Saturday, January 09, 2010

An EU bail out for Ireland? No thanks, say the EU’s biggest contributors

Europe's World, 23 July 2009

As the economic recession limbers on, there have been suggestions from several corners that the bigger EU member states – led by Germany – might be willing to bail out the weaker ones – notably Ireland.

On 18 February 2009, German Finance Minister Peer Steinbrueck said: "If one euro zone gets into trouble, then collectively we will have to be helpful."

Soon after, following a speech to foreign journalists in Berlin, the Irish Times reported that Chancellor Angela Merkel “gave the strongest signal yet that Berlin may act under Article 100 of the EC Treaty, allowing financial assistance to be given to countries experiencing 'difficulties caused by natural disasters or exceptional occurrences beyond its control.”

European Commissioner for Economic Affairs Joaquin Almunia sparked controversy in March when supporting the idea of a eurobond as he said: "If a crisis emerges in one eurozone country, there is a solution before visiting the IMF. Don't forget we are equipped to interact politically and economically to face the crisis, but these kinds of things should not be explained publicly”.

Later, in June, Times columnist Anatole Kaletsky wrote that "Germany is at the heart of a huge plan to prop up crippled EU economies - not that the German people would ever know."

Not only that, but the German Finance Ministry is reported to have come up with several draft scenarios for rescue measures. One involves Germany issuing 'bilateral bonds' to raise money for struggling countries; another involves groups of several member states collectively floating a bond; a third involves using a clause in the EU treaties which allows it to provide aid if a member state is facing extraordinary circumstances - which would mean the EU taking out its own loans on capital markets for the first time; and a fourth involves an aid package provided by the IMF.

It is widely acknowledged that all these options would represent a huge burden on the German taxpayer. Der Spiegel magazine has estimated that, "for German taxpayers, this would be no small sum. If Germany were to pay into a bailout based on its size relative to other euro zone countries, it would be forced to cover one-fourth of the entire tab." Peter Bofinger, a member of the German Council of Economic Experts, estimated that a German bailout operation of other eurozone countries "could cost the taxpayer about 1.5 billion euro per year".

But what do German taxpayers think? According to a new Psyma poll commissioned by Open Europe and the Institute for Free Enterprise in Berlin, 70 percent of Germans, are, perhaps unsurprisingly, against the idea.

And they are not alone.

In a recent article in Europe’s World, Otmar Issing, former Chief Economist of the European Central Bank argued against the idea of a common eurozone bond, saying that it would imply that “France and Germany would have to pay higher interest rates, and that would in the end mean higher tax burdens for their citizens”, given the higher risk premia for buying bonds, troubled countries such as Ireland and Greece have to pay.

He said: “issuing a common bond would be a first step on the slippery road to ‘bail-outs’, and thus the end of the euro area as a zone of stability”, and indicated that a common bond would be harmful for a “weak” country as “it would foster the illusion that it is possible for a country to get out of difficulty without having undertaken fundamental reforms.”

Last year Issing told the Frankfurter Allgemeine Zeitung that it would be a “catastrophe” to water down the 'no bailout' clause in the EU treaties, arguing that “it would spell an end to the political stability of the monetary union". He said that in order for financial discipline to prevail every member state must be responsible for its own debt and deficits: "without this there would be no end", he said (FAZ, 20 February 2009).

Other prominent German economists agree. Current ECB Chief Economist Jürgen Stark has said "the ban preventing the EU and its member states from taking responsibility for the debts of partner countries is an important foundation needed for the currency union to function." Karl Otto Pöhl, former President of Germany's Bundesbank, said that if Germany decided to bail out other members of the eurozone it would open a Pandora's Box, adding "It would be like jumping in a swimming pool without water".

Many argue that a bail-out is not, in any case, legally possible, pointing to the well-known ‘no bail-out’ clause in Article 103 of the EU treaty. It reads:

“The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.”

Article 100, on the other hand, notes:

Article 100

1. Without prejudice to any other procedures provided for in this Treaty, the Council, acting by a qualified majority on a proposal from the Commission, may decide upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products.

2. Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken.

Article 103 however prevails over article 100, following a of a declaration inserted at the occasion of the Treaty of Nice, whereby it was recalled that decisions regarding financial assistance, such the ones provided for in Article 100, are compatible with the "no bail-out" rule laid down in Article 103 (1).

Why then, are politicians trying to implicitly link the outcome of the upcoming second Irish referendum on the Lisbon Treaty to the possibility of Ireland securing financial help from other member states?

German MEP Jo Leinen, said the Irish must vote "Yes" if they wish to continue to benefit from the "protective umbrella" the EU provides. And the ‘Generation Yes’ campaign in Ireland claims among its top five reasons for voting ‘yes’ that it is “Our best chance for an economic recovery: Ireland can’t fight global economic forces on its own, in this financial storm the EU is Ireland’s safe harbour.”

These unsubstantiated claims deserve to be challenged. Even if politicians do find a legal way forward, nothing in the Lisbon Treaty changes the simple fact that any financial help flowing across EU borders depends entirely on the willingness of taxpayers – particularly German ones – to cough up, and the clear public opposition to the idea makes it politically unfeasible.

The clear ‘no’ from the Germans shows these attempts to build a common European union of debt by exploiting countries suffering in the crisis are a recipe for disappointment, at best.

(1) http://eur-lex.europa.eu/en/treaties/dat/12001C/htm/C_2001080EN.007001.html and http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+CRE+20090507+ANN-01+DOC+XML+V0//EN&query=QUESTION&detail=H-2009-0237&language=EN

Pieter Cleppe, Head of the Brussels Office of Open Europe

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