Belfast Telegraph

The compromise deal which could bring more risks

By Brendan Keenan

The Buck Stops Here, said the sign on President Harry Truman's desk. It is how it should be in an efficient democracy.



The president/prime minister listens to all the arguments, weighs all the competing interests, and makes a decision.

Europe cannot do that. Its evolving structures mean there is nowhere for the buck to stop. The consequence is that processes finish with compromise, not decision.

The plans announced for Ireland last night would probably not have been drawn up by any single individual, or any single organisation, for that matter.

Every interest, from those of German taxpayers to those of risk managers in the European Central Bank, had to be attended to in some degree. It makes it all hideously complex, and thereby risks further failure.

It has become all too clear that the euro project itself is at risk from the Greek and Irish crises.

Shockingly, the interest demanded on government bonds from Italy and Spain shot up to danger levels on Friday. If that is not reversed fairly quickly, the problem could become terminal.

Yet EU finance ministers were unable to come up with any fundamental change to the way the eurozone is governed. They have agreed on a permanent crisis mechanism to operate after 2014, which will finally allow for lenders to countries and banks to share in losses.

However, the new political trap for Ireland is the raiding of the pension reserve fund and cash reserves to fund the banks. In principle, though, this is probably the least objectionable.

It makes little sense to borrow while holding assets that earn less than the interest rate on the loans. But it will be unpopular just the same.

These two complaints merge. While it may make sense to use those funds to reduce borrowing, specifically using them for the banks will cause another burst of fury among both public and economists.

There is less merit in the widespread complaints that Ireland should have played tough and said, in effect, that it would bring down the euro if it did not get a generous deal.

No one was going to believe a bluff like that. If there were no deal, Ireland would be completely starved of funds and the economy and banking system would collapse. If you run out of credit in the market, you must make the best deal you can.

As for the interest rate, like almost everything else, it was handled badly. The EU rescue fund was set up to protect lender governments, and is not able to offer cheap loans.

The measure of that failure is the fact that IMF money costs less than 4%, but eurozone money costs more than 6%.

The total interest cost of €3bn a year is, however, onerous in an era of both low growth and low inflation. Even the Government's optimistic forecasts do not see the economy growing by 5.8% in cash terms.

This may be why the target date for achieving the EU's deficit limit of 3% of GDP has been extended by a year to 2015. The target to watch, though, is the Taoiseach's one of where the national debt peaks.

If he is right that it reaches a maximum of 102% of GDP in 2013, then the crisis will be over within 18 months.

Most people think that is too optimistic, and some think it wildly optimistic.

Still, there seems a lot to be said for having a good try at it over those 18 months, and see how we get on.

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