Friday, 3 July 2015

The Greek Crisis: Lessons from Ireland


Jim Stewart: The Greek crisis and tragedy is a seminal moment for the Eurozone and the EU.

The Taoiseach has stated “For Greece there is a lesson from Ireland” (CNN news March 4th 2015). There are certainly lessons for Greece from Ireland, but the improved Irish economy is not one.

The deep recession in Ireland was largely of our own making, but Troika policies exacerbated and prolonged the recession. An important part of economic improvement has been due to the devaluation of the Euro against the Dollar and especially the Euro devaluation against Sterling, given the unique influence of the UK in the Irish economy.

At the same time the US and UK experienced robust recoveries. In contrast the Greek economy has not been able to benefit from Euro devaluation. Valuable lessons may be learned by Greece from Irish interactions with the Troika, especially the ECB. No doubt Greece has also much to share with other Eurozone citizens.

Testimony by Kevin Cardiff (former Secretary General at the Department of Finance, available at https://inquiries.oireachtas.ie/banking) to the Committee of Inquiry into the Banking crisis illustrates much of Greek Government complaints about the anti-democratic nature of the Troika programme, its irrationality and self defeating nature in terms of hindering economic growth and the stabilisation of public finances.  Some examples:-


The Central Role of Liquidity Provision

Irish  Central Bankers and others recognised early on in the crisis and on the night of the bank guarantee (29/9/2008), the urgent need for access to short term liquidity and that funds available “were not sufficient to make large  loans to Irish banks outside the framework of the European System of Central Banks” Cardiff Testimony p. 8), and at the same time the President of the ECB (Trichet) stated that “each government should protect its own financial institutions and should not let them fail” (Cardiff Testimony, p. 15), in other words the ECB was refusing to act as the main function of a Central Bank - a lender of last resort. The liability of the Irish State for all banking liabilities was formally stated in a  letter (20th November 2010) from Mr. Trichet.

At the same time because ECB rules for acceptable collateral were diverse, arising as they did from each individual member of the European System of Central Banks (ESCB) the ECB by default rather than design, provided substantial liquidity to the banking system in different Eurozone member states.

However the ECB attempted to curtail this valuable liquidity provision. Cardiff states (Testimony Appendix 2, p. 30) that a record of a telephone call (on Sunday 28th September 2008) with Mr. Trichet  states that a request to widen collateral was dismissed. On other occasions threats were often made that Irish banks would be charged penal interest rates on ELA borrowing  (Emergency Lending Assistance) or that the rules or their interpretation for accepting collateral from Irish banks would be changed (Testimony, appendix 2, pp. 105-106).  Cardiff states “that at any time the ECB can block ELA at national level or change the rules under which the banks can access funds at the ECB level” (Testimony, appendix, 2, p. 109).

Interest rates on loans from the EU and European Financial Stability facility were initially at penal rates as were loans to Greece, although rates were subsequently reduced.  The ECB also requested that these high cost bailout funds should be used to repay ELA low cost lending from the ECB (Cardiff Testimony, appendix 2, p. 141) .

Under such circumstances ECB policies could be seen as adding to instability rather than as their remit requires, ensuring stability.

The Role of the ECB is ‘Price Stability in the euro area’ – Not Fiscal Policy

The ECB and officials from the ECB Jurgen Stark and Klaus Masuch were inappropriately involved in discussion on fiscal policy which is not within the remit of the ECB  (Cardiff states “The first part of the meeting was with the European Commission only, maintaining for a brief moment the fiction that the ECB was to deal mostly with banking matters” Testimony appendix 2, p. 96 and 99).

It is strange that the Commission did not seek to ensure that ECB intervention was in accordance with its remit. The shallowness of their fiscal policy analysis is underlined by  Mr. Stark of the ECB, who states that:-

 “the Greeks were able to continue accessing ECB funds only because they were in an EU/IMF programme, which gave the ECB some confidence in getting its money back” (Cardiff Testimony , appendix 2, p. 99).

