Slí Eile: Events are moving fast on the European monetary plains. Suddenly, various 'unthinkables' are being mentioned as real possibilities rather than impossibilities. Whatever the coming days and weeks hold a number of inconvenient truths are emerging:
European political leadership is at an all time low since the foundation of the European Coal and Steel community in the 1950s.
National interests are dominating over any sense of collective European 'esprit de coeur' and to the fore in various national interests are national financial interests.
The institutions of the European Monetary Union are not up to task - we have in some respects a house built on sand (and when the gales blew etc)
In the long-term (and possibly in the coming months) you can have a 'transfer union' and growing federalism or you have an EU without a single currency but you can't have both.
Like marriage single currencies are very attractive and lead to all sorts of mutual gains, lowering of transaction costs and increased market certainty when the partners are 'in it together'. But when communication breaks down so does trust and the current arrangements represent a pact 'til dissolution do us part'. Moreover, when the partners squabble endlessly over what is mine in terms of assets, debts and sharing of these then trouble is on the horizon. Responses at the European level have, to date, focussed on fiscal austerity with the addition of some clumsy attempts to rescue a number of peripheral countries in the Eurozone while all the time denying that there is a larger elephant in the European Euro parlour.
At the end of the day all of this comes down to who gets paid off and who has first claim to the assets of an insolvent corporation. Without wishing to over-simplify the current politico-economic crisis - financial institutions and funds in France, Germany, the UK and the US want to get paid back, the ECB wants to save the Euro and are ready to sacrifice absolutely anything for it, German and French politicians are watching their electoral backs. The IMF is playing good guy but you really would not want to be dependent on the IMF if you can help it. Read up on the last two decades of reform and adjustment in various nations in receipt of its magnificence. As for the domestic political response in the periphery let charity restrain this commentator.
'Plan A' meaning austerity (as Wolfgang Münchau terms it)is not working as it is compounding the problem by embedding debt through automatic fiscal stabilisers. Plan B is a muddle through involving some type of debt relief together with some fiscal transfer and contributions by bondholders. Plan C is Plan B plus a wider EFSF umbrella to save the big ones like Spain and Italy and Plan D is - you have guessed already - default and devaluation to continue with Münchau's terminology.
One way to prepare for the future is to deny it. Another is to assume the worst and prepare for it (secretly or openly). One wonders if policy makers and senior officials in Merrion Street are currently discussing 'what if' scenarios at a more leisurely and studied pace than what happened in September 2008. A good night's sleep would help.
And still more options include hoping for the best and proactively going for it while being prepared for the worst. The Euro is not dead yet. Even it if does not survive in the shape that we know it (in other words some countries exit in a more or less orderly fashion) it may be worth giving it another try. There is a lot to be gained and lost both ways. The protagonists for default and devaluation here in Ireland (the latter meaning the creation of An Punt Nua) need to spell out what that might mean for savings, deposits, capital controls, direct foreign investment, interest rates, mortgages and ultimately - jobs and living standards. They may argue that we are going down the swanny anyway and it is best to exit or threaten to exit before events impose themselves on us. Now they have a point bearing in mind the denial of reality in September 2008 and again in the latter half of 2010. However, the risks involved in wholesale and large-scale sovereign default allied to currency break-up are huge, unknown and without precedent. Ireland, Greece, Portugal, Spain and Italy are not Russia, Mexico or Argentina.
Right now citizens and progressive movements in Europe need to act together and reason out a number of solutions. One modest - very modest - way forward is for a European wide push that henceforth bondholders for insolvent banks should not be paid a cent. It will not - of itself - kick start economic growth and job creation but it points in the right direction and would help countries who desperately need some fiscal elbow room to crowd in investment where economic activity is being crucified by a thousand cuts. The idea of letting these categories of bondholders take the hit is hardly a revolutionary proposal as economist Colm McCarthy argues in the Sunday Independent here that:
Minister Noonan should now be seeking European support for an end to payments to holders of bonds, guaranteed or unguaranteed, in the Irish banks. Every cent paid to them is at the expense of the holders of Ireland’s sovereign debt, who have been treated in quite cavalier fashion at the behest of the European Central Bank and apparently in response to threats from this unique organisation.
Surely progressive economists and commentators can be a tad more radical and courageous than an existing pillar of economic orthodoxy?
Can we hope that at last the cent is beginning to drop on politicians, economists and progressives?