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Letters make it easy to paint ECB as the bad guy, but our crisis was homemade


"Lenihan wanted room to manoeuvre to either avoid a bailout or burn more bondholders"

"Lenihan wanted room to manoeuvre to either avoid a bailout or burn more bondholders"

"Lenihan wanted room to manoeuvre to either avoid a bailout or burn more bondholders"

History is being revealed as documents from former ECB President Jean-Claude Trichet to former Finance Minister Brian Lenihan are unsealed - along with the ECB's current position on those documents. Almost all of the main protagonists are still alive and those afflicted by the policies of the previous government are around to remember them. This really is the first draft of history.

What is amazing, in a way, is that there is any draft from which to write. The official communications are quite tense, strained documents, with implicit and explicit threats within them. It is a wonder so much of this kind of thing exists on paper, when by all accounts, Irish and ECB officials were in daily contact with one another at this time, with both sides aware these events would be interpreted in the historical context by generations of scholars. Perhaps that is why they wrote as they did.

So the ECB is adding to the historical record. That is a good thing. Its decision to release four offical letters - showing Ireland's reluctance to enter a bailout, asking the ECB, in effect, to stop briefing the markets against Ireland, and then showing the ECB's heavy-handedness in pushing Ireland into a bailout - gives us a view into the strange relationships the ECB keeps with the national authorities it oversees.

Essentially, the ECB line goes: the Irish messed up their own economy, guaranteeing the banks; we were there to help, within reason, and when things were getting ridiculous, especially with emergency liquidity to help keep the Irish banks open, we helped Ireland enter a process of fiscal consolidation, structural reform, and bank restructuring.

Reading the letters from Trichet to Brian Lenihan, it already contains the exact structure the Memorandum of Understanding would take. In a sense, the Troika was being put together for Ireland at exactly this time. The fundamental pillars of the bailout are all there: austerity, bank recapitalisation, and reform. An aside: I cannot see much evidence of structural reform having taken place in Ireland since the arrival, or indeed the departure, of the Troika. Messing with the minimum wage and the disastrous set up of Irish Water seems to have been the main attempts. Pretty much all the action in the story of the Troika has been on austerity measures and bank restructuring, rather than structural or supply-side measures to 'open up' protected sectors and make the economy more competitive. In hindsight that may have been a good thing.

The ECB argues the pressure put on Lenihan was within its remit to maintain price stability across the eurozone. I'm not sure about this. But, in practice, the ECB had full operational discretion over whether to grant emergency liquidity assistance to Ireland's banks.

The letters also show just how political the ECB is as an agency - when it is supposedly free of political influence. Lenihan's former adviser, Professor Alan Ahearne, writes of this period in a recent book on Lenihan edited by Noel Whelan called 'In Calm and Crisis'. Ahearne writes, in chapter one: "In frustration, Lenihan sometimes referred to the ECB as 'that bank in Frankfurt'. He became aware that senior people at the ECB were briefing market investors that the bank was considering the withdrawal of financial support to parts of the Irish banking system."

It is clearly this kind of briefing against Ireland Mr Lenihan is referring to, in his letter on November 4, 2010, where he and his officials enclose examples of these kinds of stories. The ECB is a political institution, just without the democratic accountability we would expect from such a powerful institution.

Ireland has always enhanced its insularity by insisting on external forces as the drivers of our destruction. Any self-examination is therefore unnecessary. Any villain will do. French and German banks, the ECB, the 'Old Enemy' of Britain, whoever. Now it's Jean-Claude Trichet.

Trichet has a lot to answer for in how he conducted monetary policy at the ECB during the crisis, but it is clear he was sure he was furthering his mandate and pushing Lenihan to accept an inevitable bailout - when it was obvious Ireland would need one. Lenihan wanted room to manoeuvre to either avoid a bailout or burn more bondholders in doing so. He got neither from an ECB president tasked with the stability of the eurozone, not just one small part of it on its western edge.

There have been three large reports written on the Irish crisis. All point to the disastrous role of prudential supervision by the national banking authorities, along with very strong demand for credit from households and firms in creating and sustaining the bubble. Whatever we might think about the ECB and what some will see as its bullying behaviour, it was not the ECB that caused Ireland's crisis, and understanding that might stop some ill-informed commentary.

We should not judge the letters in hindsight. The ECB can't claim that by imposing austerity it ensured prosperity, and nor can Ireland's government. There was no doubt Ireland needed official assistance. The only real question was what form that assistance would take. The ECB was clearly not politically neutral, and to paraphrase former Transport Minister Seamus Brennan, they were playing senior hurling. So were we, and we lost.

Irish Independent