March 24, 2011
Have you ever heard the expression “marry me now, the love will come later”? In the old days when a couple was forced together by the matchmaker, this gradual process of emotional osmosis was supposed to happen as time and loneliness took their course.
Often it didn’t and, as a result, Ireland was a country of silent homes, filled with psychological terror, violence and sadness.
Watching the depressing ‘Ballroom of Romance’ on TV the other night, I couldn’t help thinking of the dilemmas facing the architects of Economic and Monetary Union (EMU). The crisis facing the euro is one of a loveless marriage where the marriage itself has amplified differences that were evident from the start.
When assessing risks that might derail this bizarre construct, central bank economists focused on the risk of governments using the monetary union to borrow all they wanted. Therefore, the rules were drafted to prevent politicians of poorer countries — those without much access to capital — taking advantage of the monetary union to increase borrowing.
The economists forgot about the banks and the private sector and EMU became a financial crackhouse for large delinquent banks in the core of the union and their mini-wannabes in the periphery.
Take Ireland today. German and French banks only hold â‚¬10bn of our sovereign debt. But they hold â‚¬74.5bn of Irish bank debt. It is no wonder that the Europeans (led by the French and the Germans) are so keen this week to stop Ireland defaulting on the bank debt.
Anyone who pointed out this banking faultline in the early years of the 2000s was told that they “didn’t understand”. Well we understood, only too well.
We knew a monetary union without a supporting political union was a hopeful matchmaking exercise. Given that the single currency had no provision for divorce, the hope was that the unaccustomed newly-weds would learn to love each other and co-operate.
Fast forward a decade and we are now in the middle of the first monumental row of the marriage and there has been little sign of love and many indications of increased acrimony.
There is a fundamental faultline in the euro because, as it is designed at present, it means there will be periodic defaults and there is absolutely nothing the guardians of the system — France and Germany — can do about it other than threaten the weaker countries with supposed sanctions.
There is no mechanism to force the exit of one country. So the likes of the ECB’s Jean-Claude Trichet and Juergen Stark and all the others are stuck in the inconsistency of their own grand delusions.
On Monday, Trichet said he thought that Ireland could pay all its debts; it begged the question why was he so sure, when the markets thought the opposite? Yesterday, the yield on two-year money in Ireland moved above 10pc — that is above long-term yields.
There are many reasons for this but none of them would amount to any player in the market agreeing with Trichet.
We are in a serious crisis for the euro and all Trichet can do is repeat mantras. He knows, and we know, that we are caught in a debt trap. With no exit from the currency, there is nothing that the Germans and French can do but face a slow car crash of progressive defaults.
The other players in this tragedy are the markets that are shorting all peripheral markets in the expectations of a blowout. The more they sell short, the more accentuated the crisis. And it’s not just Ireland.
According to the latest figures from the Bank of International Settlements, French and German banks between them are owed â‚¬763.8bn by Ireland, Greece, Portugal and Spain. The French and Germans realise they are on the hook so they are desperately trying to rewrite history — a history where only the debtors are culpable.
But every capitalist knows that when a company goes bust, the key concept that dictates the receivership and possible subsequent rebirth is co-responsibility, where the lender and borrower are both culpable.
Every capitalist who knows a bit of economics also knows that, if you have a system where a bust country can’t pay its private debts, it will endure years of deflation and high budget deficits, which will ultimately get so big that they will have to be defaulted on and the last lender will lose everything.
There is no way out of this because the EMU architects never allowed themselves to think the unthinkable. Well, the unthinkable has happened and over the next few days our negotiators should just hold tight in the knowledge that we are all in this loveless marriage together.
There is little point in France’s Nicolas Sarkozy flying off the handle and demanding more dowry in the form of corporate tax reforms. It won’t make a jot of difference. We are now together and the only way out of this is a divorce or a two-speed Europe with default, restructuring, repudiation or whatever you’d like to call it.
The only other way out is full political and fiscal union, which the people don’t want; or the Europeanisation of all liabilities in the form of a huge, bumper European bond market, which Trichet and Germany have ruled out. Well you can’t have it every way, lads.
Our boys should just sit tight at the summit and watch the others squirm for a change.