For more than a year political leaders across the EU have been grappling with the Euro crisis. To date we have seen EU/IMF support programmes for Greece, Ireland and Portugal; ECB bond buying programmes for Italy and Spain; and significant liquidity extended to central and commercial banks.
The emergency response mechanism, the European Financial Stability Facility was introduced last year, with a fund raising capacity of €440billion. The aim was to preserve stability in Europe by providing financial assistance to Eurozone states in economic difficulty, however in July 2011its terms of reference were expanded to allow it to purchase government bonds in struggling Eurozone economies and to recapitalize banks. The EFSF will be replaced in 2013 by a permanent stabilisation fund called the European Stability Mechanism. As we go to print with this pre-budget submission it is expected that this fund will be greatly expanded, perhaps to the sum of €1 trillion.
The mainstream narrative being used by political leaders across the EU to explain this crisis is to blame errant peripheral economies. Greece and Portugal over borrowed, over spent and in turn ran excessive deficits. Ireland overexposed itself to large amounts of private banking debt via the blanket banking guarantee. In response the markets took flight, undermining not only the stability of the peripheral economies themselves but in turn the European banking system and the Euro economy as a whole. The response of the EU institutions, supported by the IMF has been to impose heavy austerity on the populations of peripheral economies while forcing their governments to take on massive loans to bailout toxic banks. EU leaders have also used the crisis to force through agreement on increase decentralisation of economic decision-making in the form of changes to the ‘surveillance’ and ‘discipline’ elements of the Growth and Stability Pact.
Misunderstanding the crisis
Despite the endless round of crisis summits and the massive transfer of monies from taxpayers to banks, the response to the Eurozone crisis is not working. It is not working because EU leaders do not understand the problem. The Eurozone is not in the midst of a sovereign debt crisis. Sovereign debt is a symptom of a much deeper problem. The root cause of the crisis is to be found in the European banking system and the structure of the Euro as a currency. Combining strong and weak economies into a single currency union without any formal mechanism for redistributing surpluses from the core to the periphery created two specific problems for the Eurozone.
Firstly, it generated substantial imbalances in trade between strong exporting economies such as Germany and weak importing economies such as Greece. In turn this dynamic generated a surplus of savings in the Eurozone core and a demand for credit in the periphery. Low interest rates enabled peripheral economies to borrow within the Eurozone to fuel consumption.
Secondly, it fuelled the bubble economy through light touch regulation and cheap money. Cheap borrowing coupled with the failure of member state governments and EU institutions to properly regulate aggressive lending by major European banks lay at the heart of the property booms across the EU.
Sinn Fein alternative
For Sinn Fein there are a number of key steps that must be taken at both a European and domestic level if we are to have any hope of delivering a fair and sustainable social and economic recovery. Sinn Fein believes that the first step in addressing the crisis in the Eurozone is to deal with the banks. The European Banking Authority’s stress tests of July this year identified 24 banks in need of recapitalisation. At the time some commentators said that this was only the tip of the iceberg. Others criticised the stress tests for failing to uncover the full extent of the banks’ liabilities, including those hidden away in special purpose vehicles. The collapse of Dexia bank has shown these criticisms to be well founded.
The solution is not, as some European leaders are suggesting, to pour taxpayers’ money into these toxic banks. Nor is it to increase the fund of the EFSF to cope with the funding needs of the banks. What is needed first and foremost is a new round of stress tests that uncover fully, and without any ambiguity, the full extent of the problems in the European banks. Once we know the full extent of the problem, the banks must be forced to write down the cost of their bad debts as a prerequisite to any recapitalisation. We also strenuously caution against recapitalisation without examining the alternative of shrinking the size of a bank. The lesson in Ireland has shown that recapitalisation has served little purpose except to correct banks’ balance sheets – it has not delivered for the real economy in terms of lending or the write down of residential retail debt.
It is also Sinn Fein’s view that where it is occurs, the cost of bank recapitalisation should not be borne by ordinary taxpayers. The Greek government has managed to secure significant private sector participation in their debt restructuring so it is not credible for the Irish Government to claim that a similar deal cannot be secured for Ireland. Nor do we believe that an enlarged EFSF is the right vehicle for meeting the funding requirements of cleansed banks. Rather the European Central Bank must become the lender of last resort for the European banking system. The ECB is already performing this function in a number of countries including Ireland. Rather than printing Euros to buy the bonds of indebted European economies in a vain attempt to reassure market anxieties, the ECB would be better placed to redirect these facilities in order to stabilise the European banking system.
Finally the EU must abandon its fixation with austerity. The crisis facing the domestic economies across the EU is a crisis of underinvestment. The banking crisis had led to a withdrawal of private sector investment from the domestic economy on an unprecedented scale. The result is loss of jobs for many and of spending power for all. In the absence of private sector investment we need the state to fill the investment vacuum. We need a European wide stimulus programme to complement stimulus programmes in individual member states. The European Investment Bank, a body with twice the lending capacity of the World Bank, must be empowered to work in conjunction with national governments to increase the level of investment in labour intensive projects that in addition to creating jobs also have a clear social, economic and environmental dividend.
Sinn Fein proposes
- That the Irish government abandon its support for the EU wide policies of bank bailouts, austerity and centralisation of economic decision making
- That the Irish government outlines an alternative strategy for cleansing the banks, including a write-down of toxic debt; investing in growth; and reclaiming member state control of economic decision making
- The Irish Government must seek a re-negotiation of the EU/IMF deal for Ireland. Fine Gael and Labour have refused to seek a proper negotiation even though it is clear the Troika would rather negotiate than see a disorderly default, as has been proven by the Greek debt write down.
- Europe takes a more central approach to the regulation of the banking sector. We want the EU to implement counter cyclical banking policies which sees banks used to dampen bubbles (e.g. restrict loan to value ratio when property prices are rising, but increase it in a recession when business capital is needed); to tackle the shadow banking industry by forcing the banks to disclose what is on their balance sheets and begin to deal with Credit Default Swaps and also by forcing actual shadow banks onto exchanges; to make the ECB a proper lender of last resort; and to look at regulating ratings agencies perhaps by centrally responding with data to the allocation of grading whether that is positive or negative