Cross-Subsidization

The blamestorming continues. There are elements of hypocracy on both sides (Ireland, for example, benefited massively from the Euro as their very business friendly tax structures meant FDI flooded into their banking system), but the root problem is, once again, that there is no such thing as a currency union without fiscal union. You simply must have monopoly currency issuing powers to make the system work.

The main elements of the story are that the banks’ problems are so
deep that they exceed the fiscal capacity of the State. We cannot
borrow enough money from the bond markets to sort them out and also
fund the exchequer deficit, so we have no choice but to turn to the
European Financial Stability Facility and the IMF.

While the later point is unfortunately true, the role of the ECB in
how we came to this sorry pass is worthy of some scrutiny. A more
critical analysis might conclude that its policies over the last two
years added greatly to our problems and ultimately its own. And it is the ECB’s problems as much as ours that brought things to a head last week.

One of the main differences between how the two-year-old crisis has
played out in Europe and America has been the refusal of the ECB to
allow any significant bank fail.

It is worth noting in this regard that Jean Claude Trichet rang Brian Lenihan over that fateful weekend in September 2008 to impress on him the importance of not letting any Irish bank fail. The obvious
inference was that the ECB would play its part.

Trichet was, of course, pushing at an open door given the other
factors at play in Ireland: profound regulatory failure combined with the inability of the administration or the banks to comprehend the scope of the problem.

But the fact remains that the Government could not have gone down the road it did without the support of the ECB. Frankfurt has provided the liquidity needed to make the National Asset Management Agency function and was committed to a similar facility for the winding up of Anglo.