It should by now be clear that the proposed Irish loan is not the answer to the problems of the Euro. This week-end the Finance Ministries should be humming with effort. They should see the drift to a loan package for Portugal. All the rhetoric deployed on Greece and Ireland telling us a loan in time saves nine has not worked.
They should recognise that the bond markets have started to take them on in Iberia. Portuguese ten year yields have soared through 7% and Spanish ones through 5%. They may discount the alarmist talk that Belgium too is at risk when they see that Belgian rates are still pretty low and Belgian debt not a huge problem. They should admit that careless talk costs loads of money. They need to repair the damage done by all the briefing about the instability and about the need to invent a system of default.
The supporters of the loan have a touch of the TINAs – there is no alternative they say. You opponents of a UK loan , they accuse, want to see the Euro collapse . Nothing could be further from the truth. I understand how much political capital is invested in the Euro project. I do not wish our neighbours ill, as we do trade with them. I wish them to sustain and grow their prosperity for their own sakes and ours.
I have two major disagreements with the supporters of the Irish loan. I do not see why the UK should be part of it. Euroland has several large and rich countries that can borrow the money needed for it. It should be club members, and club members alone, who pay the bills of their club. I believe they will do so if the UK declines to make a contribution. The main Euro members clearly think it is in their interests to lend the money. One of the main points of helping keep the UK out of the Euro was to avoid us being dragged into expensive rescues, made inevitable by the faulty design of the institutional structures of the Euro. The UK is not in a strong financial position, so we should be doing all we can to avoid additional borrowings ourselves.
My second argument against the loan is more altruistic. I do not think a loan is the answer to Ireland’s problems. I find it odd that they agreed a large loan in outline, without agreeing what it was for or the terms of the borrowing. The Euro area is lurching towards a series of bilateral agreements between EU states and individual Euro countries at financial risk. If the rest of the EU mutually guarantees too much debt for the weaker members, it becomes a money go round or chase to the bottom. There will be knock on effects to the credit rating and interest rates of the stronger countries.
I suggest it is time instead to do some basic thinking about how a normal single currency works, and to make the compromises between the weak and the strong which are needed to allow the zone a more stable future. This still entails the stronger paying some of the price for belonging to a zone with the weaker ones, but does so in a more orderly way.
The truth is simple. The exchange rate, interest rates and money growth that suit Germany do not work for many other members of the zone. The markets are now differentiating sharply. All Euro zone members share the same exchange rate and the same short term interest rates fixed by the Central Bank. They now have wildly different long term government borrowing rates.
The weaker states need a lower currency value. The states with weaker banks need more money in circulation and more money available to support their banks from the Central bank. The stronger countries are pushing for repayment of the special facilities made available to weaker banks, and are keen to keep money fairly tight to put off inflation.
Instead of an Irish and a Portuguese and a whatever loan package the Eurozoen could take the following measures:
1. Agree that special financing continue to be made available to weak banks on demand by the ECB
2. Produce a new plan to strengthen the weak banks, selling off assets and businesses where possible, reducing the size of distressed asset pools, writing off where appropriate, raising new capital where possible, cutting costs, finding new profitable lines of business. The markets should be reassured that as this goes on the ECB will do what it takes to keep all the main banks open and liquid.
3. Allowing the bank to print some more Euros, and buy in some of the lower priced sovereign bonds to show that the Eurozone stands behind its members and does not countenance default on sovereign debt within the zone. It is the Eurozone, not the US or UK, which needs to prop its bond markets and show some common purpose for a change. The Eurozone will not get easily out of its debt crisis without creating more money.
4. Working with high deficit countries to produce deficit reduction plans that are credible. The aim should then be to restart proper financing of these countries through the official bond markets.
5. Coming up with policies which promote enterprise and private sector led recovery. The EU needs to abate its appetite for higher taxes and more rules, so that economies like Greece, Ireland and Portugal have more chance of competing in world markets and earning a better living.