The tensions running through Europe are clear, emotive and taken together pose a clear threat to the survival of the Euro and European project.
Countries inside ‘bail out’ agreements do not want to be in them. On the other hand, countries funding ‘bail out’ agreements do not want to pay for them.
Every member of the Eurozone wants to stay inside the euro. But not every country is willing to meet the obligations of Eurozone membership.
Due to this the euro is now facing a crisis of legitimacy. If it does not resolve these tensions it simply will not survive.
At the heart of this is that the Euro was an unfinished currency. The surge in cheap global credit and a booming world economy meant that the fault lines at the foundations of the currency were papered over and easily ignored.
The fault lines were political and economic.
Politically, countries enjoyed the benefit of a single currency zone but were happy to ignore the requirements. The flouting of the stability and growth pact is now well documented. More seriously, the chimera of growth fuelled by credit, fatally diverted attention away from focus on productivity and competitiveness.
Economically, the foundation of a currency union without a banking union created a potentially fatal mismatch that we are now grappling with. The lack of a European wide bank deposit guarantee scheme, European wide banking regulator and European wide bank resolution scheme were all key ingredients in this crisis.
We must be honest in that the common thread in both failures was that national governments did not want to reduce their sovereignty with respect to banking and fiscal policy. Due to this countries now find their sovereignty impaired in ways and with consequences they could scarcely imagine.
If the fatal flaw was an unfinished architecture at the time of creation we are deluding ourselves if we imagine that anything less, at a time of crisis, will work now.
And that point has now arrived.
Spain, unable to deal with the cost of supporting their banking system. Greece, on the precipice of a disorderly national default and with some political leaders, who should know better, contemplating their exit from the Eurozone.The Governor of the European Central Bank, Mario Draghi, referred to this lack of completion when he stated last week that the ECB could not fill a political vacuum.
The two building blocks that are urgently required are responses to the European sovereign debt and banking crisis. Far too long the response has been that growth is enough to deal with these problems. We are now in new territory.
Let me sketch what each of these are and also what they are not and then conclude by urging the Government to play a proactive and positive role in articulating a vision for each.
A banking union requires a banking recapitalisation fund, a fund for deposit insurance, a central regulator and a clear and established process for handling banking failure.This may sound bland – but nothing could be further from the truth. While we might not flinch from this, given our own chronic failure of national banking regulation, it will mean the regulation of major national banks from a regulator that is not nationally based. There were sound reasons why this was not wanted in the past, but there are now compelling reasons as to why it is critical for survival now.
The explicit role of this new architecture will be to prevent bank runs.
I am encouraged by the recent work of the European Commission and European Parliament in this regard, but deeply worried that the likely implementation date is 2015. The euro, as we know it now, might not survive that long.
This must be accompanied or preceded by a fiscal union – which is essential for the development of some form of European wide mutual debt plan – or Eurobonds.
I do not believe that supporting all of the national debt of any sovereign state by another is economically sustainable or politically fair. The red debt/blue debt model, developed by the Breugel Institute and endorsed by the German Council of Economic Experts and last week by ‘The Economist’ is a clear way of reducing ‘moral hazard’ concerns.
In this model debt up to 60% of national income would be jointly guaranteed with credit worthiness pooled across all participating countries. Anything above 60% is a national debt issue.
All of this would be uncomfortable and would require the further dilution of national sovereignty for all participating countries. In Ireland’s case this could mean further referenda, for example, on the role of the European Central Bank, on the creation of Eurobonds, on creating a single banking regulator.
As we complete one bruising referendum campaign this will make many, including myself shiver. But if we do not spell out a convincing vision for the future because of fear of the difficulties in the present then we simply will not have the kind of future we all want.
Let me spell out what this is not. This is not federalism. I simply do not accept that resolving an economic crisis requires a quantum leap to a sharing sovereignty in defence policy. It is not even economic federalism – I do not want full Eurobonds and debt mutualisation as I simply do not believe it will work.
To borrow a phrase from another part of our heritage and present – this is ‘Unionism’ not ‘Federalism’, based on consent and based on legitimacy conferred by political decisions.
Let me also be clear that this cannot distract from our urgent focus on closing our budget deficit. Alongside doing all possible to support job creation this is our national priority. We did not lose our national sovereignty when the Troika arrived, we lost it when no one would lend to us.
This ‘Unionism’ is now articulated by many and debated by many that could work. And I believe that Ireland should play a lead role in articulating this strategy.
Andrew Moravcsik starkly summed up our crisis in his recent article in Foreign Affairs when he wrote that ‘The burden must be shifted from Europe’s public sectors and deficit countries to its private sectors and surplus countries. If this does not occur, the survival of the euro will be called into question and Europe will face a long term economic catastrophe that could drain its wealth and power for the rest of this decade and beyond’.
I am not sure if shifted is possible or even merited. But shared is essential. And the completion of a banking and a form of fiscal union offers the best possible way of achieving fairness and resolution.