Sinn Féin’s attitude to the ongoing crisis in the Eurozone is that the priority right now must be to stabilise the Euro.
We do not believe that fiscal federalism will stabilize the Euro. The current policy of austerity and bank bailouts will lead to greater instability. The ‘one size fits all’ monetary policy was part of the problem; adding a draconian and intrusive ‘one size fits all’ fiscal policy as outlined in the Austerity Treaty, will only make matters worse.
Sinn Féin is firmly of the view that what is required now is a different approach based on investment and economic growth.
Sinn Féin has been consistent on the issue of economic and monetary policy and the European Union.
Our approach has been guided as to what is in the best interests of Ireland and Irish citizens.
Sinn Féin opposed entry to economic and monetary union in 1992. We argued that a ‘one size fits all’ policy would be bad for smaller EU states, as the direction of policy would be determined by the interests of the larger, more powerful states. We argued, correctly, that this would result in a further loss of Irish sovereignty and would lead to bad economic decision-making.
Sinn Féin’s warnings have been borne out by developments since — the current crisis in the Eurozone is a result of a fundamental flaw in the design of the single currency and the bad policy implemented by the European Central Bank (ECB).
However, it is important to point out that, given the levels of public and private debt in the state and the level of exports within the Eurozone, the social and economic impact of a withdrawal would be severe for ordinary low and middle income citizens.
Stabilising the Euro and returning to social and economic growth, as Sinn Féin advocates, means that we must understand the cause of the crisis in the Eurozone and implement solutions aimed at resolving it.There is an inherent instability built into the heart of the Euro currency project which advantages strong economies while disadvantaging weak economies. This can best be seen in the cases of Germany and Greece.
The single currency made German exports more competitive, boosting their exports and growth levels.
In turn, this led to trade surpluses while also encouraging savings surpluses. In addition to exporting manufacturing goods, Germany also became a major exporter of capital in the form of loans by German banks.
Weaker Eurozone economies such as Greece were able to borrow money at cheaper levels with lower levels of risk. This led to an increase in Government and private debt, as Greece built up trade deficits, and rising levels of personal debt.
The design of the Euro provided an incentive to many strong economies to produce ever-bigger surpluses, and weak economies to produce ever-bigger levels of private and public debt.
Domestic policy choices in weaker and stronger economies also played a key role, and though measures could have been taken to counterbalance this tendency, in most cases they were not.
However the architecture of the Euro and the policies of the ECB were decisive in deepening the existing imbalances between stronger and weaker economies.
The central problem was that there was no mechanism for recycling the surpluses generated by the stronger economies in a way that would assist economic development in the weaker economies.
The ‘one size fits all’ monetary policy, set mainly according to the needs of the stronger national economies such as Germany and France, exacerbated this problem – by providing an incentive for aggressive lending by major European banks and their counterparts in the periphery, and reckless borrowing by Governments and some cases individuals.
Eventually the levels of aggressive borrowing and lending became too great; banks became risk-averse and lending into the real economy stopped during the credit crunch in 2007 and 2008.
While this was a global problem, it had a particular impact on the stability of the Eurozone. The ensuing recession led to rising unemployment, falling tax revenues and spiraling deficits across the national economies of the Eurozone.
This was made much worse by the policy of the European Central Bank, supported by member state governments, to bail out banks irrespective of the cost. At this point the markets began to believe that their debts to Governments, first in the Eurozone periphery and then at the core, would not be honored. This drove up interest rates and led to peripheral economies being frozen out of the markets.
In response, EU leaders fanned the flames of the growing crisis, by further contracting economies with austerity and increasing debt levels by insisting on bailing out banks.
Any solution to the Eurozone crisis must follow a number of interrelated steps. There is a need to correct the design flaws inherent in the project itself. We need to invest in economic growth, primarily in the form of jobs. The European banking system must be cleansed of its toxic debts. There is also a need to reduce the debt levels across the Eurozone through debt restructuring.
Thus, rather than continuing with the policies of fiscal integration, crippling austerity and bank bailouts favored by Fine Gael, Labour, Fianna Fáil and their European counterparts, Sinn Féin is advocating a strategy of investment, debt write-downs, and market return.
The Eurozone urgently needs investment in jobs, particularly in the periphery. This can be achieved by combining the resources of member states, such as the €5bn in the discretionary portfolio of the National Pension Reserve Fund, with an enlarged investment fund in the European Investment Bank.
