Angela Merkel: “now we need more in common in our economic policies…”

EU leaders met in Brussels last week, for their last summit of 2010, and agreed the text of a “narrow revision” to the Lisbon Treaty – the conclusions of the European Council (16-17 December 2010) [pdf file].

In Taoiseach Brian Cowen’s view, “There isn’t a change of competence or a transfer of competence, so our strong view is that it is compatible with the Constitution.”  That would be without the need for a referendum.  And from the same Irish Times report

On the effort to shore up the euro zone, Mr Cowen said it was important to examine any new measures in a careful and discreet way.

“Given the hypersensitivity of markets, whether we believe they are rational or not, is not the point.” He dismissed again the suggestion of Fine Gael leader Enda Kenny that a “haircut” of up to €17 billion should be imposed on the holders of €2 billion in unguaranteed senior bank bonds.

“We are not in a position to have unilateral action being taken as was suggested yesterday by leader of the Opposition. That was put on table during discussions.

“It’s clear that wider contagion, and other effects, would have had to be taken into account for Ireland. We need to internalise that and understand that and also recognise that what’s in our interest is a stable euro area.” [added emphasis]

But, as the BBC’s Europe editor Gavin Hewitt points out

But the summit has not addressed the fundamentals. Even those countries like Greece and Ireland that have been bailed out remain in dire straits. While embracing new austerity measures – to reduce their deficits – how will they find the growth to both repay the loans and to reduce their debt loads?

Many economists don’t believe the sums add up. They believe the debt loads are unsustainable. And then they cast an eye over other countries’ spreadsheets and question how they will meet their funding needs for 2011.

Meanwhile the gulf between the weaker economies and Germany’s only grows. Although there will be further banking stress tests in February it is apparent that many banks remain nervous over their exposure to these countries on the periphery of the eurozone. And although countries like Spain and Portugal are unveiling structural reforms, like in the labour market, they come very late in the day. They will take time to have an impact and perhaps increase competitiveness.

The Irish Times noted the reaction in Germany

German financial market analysts were not impressed with the summit results, with one calling it “another missed opportunity”.

“European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013,” said Carsten Brzeski of ING bank. “Debt restructuring, a common euro zone bond or an increase of the EFSF? None of these issues have been addressed. But they need to be.”

BNP Paribas analyst Ken Wattret said the measures were “piecemeal, unconvincing and reactive rather than pre-emptive”. “This is going to have to change if confidence is to be restored,” he said.

What next for the eurozone?  A couple of reports suggest a potential path…  From one Irish Times report

This (deal) goes a step in the direction of economic government … now we need more in common in our economic policies,” [German Chancellor Angela Merkel] said. Alongside stable state finances it was important, she said, that countries “step by step, in a long process” develop common economic policies. [added emphasis]

What the EU economics and monetary affairs Commissioner Olli Rehn called “the decade of fundamental reforms.”

And, again from the Irish Times

European leaders are deeply divided over the “euro bonds” concept, with Dr Merkel prime among the opponents. The question surfaced early at the summit dinner after leaders agreed a narrow revision to the Lisbon Treaty.

Although Dr Merkel has said the concept is off the agenda, both she and Mr Sarkozy said a week ago that euro countries must achieve deeper economic and budgetary harmonisation before such bonds could be issued.

The French leader returned to the theme of convergence yesterday, saying single currency governments should adopt deeper economic governance measures. “I don’t think you can have the lowest corporate taxes in the euro zone and then transfer your debt,” he said. “You can’t say I’m sovereign on receipts but for debts I can transfer them to a higher level. It makes no sense.”

I’m not sure how that will go down on the Clapham omnibus Clontarf dart…

But, Frau Bundeskanzerlin, history is knocking…

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  • The real killer for the Republic of Ireland is this clause

    “In particular, the European Financial Stability Facility (EFSF) has been set up to provide for swift
    and effective liquidity assistance, together with the European Financial Stabilisation Mechanism
    (EFSM) and the International Monetary Fund, and on the basis of stringent programmes of
    economic and fiscal policy adjustments to be implemented by the affected Member State and
    ensuring debt sustainability.”

    Given that tax harmonisation of an indebted Nation is imminent and given the very slim chance that Ireland will resolve its problems before the Financial Stability mechanism kicks in, it is as sure as night follows day that Ireland will be ensnared by this device and be forced to ditch its corporation tax policy.

    In effect, international companies previously thinking of setting up their businesses in Ireland are now unlikely to set up business in Ireland and, worse still, Companies which invested in Ireland because of the policy will consider fleeing from Ireland.

