BUSINESS OPINION:The bigger EU states have already effectively begun subsidising the poorer states. They are just not telling their electorates
THE FAILURE of the Greek bailout has provoked much navel-gazing and chin-stroking among those who are concerned with the European project and the euro in particular.
The consensus seems to be that the monetary union is now at a crossroad. It either falls apart with all sorts of apocalyptic consequences or else has to be deepened into a true fiscal and political union; this would mean the richer countries will subsidise the poorer ones, but in return demand a considerable say in how they conduct their financial affairs.
The short hand for this state of affairs is the “transfer union” and much of the debate centres on whether it can be achieved.
But sitting where we sit in Dublin it is abundantly clear the financial transfers have already happened. However, for a variety of reasons the stronger members have declined to acknowledge that a point of no return on the road to a closer fiscal and political union has been passed.
One of the reasons for this reticence – if not the main reason – is presumably that French and German politicians don’t much fancy the prospect of coming clean to their electorate about what they have done. They would far rather pretend that nothing of the sort has happened.
They are being facilitated in perpetuating this illusion by the European Central Bank, which is the conduit through which the subsidies or transfers have been made. And as long as the ECB plays along, then the French and the German’s have what might be called plausible deniability.
At the heart of this deception is the notion that the ECB will be repaid the entire €340 billion it has lent to banks and Government’s in Greece, Ireland, Portugal*. The money has been lent circuitously, via extraordinary liquidity support to banks in these countries and through the purchase of their bonds in the secondary market, but it has been lent all the same.
If it does not get it all back, the ECB will be facing very significant losses and will require fresh capital to repair its balance sheet. That money can really only come from one place, the central banks in the euro system, aka the taxpayers, of the stronger member states. A recapitalisation of the ECB under these circumstances would be – to all intents and purposes – a transfer of wealth from the taxpayers of Germany and France to those of Greece, Ireland, and Portugal.
Thus if you believe that Greece, and possibly Ireland and Portugal must default, the transfer has already happened. All that remains is for the the bill to be passed on to the taxpayers in the other member states.
This analysis puts the current standoff between the ECB and the German government over the need for a Greek default in an interesting light. It would suggest that what is really going on is a game of chicken between the bank and its largest shareholder over whether the bill is settled indirectly via the ECB balance sheet, or directly by the stronger euro zone governments, who will pay anyway.
It is interesting to note that the ECB, which is one of the largest holders of Greek debt, has said it will not roll over its holding as envisioned under the German plan for a soft Greek default. The bank is in effect saying to the Germans that if they want to engineer a default it will not be at the expense of the ECB balance sheet. ie another mechanism has to be found. Jean-Claude Trichet’s recent call for a euro zone finance ministry and all that entails is presumably not unrelated.
The ECB is clearly alive to the danger of becoming the fall guy in the whole affair and its position is justified. It has done its fair share of the heavy lifting, bending its rules beyond breaking point in order to extend massive amounts of credit to the governments and banks in Ireland, Greece and Portugal.
What should happen now is very hard to say. If the ECB capitulates the politicians in France and Germany will save face. They will be able to claim it was all the ECB’s fault and it should never have lent the money, but what choice is there but to bail out the bank?
This is a definite possibility and would be the way to go if the objective was to bring about a once-off subsidy from the rich states to the poor ones.
The alternative is to put some sort of structure in place to take the debt off the ECB balance sheet before writing it down. It could take many forms, but some sort of common European treasury or bond-issuing body seems the most sensible.
However, whatever shape it took it would represent a lurch towards fiscal and political union that many in Europe might not favour. But, the history of European integration has been one of crisis followed by further progress and, from the outset of the current crisis, many have predicted it would lead to further integration. Looking at the predicament the ECB has now found itself in, it would appear that we are much further down the road than we realise.
*See “the ECB and the hidden cost of saving the euro” at openeurope.org.uk
