European Commission’s handling of Irish bailout strongly criticised

The European Court of Auditors has strongly criticised the European Commission’s handling of the Irish bailout, highlighting its failure to notice warning-signs in the run-up to the financial crisis.

In a hard-hitting report published this morning, the EU spending watchdog also pointed to the absence of key documentation relating to bailout decisions, noting that certain documents are still missing.

The report into the European Commission’s management of five bailout programmes found that it failed to spot a number of warning signs including the emergence of high budget deficits for Ireland, Latvia, Portugal and Romania.

In particular, it cites a Commission analysis of the Irish economy from March 2008 which found that ‘the risks attached to the budgetary projections are broadly neutral for 2008’. But the European Court of Auditors report notes that by the end of 2008 the fiscal balance was lower than forecast by 7 per cent of GDP.

Noting that the European Commission already had oversight responsibility for member states' budgets in the years preceding the financial crisis, the report concludes that "the European Commission estimated the countries' public budgets to be stronger than they actually turned out to be."

“Warning the Council about the mounting fiscal imbalances was the Commission’s responsibility. The Commission was not prepared for the first requests for financial assistance.”

The Court also found that “the lack of documentation” was a common weakness of the Commission process, noting that some key documents relating to the bailout are missing.

“We could not validate some of the essential information that was forwarded to the Council, such as the initial estimates of the financing gap for some programmes [...]The availability of records improved with time, but even for the most recent programmes some key documents were missing.”

Among the main recommendations of the report is that the Commission enhances record-keeping “to ensure the factors underlying programme decisions are internally transparent. “

Further, the report found that the work of the bailout programme teams for the programme countries and their calculations “were not reviewed by anyone outside the team.” “The work of the experts was not thoroughly scrutinised and the review process was not well documented,” the report states.

It also notes that the Commission was “unprepared for the task of programme management.”

“The Commission possessed very little in-house experience of designing and managing financial assistance programmes, and that experience could not be acquired at such short notice,” the report notes.

The controversial issue of burden-sharing by senior bondholders during the Irish bailout it also raised in the report. While noting that all the troika partners accepted no burden-sharing by senior debt holder during the bailout negotiations, it does note that the IMF’s ex-post evaluation of the Irish programme suggests that alternative policy actions were available to contain the risks from higher burden-sharing, but were not pursued.

Last week economist Joseph Stiglitz said that the Irish economy would have fared better if it had been permitted by the European Central Bank to force senior bond holders to share some of the debt burden.

The European Commission was one of the three main participants in the five main euro zone bailouts, along with the European Central Bank and the IMF. In addition it financed bailouts for non-euro zone countries including Latvia, Hungary and Romania in 2008 and 2009 in conjunction with the IMF.

Launching the report, Baudilio Tomé Muguruza of the European Court of Auditors said it was imperative that Europe learns from its mistakes. "The effects of the crisis are still being felt today, and the resulting loan programmes have since run into billions of euros so it is imperative that we learn from the mistakes which were made".

In an official response -included in today’s European Court of Auditor’s report - the European Commission said that its response to the crisis “was immediate and comprehensive.”

“The Commission does not agree that the most recent programme documents lacked essential information.”

It also says that the Commission “was not alone” in its failure to identify economic weaknesses in the Irish economy.

“Domestic and international institutions, as well as private-sector forecasters, did not anticipate the severity of the downturn observed in Ireland in 2008.”