From October 2008 Cardiff comments that:- “at every point of contact between Irish authorities and the ECB it was clear that the tone and content of ECB comment on Ireland was becoming more strident and panicky. In this period started what I regard as an increasingly hectoring tone on the part of the ECB.  They would make assertions of their policy position that seemed to be based on their own assertions of how the world should operate than on the Treaty and the law” (Testimony, appendix, 2, p. 105).

The ECB can be criticised for inappropriate economic policies, for example failing to act as a lender of last resort, attempting to accelerate fiscal retrenchment (along with Troika partners) and at the same time reducing bank reliance on ECB funding.

Much more serious however, is that the ECB acted  in a way that was illegal and in a threatening and arbitrary manner.  This poses considerable risks to members of the Eurozone especially those that do not have economic power.

The Role of the Competition Authority

The ECB was not of course the only EU institution that created difficulties for Ireland. The Competition Commissioner is reported as opposing the banking guarantee (Testimony, appendix 3, p. 64).

It is also well known that the Competition Commissioner (as well as the ECB) also argued for what would in effect have amounted to a fire sale of assets by banks. Kevin Cardiff testimony refers to “constant pressure” from the Troika  to “rush the sale of assets” (Testimony appendix 2 p. 181).

Rules that are ‘Kafkaesque’

Given the emphasis on  “rules” and  frequent references to  conform strictly  to and enforce rules, it is interesting to note  from the Cardiff testimony (appendix 2, p. 26) that the “ECB would say that “legally no agreements on anything were possible” and “sometimes they seemed .. . to fail to make good on the non-promise that had not really been made, or to make good much later than expected”.

Nationalisation of a failing bank may be the only stability option available yet the ECB insisted that a bank nationalised by the State (because it was in difficulty) would be seen as being part of the State and hence any ECB funding was interpreted by the ECB as being a potential breech of Treaty provisions on monetary financing  (Testimony, Annex 2, p. 109).

The nationalisation of the former Anglo-Irish bank thus involved legal and other contortions that added to cost and uncertainty.

The absence of rules can be contrasted with the detailed rules the Troika seeks to impose, as in the case  of Ireland (http://www.finance.gov.ie/sites/default/files/euimfrevised.pdf).  Some of these rules are irrational such as the proposal to raise the VAT rate on tourism sector activities in Greece

Accountability?

The recent event organised by the IIEA (30/4/2015) is one of the most bizarre attempts to attempt to ensure the accountability of the ECB.  The arrangement was that Trichet would speak at an event organised by the IIEA to an invited audience on the topic ‘Governance of the Eurozone: Past, Present and Future’ (See more at: http://www.iiea.com/events/governance-of-the-eurozone-past-present-and-future#sthash.q3EG9guP.dpuf).

There were  two other speakers, and Banking Inquiry members were permitted to ask Trichet questions from the floor (https://inquiries.oireachtas.ie/banking/banking-inquiry).

There is  in particular damming evidence that Trichet was in part dissembling at this event.  In particular Kevin Cardiff, states that while there were “a few misleading points that might be put down to the vagaries of memory or lack of familiarity with every aspect of the ECB’s operations”, but Trichet’s  statement that the “ECB simply gave advice on this issue” [entering the bailout] is comprehensively refuted.

Cardiff states “When the ECB gave advice in relation to joining the EU/IMF programme, the implied ‘or else’ was very clear from Mr. Trichet’s letter of 19 November 2010: if you don’t do this, your banks will lose access to ECB and even national central bank support with disastrous consequences for your economy” (Testimony p. 29).

It is also interesting that  Mr Trichet’s successor Mario Draghi also claims that Ireland was not forced into a bailout by the ECB (Arthur Beesley, Suzanne Lynch, Irish Times, November 14th, 2014).
   
