ANALYSIS:While Irish politicians are preoccupied with the election, decisions that will shape our economic future will be made in Brussels, writes ARTHUR BEESLEY
EU LEADERS gather again today to plot a new offensive in their titanic struggle against the sovereign debt emergency. As Irish politicians slug it out at home in the opening skirmishes of the general election campaign, the talks in Brussels will have a crucial bearing on conditions in the domestic economy for years to come.
Ireland will be represented by the caretaker Taoiseach Brian Cowen, far from ideal in the circumstances. Although definitive decisions will not be taken today, EU leaders want a deal by the end of March. From this perspective, the timing of the election is dreadful.
Cowen’s successor may have barely a fortnight to put his stamp on a high-stakes debate with the likes of Angela Merkel and Nicolas Sarkozy. Whether the German chancellor and the French president would be of a mind to listen or to change course is questionable, but such are the unavoidable vicissitudes of democracy.
Three issues are in question as Europe searches for the elusive lost chord to finally resolve the debt crisis: the enlargement of the scale and scope of the current temporary bailout fund; arrangements to underpin a new permanent fund; and a deepening of economic policy co-ordination to ensure the debacle is not repeated.
These are the essential features of a new “grand bargain” under which the strongest euro countries would pledge anew to protect spendthrift, indebted stragglers like Ireland, Greece and Portugal. All three features are interlinked, each is riddled with political and financial complexity and each gives all power to Europe’s mightiest nations over the weaklings.
This is not an abstract point. In the eyes of Merkel and Sarkozy, European solidarity cannot be a free lunch. It is a given, too, that each issue plays first to a domestic audience. Therefore, it may be that bailout recipients suffer the consequences of political forces far from home.
That any promises to reinforce Europe’s bailout scheme would come with a rather large price tag is but one reason to pay very close attention.
This is all the more important given the force of renewed pressure from Berlin and Paris on corporation tax. Merkel wants all European countries to reshape their economies in Germany’s image. She wants tougher debt and deficit rules, constitutional debt limits and broadly similar labour laws. Although Sarkozy might well recoil in horror at her push to harmonise the retirement age throughout Europe, her demand for common corporation tax rules chimes with his clamour against Ireland’s 12.5 per cent rate.
The key point here is that all this represents the strong countries’ “take” on the flip side of their “give” in the bailout scenario. This is bad news indeed for Ireland, given the importance attached to corporation tax. Ireland’s clout in the European milieu these days is already close to zero.
It follows that the next phase of the battle against the debt crisis has the potential to make the domestic recovery a little easier or a great deal more difficult.
Numerous proposals are on the table to reinforce the temporary rescue fund, known as the European Financial Stability Facility (EFSF). For Ireland, however, the immediate debate centres on reducing the interest rate the EFSF charges for bailout loans.
The loans come at a hefty premium. Dublin’s hand is weak, but senior diplomatic sources detect a greater willingness in the wider euro zone to agree to a marginal reduction in the rate. It remains to be seen, however, whether a reciprocal concession on corporation tax is sought. If Dublin refused, a rate cut might well be off the table.
Still, a lower interest rate can be contemplated because the EFSF’s constitution will have to be reopened if its mandate is to change. The proposals here include giving the fund powers to intervene in sovereign debt markets, to issue emergency credit lines without the strictures of an IMF-style austerity plan and to extend the duration of its loan programmes to as long as 30 years.
Another is for the EFSF to make loans for bailout recipients to buy back their sovereign bonds at a discount to their issue price, thereby introducing a form of sovereign debt restructuring into the euro zone. If done to help Greece, it could be done for Ireland.
A deeper form of restructuring is on the table in the debate on the proposed permanent rescue fund, known as the European Stability Mechanism (ESM), which will come into being when the stability fund expires in 2013. Merkel wants sovereign debt issued after that date to carry the proviso that investors must take a hit if the country in question has to be bailed out.
This raises a very prickly question for all EU leaders, one they have so far failed to answer. Why won’t they contemplate deep debt restructuring now if they can contemplate it after 2013?
They can’t answer because they have no policy here and fear panic on the markets if they say the wrong thing. Yet if debt issued after 2013 can be restructured, such provisions would implicitly apply to the burden of existing debt if it is rolled over at maturity instead of paid off. This is a question EU leaders have yet to tackle in earnest, but the debate may be about to intensify radically.
Given Ireland’s overbearing and growing mountain of bank debt, most of it guaranteed by the near-bankrupt State, this is critical.
All the more so in a scenario in which senior bank bondholders are being fully paid by taxpayers, senior bond “haircuts” having been ruled out at bailout time four months ago.
Unilateral moves in that direction are still deemed too hot for markets to handle. But that does not rule out co-ordinated action down the line. Still, burning Irish bank bondholders could lead to a requirement for fresh capital from European governments for their own banks. Would leeway on Irish corporation tax be the price of such a concession?
To repeat the point, the timing here from Ireland’s standpoint is rather unfortunate. European leaders want agreement on the EFSF, the ESM and all matters arising by late March, specifically at a summit on March 24th and 25th. There is even talk of a special euro zone summit on March 7th. This would be two days before the Dáil reconvenes; two days, therefore, before the earliest date for the election of a new taoiseach.
If such a euro zone summit were called, the game might well be over before any member of the incoming administration opens the front door at Government Buildings. If it is not, there would still be only a matter of days to catch up politically on a debate which has huge implications for Ireland’s future.
Over lunch this afternoon, EU leaders may very well set the tone for the remainder of the debate. Yet another crucial moment in the debt drama is upon us.
Arthur Beesley is European Correspondent