Leading German economists have described as “problematic” last year’s June EU summit conclusions allowing direct recapitalisations of euro zone banks by the ESM bailout fund.
In their autumn forecast, provided to the federal government yesterday in Berlin, the four economic institutes said Ireland was still vulnerable to shocks because of continued high levels of debt.
However the economists said only limited direct ESM recapitalisations should be allowed when a euro zone banking union is established, comprising joint regulation and oversight structures. Before then, a solution must be found for euro zone banks’ existing liabilities – so-called legacy debt which does not drain the bailout fund.
“Legacy cases should be solved at the outset through the participation of owners and creditors with resulting restructuring costs nationalised,” wrote the four economic institutes. “Should respective states be overwhelmed, these could be supported by the ESM.”
They issued a warning for Berlin to resist pressure from other euro zone member states to rush into activating the banking union.
“There is at present a danger that, given the pressing legacy liabilities in some member states, progress will not be made with the necessary thoroughness,” wrote the economists from four institutes: Munich’s Ifo, Berlin’s DIW, the IWH in Halle and Essen’s RWI.
They said Ireland had made the most reform progress among all euro crisis countries and was the only to have passed its jobless peak.
“However continued high public and private debt levels, as well as existing risks in the banking sector, mean the vulnerability to domestic and external shocks remains high,” it added.
Debt deal
One of the report's authors, Dr Ferdinand Fichtner of Berlin's DIW, acknowledged that Ireland was viewed by Berlin as a "special case" among crisis countries. But, given large risks in Spain and elsewhere, he said this did not automatically translate into a special debt deal.
“Ireland is a special case, in my personal view, because it didn’t have the massive problems of competitiveness and, before the financial crisis, had solid finances,” he said. “But Ireland is also an example of a euro zone country that experienced undesirable developments, from an under-regulated financial sector and large inward capital flows.”