Other attempts to seek accountability for ECB actions have also failed.  One of the better known and publicly available examples is the attempt by television journalist Vincent Browne (to obtain answers in relation to ECB policies in relation to the bank bailout from ECB representative Klaus Masuch (available at:- https://www.youtube.com/watch?v=HAf7J4a_T1g).

The Role of the Eurogroup

The Eurogroup of Finance Ministers is the key decision forum for discussion of matters dealing with the Euro area.  It is described as “an informal body where the ministers of the euro area member states discuss matters relating to their shared responsibilities related to the euro” (http://www.consilium.europa.eu/en/council-eu/eurogroup/).  Its main tasks is described as “to ensure close coordination of economic policies among the euro area member states”.

There is no doubt that this is an influential body.  The German Chancellor has described the Eurogroup meeting of 27th of June as of “decisive importance” (https://euobserver.com/tickers/129314)

Yet according to the Greek Minister for Finance a key intervention was made by Michael Noonan to the effect that ”ministers had not been made privy to the institutions’ proposal to my [Greek] government before being asked to participate in the discussion”.  This may indicate that some members of the Eurogroup are better informed than others.

The Eurogroup meeting of 27th June proved seminal in many respects.  One reason was the decision that 18 of the members excluding Greece would issue a statement basing the burden of the “impasse on Greece and the 18 would reconvene later to further discuss these issues”.

The Greek Finance minister sought legal advice from the secretariat on whether a statement can be issued that is not unanimous and secondly whether the Eurogroup can convene without a member state being present.  Despite the powerful nature of the Eurogroup the reply given was that:-

“The Eurogroup is an informal group. Thus it is not bound by Treaties or written regulations.  While unanimity is conventionally adhered to, the Eurogroup President is not bound to explicit rules” (source:- http://yanisvaroufakis.eu/2015/06/28/as-it-happened-yanis-varoufakis-intervention).


Some implications 

The Greek crisis is a seminal event for the European Union.  It may also be seminal for other institutions.  It is the first case of a ‘developed country’ and a European country being in ‘arrears’ in the history of the IMF.  This will not have gone unnoticed by all IMF shareholders. Could this result in an AMF (Asian Monetary Fund) to match the AIIB (Asian Infrastructure Investment Bank) ?

The main four banks in Greece are supervised directly by the ECB.  ECB regulation guidelines emphasise “early  intervention” and use of “resolution mechanisms” (ECB Guide to Banking Supervision, principle 9).  It is not clear if exit from the Eurozone ends this supervisory role, or indeed the role of supervisors in shutting Greek Banks and imposing restrictions on capital outflows.

One could argue for or against the Greek Government tactics.  The strong  impression given is that there were far more robust exchanges with the Troika than in the case of Ireland and perhaps stronger tactics would have reduced Ireland’s debt burden.

Yet a group (such as members of the Eurozone Finance Ministers) who firmly  and collectively believe ‘the earth is flat’ or in a more contemporary setting that ‘Elvis Presley is still alive’ will not have their views changed by a new member with alternative views. Rather expulsion from the group - regime change or what some describe as a “coup d’etat” in the case of Greece (see Suzanne Daley  New York Times, 2, July 2015), is a more likely outcome.

But the main implications of the Greek crisis for other eurozone members is for democratic principles and the widening gap between EU citizens and EU institutions.  Given institutional irrationality and relative absence of democratic checks and balances, smaller countries, with low economic power are likely to be recipients  of policy directions rather than influencers. In this context it is not clear what strategies they should adopt that are in the best interest of their citizens.

We can thank the current Greek Government for the transparency associated with the negotiation process, for example negotiating documents that were made available via the Financial Times and other media.  A transparency with which the Commission eventually partly reciprocated.

But the main contribution the Greek Government has made is to an emphasis on democratic values.
Failure to put democratic values, accountability and evidence based policy making at the forefront of EU reform for example  in the  Five Presidents Report (http://europa.eu/rapid/press-release_IP-15-5240_en.htm) is likely to ensure that this report remains just that, a report.