    The Euro is fundementally flawed but this is a solution to suit the Germans. Only full political union can actually solve the problem of inequality of different regions within the economic political zone. At least, in that situation, democracy is the balancing factor.

    Putting it this way, the less well managed economies were always up against it, once they joined the Euro, as countries like Germany, used to a rising currency to compensate for their increasing strength, could lord it in terms of expanding their trade. The only defence that a weaker nation had under the existing system was fiscal independence. Now they are going to take that away, what incentive does Ireland have left to remain in the Eurozone?

    Should the UK now be looking at ways to parachute Ireland out of the Eurozone? You wont see that debate on the front pages of any of the Newspapers yet but you can rest assured that the possibility will cross the minds of UK Treasury ministers with increasing frequency.

  • Mack

    Pete the 46A is generally used as the equivalent of the Clapham Omnibus..


    The clause on fiscal policy adjustments doesn’t seem to give specifics. If there is tax harmonisation I would hope it is limited to ensuring tax takes within a certain per centage of GDP or GNP (Ireland takes in more corporation tax as percentage of GNP than most.)..

    Twitter seem to be interested in setting up their EMEA Headquarters here.

  • Alias

    The EU has always been governed from a French/German axis to the benefit of those two countries so it isn’t any surprise that the two countries most in favour of extending the policies of that axis into other countries are the French and the Germans. What they want is more of the same: power without responsibility for how they use it, i.e. economic union without sovereign debt union.

  • Mack,

    The news about Twitter is good news. However, this latest development has only been in the news since the end of last month. I would doubt that there will be many more pieces of good news left as the full implications of this development make the rounds amongst accountants and lawyers.

    It is true that the clause on fiscal policy adjustments does not give specifics but this policy is early in its development and lets be realistic here. Once a nation is in that fix, their sovereignty on setting tax, public spending and borrowing is effectively out of their hands. Tax harmonisation is the stated policy of the most powerful nations in the Eurozone. Let me quote from today’s Sunday times under the headline “Merkel pushes EU integration as price of bailout”. The report firstly discusses the thrust of the German Government’s European policy, which is fiscal and political unity. The report says

    “Merkel was echoing comments by Wolfgang Schäuble, her finance ministe, who declared that Europe would see “fiscal and political unity” within a decade,”

    The report then went on to discuss this weekend’s agreement. It said this:

    “What this means in practice is that every [eurozone] country’s economic policies will now have to be run according to the German model,” said one EU diplomat.

    Who knows if Ireland will be dragged into political union with Europe kicking and screaming? I think that most Irish people will now hope for the Euro to collapse or that the British will parachute them out. Apart from default, there is no other way that Ireland can regain control of its own destiny.

  • The solution is to split the banking debt from the sovereign debt and let it sink. Ireland’s sovereign finances are in bad shape, but the bank guarantee is what has pushed it over the edge. A managed restructuring of the bank debt is the only alternative to sovereign default.

    There has been resistance to forcing the primary bondholders in the Irish banking system to take a haircut, because of fears of contagion elsewhere in the Eurozone. There may be merit in that, but expecting the Irish state to foot the bill to protect the entire Eurozone is madness. If the banking system needs a capital injection then it should come directly from a European fund, rather than the current system of loans to which will ultimately be repaid by the Irish taxpayer.

  • There is no dought that the Fianna Fail Government made a catastrophic mistake in failing to allow Anglo Irish and Irish Nationwide to go bust. Perhaps if they could turn the clock back to Autumn 2008, all the other banks should have been allowed to go bust.

    What about AIB, EBS, Irish Life and Bank of Ireland? Should those banks be let go or is it right, as Fine Gael and Labour politicians seem to argue, that as front line banks to people in Ireland, they should be protected?
    Or is that halfway solution still too burdensome, so much so that the people should accept the chaos that would ensue on a total bank default? I’m not absolutely certain here but that seems to be the position of Sinn Fein.

    Unfortunately, whatever is done, Ireland’s Sovereign debt will soon surpass €100 bn. The Government’s recent budget announcement seems to have grossly over-optimistic growth forecasts for 2012. Query, is it now too late to prevent Ireland from going into its “European debtor’s prison” in any event?

    These questions have to be answered in pre-election political debate in Ireland because people need to know what they are going to have to take to get what they want.

  • Ordinary savers must still have the choice of a high street bank, so allowing AIB and Bank of Ireland to collapse would be disastrous. There is no compelling reason, however, why both should remain independent and locally-owned. Indeed, if they were sold (whole or in parts) to other European banks it would have the added benefit of distancing the Irish banking system from the inbred cronyism of the Tiger era.