Breaking the Link Once and for All

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Day by day it gets weirder.  First, the EU commits itself to breaking the link between banking and state debt.  This was described as a ‘game-changer’ and led some in Ireland to believe that not only would future bank debt be borne by someone else, but that same someone else would also repay us for our past bank debts.  Oh, happy days.

But recent announcements suggest that just the opposite.  The ECB states that where banks fail the upcoming stress tests and they cannot raise capital in the markets, then national governments will have to pick up the tab.  And now an argument is being put about some European capitals that the European Stability Mechanism will only be a last resort for countries with bank debt problems – only after individual governments have come up with the money.  All this means that national governments will still be responsible for their own banks’ debt and capitalisation requirements; and if they get into fiscal trouble, they can use the ESM as a  . . . bail-out mechanism.

So breaking the link between banking and state debt may end up strengthening that link. This is what passes for common-sense in the Eurozone.

Still, there is a logic in all this that the Irish know only too well.  In a previous post I pointed out that the Eurozone could be on the hook for nearly €900 billion in banking debt.  Much of this is contingent and wouldn’t make its way on to public books.  But the problem is that we don’t know how much.  And this is before the bank stress tests.  The Irish people have rightly complained they shouldn’t be responsible for private banking debt.  So why should the Dutch or the Finnish or the Austrian people?  What would lead them to take on board on unknown but potentially large amount of liability?  If it’s not the Irish people’s debt, it’s not their debt either.

The responsibility for paying for this crisis lies with those sectors that created the crisis.  And this crisis started, and continues, in the financial sector.  It has had a devastating impact on the productive economy and public balance sheets.  To break the link means putting the responsibility back where it belongs – where it originated.

That’s why UNITE’s proposal has such considerable potential.  The union’s proposal has two parts:

  • First, the Ireland should sign up to the Financial Transaction Tax (FTT) – a fractional levy on financial transactions which eleven EU countries have already agreed to introduce.
  • Second, that Ireland should negotiate that a portion of the revenue from the FTT goes to repaying bank debt that the participating EU countries have already incurred.

In short, revenue from a tax on financial institutions should go to compensating those countries that were hit by the financial institutions. It’s a fairly straight-forward formula.  How would this work?  Let’s take a crude example.

The EU Commission estimates that FTT revenue for the eleven countries that have already signed up would be approximately €30 billion (it would be about €57 billion if all EU countries signed up).  If only a quarter of those proceed were set aside to repay the countries that have suffered bank debt – it could be ring-fenced in a bank debt compensation fund – Ireland could expect approximately €2 billion in annual repayments over the long-term, until the bank debt is fully paid off.  Given that Eurostat assigns us an official bank debt level of €39 billion – repayments would be made over 20 years (with no inflation factor).  Of course, there are different repayment formulae – for instance, the repayments could be front-loaded; or poorer countries such as Portugal, Greece and Slovenia could be prioritised.  There are any number of repayment schedules that could be developed – the first stage, however, is to get the principle adopted.

Ideally, the revenue from the FTT should be ring-fenced for comprehensive debt write downs – and not just for the participating EU countries and not just for state debt; and not just for the past but the for future as well.  There could (and should) be provisions for

  • Developing countries debt:  while there has been  some progress made in writing down debt levels in the developing world, many countries still remain mired in a debt trap where basic services and infrastructure must be sacrificed in order to service foreign debt repayments.  Using part of the proceeds of the FTT to assist these countries would give evidence of real solidarity with our fellow citizens.
  • Household debt:  the financial crisis did not just undermine the balance sheets of governments but of households as well.  Private debt can be just as damaging to economic growth (and in many cases, even more) as state debt.  A programme of writing down or restructuring household debt, including SME debt, would constitute a significant stimulus and provide relief for households throughout the participating EU countries.

So what needs to be done?  First, we must campaign to get the Irish government to sign up to the FTT.  The Government claims that the FTT would undermine our financial sector; however, they have produced no evidence to support this claim.  Not surprising given that the tax is fractional (on a €1 million derivative transaction, the tax would be €100).  And given that VAT is not applied to such transactions, it is hard to see what the complaint is about.  In any event, only a portion of the activities of financial institutions would attract the levy.  Given that financial institutions benefit from a low-tax regime, it is hard to see where they could go to get a similar beneficial treatment even factoring in the FTT.

But all this has to be seen in the context of the potential gains to the Irish economy.  There would be a permanent stream of revenue – estimated to be between €500 and €700 million annually.  Though this would be reduced if a portion of total revenue was assigned to bank-debt compensation, there would be the gains of getting back some if not all our bank debt.

UNITE has specifically stated that they are putting this forward for discussion – not as a specific policy position.  This is the correct way to do this.  There may be other, better ideas to get the bank debt off our collective backs.  The important thing is to start that debate – and put bank debt back on the agenda.

The benefit of the UNITE proposal, however, is that it decisively breaks the link between bank and state debt.  The debt is not ‘shared’ or ‘mutualised’ among governments and, so, working people.  It is put back on to the shoulders of the financial sector.  This might be a more appealing route to bank debt compensation in other EU countries – knowing that their balance sheets will not be affected.

And with the proceeds, Ireland and other countries could retire debt (generating savings on interest payments), or launch investment drives, or a combination of both.  This could help stimulate growth in countries and regions which are working under considerable debt burdens and low growth.

The UNITE proposal deserves to be widely debated.  All proposals to reduce our bank debt burden deserve attention.  For one thing is sure – people are still being burdened with a debt they did not cause.  This is socially inequitable and economically efficient.

Remove the debt, grow the economy and put people back to work – that is the new banner under which we should all rally to.

NOTE:  Debt and Development Coalition Ireland and Ballyhea Says No will be hosting two meetings this Saturday in Charleville – at the Charleville Park Hotel.  The DDCI meeting is during the day and Ballyhea Says No meeting is in the evening.  So try to make some or all of it for discussions on how we can proceed in the future.

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