Varad­kar’s vi­sion for the fu­ture,

Brexit may have reper­cus­sions for Ire­land but Franco-Ger­man dom­i­nance of a re­or­gan­ised union may be more se­ri­ous, writes Colm McCarthy

Sunday Independent (Ireland) - - News -

IR­ISH pol­i­cy­mak­ers are un­der­stand­ably alarmed about the wors­en­ing eco­nomic en­vi­ron­ment cre­ated by Bri­tain’s likely de­par­ture from the EU’s sin­gle mar­ket and cus­toms union, but there could be equally trou­ble­some changes com­ing in the struc­ture and op­er­a­tion of the Eu­ro­zone.

Con­tin­u­ing mem­ber­ship in the Euro­pean Union has been judged by the main po­lit­i­cal par­ties, busi­ness fed­er­a­tions, labour and farm­ing or­gan­i­sa­tions as the cor­rect re­sponse to Brexit. Join­ing the EU back in 1973 en­joyed wide­spread public sup­port at the time and has re­tained pop­u­lar ap­proval in opin­ion polls ever since. Most econ­o­mists be­lieve that EU mem­ber­ship has been, and re­mains, the best choice for Ire­land, even with Bri­tain’s un­wel­come de­par­ture. But the de­ci­sion to scrap the in­de­pen­dent Ir­ish cur­rency in 1999 has not worked out so well: a case can be made for the view that the Ir­ish fi­nan­cial bust would have been smaller, and hence the fall-out eas­ier to man­age, had the temp­ta­tion to join the com­mon cur­rency been re­sisted. Aside from the dam­age wrought by Jean-Claude Trichet’s ECB dur­ing the fi­nan­cial res­cue pro­gramme, Eu­ro­zone mem­ber­ship has pre­cluded any re­sponse to the gy­ra­tions of ster­ling, cur­rently both weak and volatile.

De­part­ing the com­mon cur­rency is hor­ren­dously dif­fi­cult, a prac­ti­cal im­pos­si­bil­ity for coun­tries that find them­selves in fi­nan­cial trou­ble. Not even Greece chose this route dur­ing the cri­sis. How­ever de­bat­able Ire­land’s de­ci­sion to abol­ish the na­tional cur­rency in 1999, there is no ready pro­ce­dure for ex­it­ing the Euro. So Ir­ish gov­ern­ment pol­icy has two im­por­tant strands: to stay in the 27-mem­ber EU and also in the 19-mem­ber com­mon cur­rency. In cur­rent cir­cum­stances there is no ap­peal­ing al­ter­na­tive in ei­ther case.

The Gov­ern­ment is ac­tively en­gaged in dam­age lim­i­ta­tion con­se­quent on the Brexit de­ci­sion, which will al­ter for the worse the terms of Ir­ish mem­ber­ship in the EU. But the de­par­ture of the United King­dom is likely to has­ten the re­form of the Eu­ro­zone, even though Bri­tain is not a mem­ber. In a se­ries of re­cent speeches prom­i­nent Euro­pean politi­cians have been voic­ing am­bi­tious pro­pos­als for ac­cel­er­at­ing Euro­pean in­te­gra­tion, a re­flec­tion of the Good Rid­dance sen­ti­ment in con­ti­nen­tal Europe ex­ac­er­bated by the ul­tra-Brex­i­teers and which diplo­matic lan­guage can­not mask. With the un­co­op­er­a­tive Brits out­side the club, so the sen­ti­ment goes, the in­te­gra­tion agenda can be re­sumed.

In the case of the com­mon cur­rency, re­form is over­due. The Eu­ro­zone has never been a proper mone­tary union like the United States, and the fail­ure of the sys­tem to in­su­late na­tional trea­suries from bank in­sol­ven­cies was one of the prin­ci­pal de­sign flaws. This dan­ger­ous weak­ness has yet to be de­ci­sively ad­dressed: the next coun­try to suf­fer a bank fail­ure is not guar­an­teed that tax­pay­ers will be spared fur­ther bailout costs. In Ire­land’s case the cost im­po­si­tion was egre­gious: with the Ex­che­quer al­ready un­able to bor­row, the Euro­pean Cen­tral Bank twice threat­ened the clo­sure of the Ir­ish bank­ing sys­tem un­less the in­sol­vent state paid out in full to hold­ers of un­se­cured and un­guar­an­teed bonds in mis­man­aged banks, some of which had al­ready closed for busi­ness. The ECB has never ac­knowl­edged that this was a tar­geted at­tack on the fi­nan­cial re­cov­ery ef­forts of a mem­ber state. For a while in 2011 and 2012 it looked as if the ECB’s hand­i­work would de­rail the fi­nan­cial res­cue in which it was a sup­posed part­ner.

Sur­pris­ingly Trichet was wel­comed to Dublin to ar­gue, at a con­trived non-ses­sion of the Oireach­tas bank­ing in­quiry, that the ECB had done no dam­age to Ire­land’s in­ter­ests.

