Down, down, down we go

At both European and national level the best-laid plans to resolve the euro crisis can be undermined by a lack of urgency, which in turn further limits the room for manoeuvre. As time goes on, options are becoming fewer. By Michael Taft.

The debate is falling even deeper down the rabbit-hole.  We’ve been promised a bank-debt deal (if only the ECB and the German Christian Democrats, CDU, would play in our sandbox) and stimulus through European funds which can be measured in hundreds of billions. This provides cover for a government that is determined to continue with its highly deflationary economic policy, which is leading straight us into a second bailout.

No doubt, European leaders collectively are determined to kill off the European project.  As Martin Wolf writes:

“Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.”

This is a far different scenario than what is being presented by our own government; where the ESM will retrospectively recapitalise our banks (and returns wads of euro notes back to us), where billions of euros through unspent structural funds/European Investment Bank/project bonds are ready to flood the economy. Already, the excuses are being prepared for when the whole thing comes apart:  blame the Greeks.

How realistic are some of these euro solutions?

First, on the bank debt.  We are not going to be paid back all that money we sunk into the banks; namely, the recapitalisations. Even if (and this is a big if) the ESM was suddenly transformed into a direct bank bailout mechanism, and a retrospective recapitalisation was agreed, all we’d get is ‘fair value’. Any takers for what fair value for AIB would be? Would we get the €10 billion?  The ESM is not a grant-giving agency – it would expect a return.

Regarding Anglo-Irish there is no fair value – we are paying off past bondholders that should never have been paid. This is a public agency to public agency debt. The ESM is not going anywhere near this turkey. At best, we will get a long-term loan at higher interest rates to pay off a debt that isn't a public debt.

All that could be expected is that any future recapitalisations would come via the ESM, bypassing the state. With rumours of future recapitalisation needed for the covered banks reaching €5 billion this is no small thing.

But all this is contingent on the ESM becoming such a vehicle. It’s not that and the German CDU is balking. By the time they get around to a solution (and the EU Commission is proposing a banking union by 2015), who knows where we will be.

Second, if we’re waiting for a massive EU stimulus we could be waiting a long time. Sebastian Dullien goes through some of the proposals and it makes grim reading.

Increasing the capital for the European Investment Bank to facilitate more loans is all well and good. But these loans count as state debt. Given that EU countries are supposed to be in deficit reduction mode, where is the impetus to take on more short-term debt and higher deficit spending through accessing EIB funding?

Project bonds are intended to guarantee private sector borrowing for infrastructural investment. Question: is it the case that private companies want to invest but can’t access money? Or is it that they do (at least in the core countries) but the continuing uncertainty is the obstacle? As Dullien puts it:

“Do you think that any manager in his right mind at an international telecommunications company would now invest in the upgrading of the Greek internet infrastructure just because he gets funds a few basis points cheaper?”

And then there’s the EU structural funds. The first problem is that these funds must be paid out of the annual budget and, so, may not be readily available.  Second, there are €80 billion in unspent funds. Sounds like a lot; it isn’t. It makes up 0.6% of the EU’s GDP. On this basis, Ireland would be up for €1 billion if they were dispersed evenly throughout the EU. This won’t even make up the €1.2 billion that the Government has cut from public investment. We might be able to negotiate more – but it will take time. Third, don’t forget there’s a knock-on effect on member-states’ deficits – unspent EU money is returned to the budget; if this is recycled, member-states will have to come up with the money through EU contributions. Nothing is for free.

None of the above is to dismiss these developments. Some kind of debt restructuring, some money from the European Investment Bank, some Project Bonds and some EU structural funds – it’s better than nothing. However, if the larger picture is not addressed and addressed quickly - a European banking system not fit for purpose, the collapse in investment, a sovereign debt crisis driven by private debt – then all the above will only serve to slightly ease the terrible pain, if that.

But while we debate these euro developments, or lack of developments, we lose sight of Government policy and their intention to continue a deflationary policy which is leading us into stagnation and a second bailout; its lack of policy over household debt; the politics of press releases as a substitute for concrete action.

At both European and national level the best-laid plans can be undermined by a lack of urgency which in turn further limits the room for manoeuvre. This is where we are now – options are becoming fewer.

We could bear up better if there was an open and honest dialogue from Government ministers. But all we get is “we’ve returned to growth”, “Spain’s difficulties are our opportunities”, “we’ve hit our targets”, etc. etc.

And down down down we go. It’s looking like the rabbit hole has no bottom. {jathumbnailoff}

Image top: esdesign10.