Monday, November 22, 2010

Will an Irish bailout actually solve anything?

Open Europe has today published a briefing asking the simple question: will an Irish bail-out actually solve anything?

A healthy Irish economy is quite clearly in the UK's interest, and to extend loans to a struggling neighbour (to use Osborne's rhetoric) is in itself nothing controversial. Sweden offered cash to Iceland after that country hit the rocks following a banking meltdown (not unlike that of Ireland) for example.

And Ireland is clearly in better shape than Greece, Portugal and Spain, and a rescue package could, at best, buy Ireland some time to get their house in order - courtesy of its open economy.

However, it's also true that euro membership alters the logic - and potential effectiveness - of a bailout. As we argue in the briefing, there are five reasons why a one-off bailout for Ireland will not solve the eurozone's problems:

1. Temporary loans or greater budget discipline across the eurozone will do very little to help countries such as Greece, Ireland or Portugal regain competitiveness, the main problem these countries face.

2. In essence, what was asked of Greece, and soon Ireland, is two-thirds of a traditional IMF package - cuts in expenditure and increased taxes. However, the third, vital ingredient - currency depreciation - isn't permitted within a single currency. Instead, currency devaluation has to be replaced by so-called "internal depreciation", meaning even more squeezes to jobs and wages which aren't politically or socially affordable.

3. The ECB is likely to continue to pursue a German-style monetary policy, leading to an undervalued currency for Germany (fuelling German export-led growth) but an equally overvalued currency for the weaker economies such as Portugal and Spain (although Ireland itself could be helped by a weaker euro). This, in turn, locks in a multi-speed eurozone, with the same type of tensions we've seen over the last year coming to the fore again in future.

4. The politics of a loan bailout and stronger supranational budget rules are unsustainable. The lending countries, most importantly Germany, can only sell a de facto debt union to their electorates if it comes with strict rules and terms. But such terms imposed from the outside seriously undermine the ability of the borrowing countries to democratically govern themselves.

5. The role currently being played by the ECB is untenable, both for political and economic reasons:
  • Politically, the ECB's decision back in May to start buying 'junk' government bonds from the secondary market has compromised its independence - which the Germans were promised would never happen. A bailout using loan guarantees from other EU states may allow the ECB to withdraw its emergency funding for now, but without a long-term solution the ECB is likely to be called on again to prop up ailing states.
  • Economically, the situation is unsustainable as well. The Eurosystem of eurozone central banks that underpins the ECB is leveraged 24 times, while the average hedge fund is only leveraged 3 to 4 times. A fall in assets of only a few percent would wipe out the ECB's reserves, which could lead to the ECB itself being in need of a "bail-out".
As we conclude,
There are no obvious long-term solutions that do not come with huge political and economic costs. The dilemma facing the eurozone remains whether it is to become a fully fledged United States-style fiscal and therefore political union with huge continuous transfers from the German-led bloc to those on the periphery - which would inflict serious damage on the German economy; or prepare for a messy divorce possibly in the form of a two-tier euro and even some countries exiting altogether.

3 comments:

theyenguy@yahoo.com said...

By Leaders Announced Agreement, Ireland and its banks received a seigniorage bailout from The EU, IMF, and the UK on November 22, 2010. This lending establish the UK as a fully integrated part of a European region of global governance, and disannulled the sovereignty and nationhood of Ireland.

Jean Claude Trichet, Dominique Strauss-Khan and David Cameron are now Ireland’s sovereigns and seigniors. Their supranational budget rules impose regional global governance, specifically economic governance, upon Ireland. The bailout clearly constitutes intensified fiscal federalism in the Eurozone, and unifies not only Ireland, but the UK into a European region of global government. The Leaders’ Agreement waived Ireland’s national sovereignty. It is no longer a sovereign nation state. This is simply part of the vision of the Club of Rome in 1974, when it called for the creation of ten regions of global governance. Ireland’s budget is now directed by others from outside and this means more internal devaluation, that is more austerity.

International Monetary Fund chief Strauss-Kahn, in a speech at the European Banking Congress in Frankfurt, Germany, spoke of sovereign crisis according to Phillip Aldrick of The Telegraph. The crisis is now held in abeyance, it has not been abated.

There is a trigger for all things economic. It was German Chancellor Angela Merkel’s call for a Permanent Crisis Mechanism, a commonly accepted tool which would be used in the event of a sovereign default, as Econogirl reported on October 28, 2010, that lead to a blast higher in periphery European sovereign debt interest rates in November 2010, as well as a run on Ireland’s banks, that brought about the negotiation of seigniorage aid for Ireland.

I ask why would Mrs. Merkel suggest such a thing? I believe it is because the Germans, knowing that they have a strong and export productive economy, can do without a common currency. The announcement of Germany to push for the Permanent Crisis Mechanism, together with the Basel III requirements is the kiss of death for all of the all European Financial Institutions, EUFN, and accounts for the 4.5% fall in Banco Santander Madrid, STD on November 22, 2010 Lending via European banks died, November 22, 2010 with the announcement of a Ireland bailout agreement.

In as much as Mr Strauss-Kahn says there is a sovereign crisis, I believe a sovereign will arise to address the crisis. Perhaps this person will be Herman van Rompuy.

And I believe the sovereign will be accompanied by a seignior, an old English word meaning top dog banker who takes a cut. He will provide credit seigniorage to all European Financial Institutions and corporations and persons residing in the currency union.

And in so doing he will command great authority. An example of such authority is EU’s Economic Affairs Commissioner Olli Rehn’s October 2, 2010 statement in FT article, Ireland May Have To Sacrifice Low Tax Status: “In the coming decade, it’s a fact of life that after what has happened, Ireland will not continue as a low-tax country, but it will rather become a normal tax country in the European context,” he said.

I believe the seignior (perhaps it will be Mr. Rehn), will pave the way for a global currency system, to replace all current currencies, as they expire in the current bout of global debt deflation that commenced that November 5, 2010, when the currency traders sold most of the world’s currencies, as the bond vigilantes sustained the Interest Rate on the US 30 Year Government Bond above 4%, causing the US Dollar, to risej.

Evidence abounds, and is clear, cogent and convincing that fiscal seigniorage has failed in Europe. As the end of credit approaches, then a Supra Government, of the Sovereign And Seignior, will be the Federal Government of Europe, and sole fiscal and credit seignior. This triune power will be the first, last and only provider of credit in the Eurozone.

Hal (GT) said...

The problem here is that no one desires to face reality and deal with the problem of the toxic debt. Until they do the dominoes will continue to fall and the austerity measures will be in play.

Heather said...

As you said, this loan infusion is not sustainable much longer - the funny fact is that Germany helped Greece because they have had shares in their banks, and now they have to be the saviors for all other countries. Of course they don't like it, even if it's their fault...