Messages from Europe : Is bailout ‘renegotiation’ realistic any more?
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Do Fine Gael and Labour still believe they can, in government, dismantle the key provisions of Ireland’s memorandum of understanding with the IMF/EU/ECB, at least on the EU end of things? Messages from Europe suggest the scope for changing any aspect of the deal is very limited.
First, there was Trichet. On February 4th, the President of the European Central Bank sent a message to Ireland’s political class:
“Our message to the Irish government is ‘Apply the plan,’” he said. “The plan comprehends a number of measures concerning the economy and reshaping of the banking sector. Our message remains: ‘Apply the plan.’”
The IMF/EU/ECB deal had been voted on and accepted by these international bodies, he pointed out.
“Implementation of the plan is absolutely essential, in my opinion and in the opinion of the ECB, for the credibility of the country,” he added
Just in case of any doubt in Irish minds that the deal on the table is the deal they will have to work with, he finished up:
“We have always a very strong message for all countries in Europe, without any exception, on the necessity to be absolutely credible on fiscal consolidation. We consider that fiscal consolidation is not contradictory with the consolidation of the recovery and with job creation, because consolidation brings about increased confidence, and confidence is the ingredient that is most missing in most of the countries.”
Yesterday, along came Olli Rehn. “I’m of course following the Irish debate closely and I’m aware that in democratic politics we have freedom of speech and freedom of positions,” the EU economics commissioner said. “At the same time, it is clear that the EU has signed the Memorandum of Understanding with the State, with the Republic of Ireland and we expect continuity and respect of the memorandum.”
“It is essential to respect the plan, respect the memorandum,” Ollie Rehn stated, “ and especially for 2011 the decisions are very much framed by the memorandum but concerning the outer years (i.e. 2012 – 2014)there is more room of manoeuvre.”
That room for manoeuvre, especially on the interest rates, may be limited by other political factors in the EU. The rates of interest for loans from the temporary fund to which Ireland applied for assistance in November were set in May 2010 when the fund was established. EU member states who signed up to the fund secured parliamentary approval on the basis that relatively high interest rates would be imposed on any country looking for a loan from the fund. It’s already reported that the Dutch government, for example, is opposed to any changes in the rates applying to the existing loan fund because of the domestic political difficulties this might pose for them.
Yet it’s clear that Rehn appreciates the problems Ireland could run into in servicing debts on loans with 5.8% interest rates and is sympathetic to some reduction, provided everyone else around the EU table agrees to it and the objective of any reduction is for the benefit of the EU as a whole, not any particular concession to Irish gripes.
“If there will be any changes to the pricing policy, which I personally support and the commission supports,” Rehn said, “it will take place for the overall European reasons not specifically because of electoral statements in Ireland.”
The IMF position has been clear from the outset: the interest rates applying to their bailout loans are calculated according to a formula used for different classes of country.While these rates may go up or down over the course of time, they are non-negotiable with any individual country. Further, whilst the IMF will consider adjustments to the details of the implementation programmes, that only applies to initiatives that will, overall, deliver the same result.
The respective approaches of the EU Commission, the ECB and the IMF combine as one stark message : the loans agreement is between the state of Ireland and the institutions, irrespective of any government that holds office. There’s a long tradition in Irish politics of governments adhering to commitments made on behalf of the state with external parties, of not repudiating international agreements. An example that comes to mind is Charles J. Haughey accepting the Anglo-Irish Agreement on his return to office in 1987, even though he had fiercely opposed it as leader of the Opposition. Will Fine Gael, or Labour, in government repudiate an existing international agreement?
The second part of the message is equally straightforward: apply the terms of the memorandum. The unspoken ‘or else’ is that repudiation of the agreement will result in the ECB withdrawing liquidity (that’s cash to you and me) from the Irish banking system, for which it’s in hock to the tune of about 100bn euro already at a 1% interest rate. Cutting off the flow of cash to Irish banks means there would be no money in the ATMs the following day and risks a collapse of the entire economy. Even those who advocate taking a tough line with the EU in the quest for a better deal, or who favour sovereign default now rather than being forced into it later, do not deny that if the ECB stops propping up our banks with cash, there’ll be no cash for anyone the next day. Would either of the parties most likely to form the next government be prepared to risk such an outcome?
From the outset, Fine Gael and Labour made ‘renegotiation’ of the IMF/EU deal the central plank of their election campaigns. Eamon Gilmore and Enda Kenny, respectively, declaimed that the election was about securing a mandate from the people to renegotiate this ‘bad deal’. Even allowing for election rhetoric – and we’ve been subjected to some egregious examples like ‘Frankfurt’s way or Labour’s way’ – both parties have been forced to shift their positions from their initial stance and acknowledge that whatever possibility for renegotiation may actually exist, it will have to be pursued within the framework of the EU. Moreover, with every statement coming from Europe, the limits on what’s up for renegotiation draw tighter.
The only remaining institution to which Ireland can turn for some relief from the current interest rates applying to the loan agreement is the EU Council, currently working its way through all the options for a new permanent loan facility. The presumption is that the new regime would either apply lower rates of interest than the temporary fund or that the period of the loans could be extended to a long-term framework of twenty or thirty years. Not so nice ideas also in the ether are for common EU rates of corporation taxes, constitutional provisions to make it illegal for governments to run excessive deficits and the like. What emerges from the current process will be voted on and agreed at an EU summit on 24-25 March.
But this raises an interesting question: what if the terms and conditions attaching to the new loans arrangement are worse than those which apply to the memorandum of understanding that Ireland has already entered into to secure the 85bn needed to see the country through the next two to three years? What then? And why is nobody putting this question to the parties that make up our government-in-waiting?