ANALYSIS:That the ECB should act decisively is not in doubt but contravening the treaty is not the answer
THE ECONOMIC and Social Research Institute’s Dr Joe Durkan is not the kind of fellow to pussyfoot around. If he has an opinion, he gives it with both barrels.
Dr Durkan shares the frustration of almost everyone outside the German-speaking world at the astonishing recklessness of euro area policymakers whose inaction poses a grave threat to the continent and its citizens.
This frustration was much in evidence in the ESRI latest economic commentary, published today, and in Dr Durkan’s comments at a briefing yesterday.
“I don’t care how they do it,” he said, but if leaders don’t act Europe faces “a second Great Depression”. He spoke of a fall in output in Europe of 20-30 per cent if sovereign default and euro break up come to pass. In fact, a decline of those proportions would be considerably greater than the contraction of output suffered in the 1930s in Europe. But that is not to say his scenario is excessively pessimistic – an unprecedented wave of defaults in a highly financialised modern economy would almost certainly have unprecedented consequences.
What should be done to prevent this? Like almost every observer of the crisis whose worldview is not informed by Weimar-era hyperinflation, Dr Durkan urged the European Central Bank to bring its firepower to bear on the crisis.
"A true solution requires that the ECB provides, either directlyor indirectly, the funds that governments need to fully capitalise banks and reduce the debt of Greece to a manageable level," today's report states.
The view that the ECB must now radically ramp up its response is no longer in any way controversial, but the manner is which Dr Durkan suggests it do so is. This is the second consecutive quarterly report in which the ESRI is calling for the ECB to ignore the explicit prohibition on directly funding sovereigns contained in article 123 of the Lisbon Treaty. Why advocate breaking the law when the indirect route – via the ECB’s secondary market bond purchase programme – is the obvious and immediate answer to addressing the problem?
The ESRI’s influence outside Ireland is limited (something Dr Durkan himself alluded to), but for the country’s leading think tank to repeatedly advocate unconstitutional acts can only add to German fears, in however small a way, that the peripherals do not appreciate the sanctity of constitutionally enshrined law.
If the euro crisis gets no little coverage in the latest ESRI quarterly, more humdrum issues are considered too. And there was very little to dispel the gloom generated by the euro crisis.
The ESRI is more downbeat about 2012 by almost every measure when compared with its last assessment at the end of the summer. The Dublin-based institute has not only cut its 2012 forecasts sharply, it has gone from being the most upbeat of the main forecasting bodies to being among the most downbeat.
This is mostly owing to the confidence-sapping effects of the euro crisis and slowing real economic activity in Ireland’s main export markets.
But for all this the ESRI still expects exports to rise next year. By contrast, it expects all components of the domestic economy to contract yet again, including households and Government spending.
The report goes on to say that the Government faces less uncertainty than households. I am not so sure. Households have extended family and a welfare system to fall back on if their circumstances take a turn for the worse. Governments have the international community to go to for digouts. In normal times bailouts are a reliable, if humiliating, source of funding. But these times are very far from being normal.
The main source of Ireland’s bail out cash comes from the European Financial Stabilisation Fund. The EFSF is itself in trouble as a result of the deepening crisis. There must be real concerns about whether bailout funds will continue to flow, and at what price.
If the tap is turned off, for whatever reason, the Government will have to make decisions of a kind none of its predecessors have ever contemplated.
It is to be hoped that when the ESRI next assesses the economy in three months time, it is not considering such scenarios.