It should be con­ceded that sub­se­quent ECB ac­tions, in par­tic­u­lar the deal done on the prom­is­sory notes and the re­duc­tion in mar­ket in­ter­est rates on gov­ern­ment debt, have helped the Ir­ish re­cov­ery. But the ECB re­mains an in­sti­tu­tion with the for­mal power to en­gage in ac­tions tar­geted at vul­ner­a­ble mem­ber states, and has done so in Cyprus, Greece and Ire­land. In Italy the ac­tions of the ECB ef­fec­tively re­moved a recalcitrant prime min­is­ter.

Only the con­ver­sion of the Eu­ro­zone into a proper mone­tary union, with cen­tralised bank su­per­vi­sion and res­o­lu­tion, a com­mon Euro­pean debt in­stru­ment and sys­tem-wide de­posit in­sur­ance, will avoid the re­ten­tion by the ECB of ar­bi­trary and un­ac­count­able pow­ers over mem­ber state gov­ern­ments, im­ple­mented through threats of bank­ing sys­tem clo­sures. What hap­pened in Ire­land and in other tar­geted coun­tries has un­der­mined gov­ern­ment le­git­i­macy and dam­aged demo­cratic ac­count­abil­ity: any Eu­ro­zone re­form which fails to ad­dress these is­sues should be re­sisted.

The cen­tral pri­or­ity is not a big­ger fed­eral bud­get or tighter fis­cal rules. It is the re-de­sign of the com­mon cur­rency, in­clud­ing a full bank­ing union and ac­count­able gov­er­nance at the ECB.

In Stras­bourg on Thurs­day Jean-Claude Juncker, the Com­mis­sion pres­i­dent, re­marked that “We now have the Euro­pean Sta­bil­i­sa­tion Mech­a­nism (ESM). I be­lieve the ESM should now pro­gres­sively grad­u­ate into a Euro­pean Mone­tary Fund and be firmly an­chored in our Union. The Com­mis­sion will make con­crete pro­pos­als for this in De­cem­ber”.

He con­tin­ued: “My hope is that on March 30, 2019, Euro­peans will wake up to a Union where we all stand by our val­ues... where we have shored up the foun­da­tions of our eco­nomic and mone­tary union so that we can de­fend our sin­gle cur­rency in good times and bad, with­out hav­ing to call on ex­ter­nal help.” Juncker was echo­ing a rather more ex­plicit state­ment from French Pres­i­dent Em­manuel Macron in Athens a week ear­lier, where he called for the cre­ation of a new Euro­pean Mone­tary Fund to han­dle fu­ture crises, adding that “as far as I am con­cerned, the IMF has no place in EU af­fairs”.

When the Eu­ro­zone cri­sis first emerged in Greece in the early months of 2010, there was no ob­jec­tive need to in­volve the IMF in fi­nanc­ing the res­cue. The for­ma­tion of the Troika (Euro­pean Com­mis­sion, ECB and IMF) was ini­tially op­posed by var­i­ous Euro­pean politi­cians, con­scious that the Euro was a strong re­serve cur­rency; that the Eu­ro­zone en­joyed a healthy ex­ter­nal pay­ments po­si­tion; and that Europe had no le­git­i­mate call on fi­nan­cial aid from the rest of the world. But po­lit­i­cal ex­pe­di­ency in Ger­many pre­vailed and the IMF made its largest loans ever to some of the wealth­i­est coun­tries in the world.

In Ire­land the pres­ence of the IMF in the Troika ar­range­ment mit­i­gated the worst in­stincts of the other two mem­bers. The Euro­pean Com­mis­sion de­ferred through­out to the ECB, giv­ing the lat­ter a two-to-one ma­jor­ity against the IMF, whose team were openly in­fu­ri­ated by Trichet’s im­po­si­tion of bond­holder bail-outs.

With­out IMF in­volve­ment in the pro­gramme coun­tries would have been fully ex­posed to the ECB’s com­mit­ment to the pro­tec­tion of cred­i­tors, par­tic­u­larly the French and Ger­man banks.

The es­tab­lish­ment of a Euro­pean Mone­tary Fund, im­ply­ing the ef­fec­tive end of IMF mem­ber­ship for coun­tries like Ire­land, should be con­di­tional on the com­ple­tion of the bank­ing union and the re­moval of the threat of Trichet MkII. The pres­sure for the ter­mi­na­tion of IMF mem­ber­ship for Eu­ro­zone coun­tries seems to be com­ing from the Franco-Ger­man axis, em­bold­ened to new am­bi­tions of EU lead­er­ship by Bri­tain’s im­mi­nent de­par­ture. The Fi­nan­cial Times re­ported last Fri­day that French fi­nance min­is­ter Bruno Le Maire is a can­di­date for the pres­i­dency of the pow­er­ful Eurogroup of fi­nance min­is­ters. This too Ire­land should re­sist — Franco-Ger­man dom­i­nance in Eu­ro­zone de­ci­sion-mak­ing has done quite enough dam­age.

‘Trichet ar­gued that the ECB had done no dam­age to Ire­land’s in­ter­ests’

POWER: Euro­pean Cen­tral Bank pres­i­dent Jean-Claude Trichet

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