Tuesday 19 February 2019

Brendan Keenan: Barroso outburst reflects some unease at EU role in the crisis

Brendan Keenan

Brendan Keenan

IN the markets, they call it "political risk". Thank goodness we aren't trying to borrow money there at the moment.

They would probably take the same view of us as EU Commission President Jose Manuel Barroso in his now famous outburst, after being goaded by Socialist MEP Joe Higgins.

Being goaded by Mr Hig-gins must indeed be one of the most unpleasant experiences imaginable. Yet any Commission president must endure much worse as part of the job.

Mr Barroso has had more than his fair share of provocations, what with the financial crisis, the interminable Lisbon Treaty, and then seeing the Treaty replicate Commission roles in foreign affairs and presidencies themselves.

Were all those frustrations bubbling underneath, to be released by Mr Higgins's pronouncements, which do tend to be delivered in a way which makes papal infallibility look like an each way bet? It seems unlikely.

One explanation doing the rounds is that Mr Barroso was a Maoist in his youth, and even ex-Maoists can't stand Socialists. Or is it the other way round?

More prosaically, some observers have noted that Mr Barroso is a former, and perhaps future, Portuguese prime minister. As we all know, Portugal is next in the line of dominos.

Does he blame us for creating the dominoes in the first place? Not much changed in Portugal during the bubble years. It is outside attitudes in the markets which have changed.

But there could be more to it. Or at least there should be. Anger often reflects unease, and there is much for the EU and the Commission to be uneasy about.

It would be relatively simple to repudiate Mr Higgins's assertion that "Europe" want to make vassals of the poor Irish; even easier to dismiss the idea that it is all done to toady up financial markets, but there are harder questions to answer.

The first concerns the Commission's own supervisory role. There was no eurozone banking regulator during the bubble. (There is now, and its first meeting took place last week to remarkably little fanfare. The past and the future seem so much more interesting than the present).

The ECB could have tried what the Bank of England used to call the "cup of tea" approach -- a quiet word with over-excited bankers. But it had no statutory role, and probably did not have that kind of influence. The guardian of the public finances in the euro area was the Commission.

Its published stability reports on Ireland contained nothing which suggested disaster on the scale which has occurred. If that is all Brussels ever produced, then Brian Cowen has been unfairly pilloried.

He is not Mystic Meg, able to see what was coming. But after what did happen, there is a widespread belief that there must have been stern warnings in private, which were ignored.

Yet no real evidence has emerged to support such a belief. If there really were no clear official recommendations to check the lending spree, Mr Cowen might have saved himself by opening the files. The fact that he has not done so looks like evidence of guilt but, given what we know of his nature, he probably would not have done so anyway.

Mr Barroso's outburst is no help. He made it sound like the Irish ignored unofficial warnings, but it could be guilt because there weren't any.

So much for the intriguing past. The "vassal" jibe is about the future -- in particular the EU/IMF rescue plan. If the jibe hit home, it is because there are good grounds for unease.

Last week's quarterly review from the ESRI and Tuesday's global outlook from the IMF illustrate the concerns in different ways. You may recall the flurry last autumn when an ESRI researcher opined that the doubling of the correction programme to €15bn might result in a "lost decade" for the Irish economy.

Oil was quickly poured on the resulting troubled waters. Yet the reduced forecasts in the latest quarterly make the case. Growth is seen below trend in the two-year forecast period. The last longer-term forecasts from the IMF had above trend growth only in 2015. A decade doesn't be long going by.

It does not help that the Commission has to start with the EU rules which limit deficits to 3pc of GDP. That figure has little economic rationale, but totemic status. It crowds out measures which economists prefer, such as the "primary" balance before interest payments.

Both move in tandem, but the country will have to move to primary surpluses to restore its credit ratings. The EU rules have little to say about that sort of thing and it will not be helpful if people think the objective is a 3pc deficit.

To be fair, the deadline for meeting EU rules has been extended by two years. It says a lot about EU processes that 2013 was ever touted as a realistic timetable. The IMF report refers to the difficulty of believing even in the 2015 date.

"Market participants are still concerned about . . . the political feasibility of current and envisioned austerity measures, and the lack of a comprehensive solution," it notes.

The two things are connected, because only a "comprehensive solution" across the euro area can give political feasibility to the process.

The IMF gives a chilling analysis of the cost of failure for Europe and the world. Under such a scenario, euro area growth would be reduced by about 2.25 percentage points.

Global growth falls by one percentage point, even if financial spillovers to the rest of the world are limited.

"If financial contagion to the rest of the world is more severe, the impact on global growth would be substantially larger," the IMF warns.

It repeats the consensus view that the solution requires a much larger rescue fund and substantial money creation by the ECB through the purchase of government debt.

All fine and dandy, but the Treaty-based European Union was never designed to take the kind of action which stressed the political system even of the federal US.

Perhaps, then, it should not have got into something like monetary union, but it is too late now.

The EU may be suffering from imperial over-reach, without even having an imperium. Such a thought would be enough to make anyone lose their cool.

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