The ECB and the Fiscal Compact Treaty Referendum

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Jim Stewart has an excellent post on Progressive Economy which suggests that inadvertently the recent talk given by the Executive Director of the ECB, Jörg Asmussen to the IIEA in Dublin provided plenty of grounds for voting no in the Fiscal Compact Treaty referendum.

While this may sound like a conceit, it’s not. This is because Asmussen’s arguments illustrate several falsehoods which inadvertently highlight what is wrong with current ECB policy.

The claims of Asmussen are:

1. “The Programme is on track. So far Ireland has delivered” (p.1);

2. The ECB is “a true partner” to Ireland (p.3);

3. “No other institution has provided more help to Ireland than the ECB” (p.7).

Jim Stewart works through each of these, pointing out in the first case that “projected growth (Table 1) at the time the Memorandum of Understanding was signed (16 December 2010), and on which the programme was predicated, was considerably larger than actual and projected GDP.”

Also, Asmussen failed to highlight, says Stewart, “that unemployment in Ireland is the second highest in what the IMF classifies as advanced Europe (IMF World Economic Outlook April 2012, Table 2.1 p. 53) at 14.4% in 2011 and is forecast at 10.5% in 2017″. The ECB Executive Director’s ideas about reforming the legal and medical profession are not going to change this very much.

Ultimately though it is the argument that the ECB is Ireland’s true partner and that it has provided us with “preferrential treatment” that needs to be challenged.

“Mr Asmussen describes the ECB “as a true partner”. In fact many of the policies implemented and required by the ECB have magnified the crisis in Ireland. In his address Mr Asmussen clarified that the ECB regarded repayment of Anglo bondholders as a key consideration to prevent negative effects to “banks in other European countries”. This clarification is strangely absent from the written statement (available here). These ‘negative effects’ are uncertain.

Bondholders may have held insurance in the form of credit default swaps. Default on senior bank debt by banks in Denmark had no or very little (reported consequences) for banks in other countries (see Denmark Takes Over Second Bank to Trigger Bail-in Resolution, Bloomberg 27 June 2011) and yields on Danish Government debt are close to or below those for Germany. But the main implication of Mr Assussens comments are that the ECB sought to give preferential treatment to banks in other countries at the expense of the Irish State and Irish society. This transfer in wealth (it was a transfer as Anglo-Irish and other banks senior debt was trading far below the value at which it was redeemed before the new government took office) has helped increase the cost to the State of the bank recapitalisation to €62.8 billion by March 2012 approximately 38% of General Government gross debt. Without any bank recapitalisation Irelands Debt/GDP ratio would be approx 65% of GDP (ignoring interest savings)- amongst the lowest in the eurozone.”

By highlighting that ECB policies have magnified the crisis Stewart argues that the “ECB and other EU institutions can and must change to support a pro-growth strategy for Europe as a whole. This is in the interest of all countries in the EU, and in the vital long run interest of Germany. Irish Government policy should be to support the likely new Hollande administration in amending the fiscal treaty and in reforming the ECB.”

Read the whole thing here.

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Donagh is the editor of Irish Left Review. Contact Donagh through email: