TAOISEACH ENDA Kenny needs to get straight answers to some simple questions, when he meets his fellow leaders at the European Union summit this week. Mr Kenny might well start by asking that the minutes of the last summit meeting in June be read, to remind his colleagues of just what they had decided less than four months ago, in what was hailed as a game-changing summit.
There political leaders agreed to set up a European banking supervisor under the leadership of the European Central Bank (ECB) and to allow the newly established bailout fund – the European Stability Mechanism (ESM) – to recapitalise banks directly without involving national governments. In addition, Ireland was assured of help to improve the sustainability of its adjustment programme – most likely by an easing of its huge debt burden. But what was then agreed has since been re-interpreted by some countries – Germany, the Netherlands and Finland – to mean something wholly different, with potentially adverse financial consequences for Ireland, and indeed for the euro area.
Finance ministers of Germany, the Netherlands and Finland in a joint statement last month insisted the ESM could only be used for future bank recapitalisations, and then as a “last resort”. Germany now insists that any direct recapitalisation of banks by the bailout fund also requires a sovereign guarantee. It would mean no compensation for legacy or sovereign debt incurred in past bank recapitalisations: in Ireland’s case this amounts to €64 billion. However, euro zone leaders in June implicitly accepted that such debt could be included, and that view was reflected in the bond market’s positive reaction. The yield or interest rate payable on Irish debt has fallen sharply ever since, enabling Ireland to make a successful, if temporary, return to the sovereign bond market. In June the euro zone leaders agreed it was “imperative to break the vicious circle between banks and sovereigns”.
While Germany wills the end of securing the euro’s survival, it appears to baulk at the means of best achieving it, by turning a currency union into an effective monetary union. Germany favours a strictly limited role for the ECB as a bank supervisor, covering just some larger banks rather than all euro area banks. And it shows little enthusiasm for making rapid progress towards a banking union, as proposed by the European Commission last month. Making haste slowly to ensure the euro’s survival is proving to be an inadequate response by Germany to a financial crisis that has lasted for four years.
Policy uncertainty about the euro’s future remains an obstacle to recovery in the euro area, where the outlook stays depressed. The IMF’s recent forecast is for a decline in economic activity and rising unemployment this year, with little improvement in 2013. Hopefully, the EU’s 20th crisis summit – helped by some much-needed clarification from German chancellor Angela Merkel – will provide a coherence and direction to the European project that it needs, and lacks.