It looks as if we have reached the endgame in the eurozone crisis, writes Patrick Mc Nally. The G20 countries are very concerned at European leaders’ failure to solve the crisis and for allowing it to develop into a global crisis. It is clear that if the issue is not resolved at the European Council meeting on 23 October, others will step in to solve the problem. This is expected to be a “make or break” meeting. It will represent a final opportunity for Europe’s leaders to show that they can take action to control the situation.
After this meeting European leaders are expected to present the proposals to the next meeting of the G20 group on 3-4 November. If the proposals are insufficient to prevent a eurozone banking meltdown and the breakup of the currency zone, then the IMF will take action to protect the global economy. Additional funding is expected from China and Brazil for the IMF. Both countries have an interest in maintaining the current global system, but they will ask a price in return. The expected price will be increased influence and voting rights at the IMF probably to the disadvantage of European countries.
Based on past experience there is no great confidence that the current eurozone leaders are capable of solving this crisis. It is unclear if the political will is there, and even if it is, it is not clear that the eurozone has the financial resources to solve what has now become a global crisis. The European bank stress tests announced in June have been discredited because they did not include sovereign debt. There is now a need for a further credible bank stress test for European banks.
The announcement of further quantitative easing by the Bank of England is being interpreted here in Ireland as a lack of confidence by the Bank in the eurozone’s ability to solve the crisis. It is seen as a move to protect the UK economy by trying to avoid a double dip recession despite the harm that the increased stimulus will have on UK prices and the increase in poverty levels which this will cause.
It is clear that changes to the existing eurozone arrangements will be required if the euro is to be saved. The changes demanded will enshrine tougher economic rules and will give Europe greater powers to impose its will on member states who fail to keep to the new rules. This raises the question of what kind of fiscal union will emerge. Will it be on the basis of an inter-governmental arrangement or on the traditional community basis?
The Franco-German partnership is now functioning again as the motor for European integration. This time the proposals are founded on an inter-governmental arrangement. These proposals are seen to be serving mainly Franco-German interests though dressed up in European clothing. They aim to provide funding to recapitalise their banks but have run into the problem of who should pay for this recapitalisation in view of the scale of funding arising from Greek debts. Germany has now realised that by limiting bond holders to a 21 per cent default on Greek debts, the effect has been to put a floor under these losses and the taxpayer will have to pay the difference if the market is correct that a 50 per cent or even a 60 per cent haircut is necessary. This will put further pressure on French banks. In the current negotiation there is an attempt to increase the “voluntary” bailout by bank bond holders.
It is estimated that to recapitalise the eurozone banks would cost EU member states at least €200 billion. There is also the growing fear that this level of recapitalisation may not be enough. The German position is that national governments should recapitalise their own banks, the French position is that funding should be available through the EFSF at an earlier stage than Germany would like.
The French fear that the amount required to fund their banks would endanger their triple A rating status and they have been pressing for leeway to use the EFSF funds much earlier in the recapitalisation process. French bankers have been spotted in Dubai seeking to obtain Gulf funding. In 2008, at this stage of Ireland’s crisis, the country was forced into a strict IMF bailout before it got the funds to recapitalise its banks. In addition the country had to pay most of the associated costs. It seems ironic that European bank recapitalisation was rejected as unnecessary by both France and Germany and instead they favoured bank bondholders over the Irish taxpayer and levied the cost onto the Irish taxpayer. Yet when the European credit facilities are coming under strain, recapitalisation of banks is suddenly accepted as a necessary solution by both countries.
Part of the process for saving the euro will involve some kind of fiscal union. This will require a new political integration. The concern here is that the current proposals are inter-governmental which increases the power of the larger states at the expense of the smaller states and weakens the role of the European Commission and the European Parliament. Ireland would prefer an approach favouring existing EU institutions with less unanimity voting. It sees current proposals as eroding the institutional and political balances that compensate smaller sates for the loss of sovereignty involved in European integration. At the same time the democratic credentials of the European Parliament and national parliaments are being eroded and accountability and legitimacy weakened.
It will be very difficult if not impossible to win support for a treaty change or for any new treaty here in Ireland. A recent survey of public opinion shows that over 25 per cent of the population are disillusioned with the current EU leadership and their inability to contain the fiscal and economic crisis. They are critical of the absence of effective leadership in Europe and yet despite this, there is still a solid majority for continued EU membership.
It is becoming clear that if the common currency is to be saved it must be done with the consent of the governed. A system of European integration based on the rule of law must now take the radical step of making the system more democratic, otherwise the gap between governments and their electorate will be increased. European electors need to have a voice in the direct election of those who are making decisions on their behalf.
The inter-governmental proposals have poisoned relations within the eurozone and increased suspicions amongst the member states. The national genie has been let loose. Because of this it will be more difficult than usual to secure a Yes vote in Ireland. There has been a subtle change in Irish attitudes to Europe. It was widely believed, until recently, that Europe was well disposed towards Ireland and the country would be treated fairly by the European institutions and the Franco-German leadership of the European project. Indeed Germany was seen as the protector of small states. This is no longer the case. This belief has been undermined by the flaws in the construction of the euro and citizens feel that they are paying an unjustifiable share of the burden of rescuing the European banking system. The belief that countries would stand behind the euro has also gone. Ireland still remembers the Franco-German hostility and the demands for changes to the level of corporation tax as part of the bailout negotiations.
The government is attempting to differentiate itself from Greece and Portugal in the current crisis with some success. The fear is that a large Greek default will raise market fears that Ireland will eventually default. The government would like any new arrangements for a Greek bailout to make it clear that the arrangements are unique to that problem. Though whether the market will believe this is another question. A major Greek default will expose the government to opposition charges that what is good for Greece should be good for Ireland and thereby ease the burden on taxpayers and increase the pressure for an Irish default.
Finally one commentator, a lone voice at the moment, has suggested that Ireland should establish working relations with a proposed new Non-Euro Group. By the time the Non-Euro Group is established and recognised by the European Union as part of the EC structures, membership of this group could appeal to Irish voters especially if it was linked to policies that could re-stimulate growth.