiseach Enda Kenny may be keeping a foot in each camp as our paymasters in Europe work out a solution for themselves. If the price we must pay is too high we might try to realign ourselves with the United Kingdom and sterling. That would be a move in the wrong direction, but we could be left with no choice. Last year we were in the limelight, but now we can only wait and see what unfolds. There is pressure to do more to achieve fiscal unity now rather than in March as is planned. Financial markets have waited long enough, as have we all. They grow impatient as the Germans dither. The banking crisis will be resolved in 2012, or the system will fall apart. The solution may not be complete but it will be radical.

James Fitzsimons is an independent financial adviser specialising in tax and financial planning.

Sunday Independent