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
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’