Sinn Féin is arguing that the existing funds of the European Investment Bank should be supplemented by a once-off investment by EU member states on a proportional basis. This would be made, not as fiscal transfers between states, but as sound investments that would provide sound returns for the state investment.
In addition, the matching funding criteria for member states should be amended to a 75:25 ratio, with the European Investment Bank providing the larger portion.
With this enlarged fund, the European Investment Bank would work in partnership with those states experiencing severe recession to roll out major projects in order to generate employment, increase competitiveness and improve the social and economic infrastructure, leading to both immediate and long term economic growth.
In the first instance, this EU-wide investment programmewould aim to kick-start those economies experiencing recession and assist them in reducing their deficits.
However, a reformed and enlarged European Investment Bank would remain in place after the initial investment period, as a permanent mechanism aimed at recycling a portion of the excessive surpluses from the stronger economies to those on the Eurozone’s periphery in need of longer-term economic development.
Unlike the existing bailout transfers, under the terms of the European Financial Stability Facility or European Stability Mechanism, these investments would produce a win-win for both the stronger and weaker economies, generating growth in the periphery and investment return for the investors.
In Sinn Féin’s view, an enlarged European Investment Bank working with member state governments would not only assist the immediate problem of underinvestment but would also help address the underlying imbalances in the Euro between those states with excessive surpluses and those with excessive deficits.
In parallel with this major investment programme, there is a need to reduce the debt burden, particularly for those states with unsustainable levels of debt such as Greece and Ireland.This can only be achieved by writing down a portion of the debt currently held by sovereigns.
In Ireland’s case, this can be achieved by writing down debts that were originally banking debts while honoring real sovereign debt. In the first instance, this will require lifting the obligation on the state and the taxpayer of the Anglo Irish Bank promissory note. This could be achieved by agreement with the ECB and would reduce our debt-to-GDPratio by up to 20%.
There is also a need to deal with the smaller but not insignificant volume of senior bondholder debt held by banks such as Anglo.
Cleansing the European Banking System
There is also an urgent need to cleanse the banking system of the as yet undisclosed and un-quantified toxic assets on its balance sheets. This can only be done by imposing rigorous stress tests, including not only banks’ loan books but also their exposure to sovereign debt and all special purpose vehicles used for toxic assets, such as credit default swaps and collateralised debt obligations.
These new stress tests must be followed by a process of writing down portions of the banks’ toxic debts and deleveraging assets in order to refocus the banking system on the needs of the real economy. Only after such a process should the European Central Bank provide any capital required for the recapitalisation of the cleansed banks.
Returning to the markets
While investing in the real economy and making debt levels more sustainable, there is also a need to assist member states to return to the markets at normal interest rates.Within existing EU treaty provisions the European Council must ensure that the European Central Bank takes all necessary action to stabilise sovereign bond interest rates and ensure market access for all member states.
Not withstanding the existing prohibition on the ECB lending money to EU institutions or Member States, the European Council should, under Article 282 (2) of the European Treaties, instruct the ECB to take whatever emergency action is required to stabilise the Euro. This could include, in the context of a grave threat to the stability of the currency, entry into the primary market on an emergency basis to stabilise the price of sovereign bonds, in order to prevent any Eurozone member state from being frozen out of the markets due to prohibitive interest rates.
While controversial, there is a strong political and legal argument that this should include, on an emergency basis only, the ECB buying Government bonds of countries currently excluded or at risk of exclusion from the markets. Such bond buying programmes should be done in parallel with programmes agreed between the member state and the ECB detailing strategies for deficit reduction, economic growth and debt reduction.
By investing in growth, reducing the levels of debt, cleansing the banks and assisting member states to remain in or return to the markets at normal borrowing costs, Sinn Féin believes that the instability in the Eurozone can be calmed, the imbalances in the design of the Eurozone can be corrected,and the economies of the Eurozone can be returned to growth. This can all be done within the existing EU treaties and without imposing crippling austerity on ordinary people.
The policy of Governments in Ireland and across the EU is one of more austerity, more bank bailouts and handing more decision-making powers over to EU institutions. This is the very opposite of what Ireland and the EU need.
Instead we need greater flexibility for member states to implement policies suited to their specific needs, we need major investment in jobs to generate economic growth and assist in deficit reduction, and we need debt reduction to enable indebted member states to return to the markets at normal rates.
Implementing these policies means we must reject the Austerity Treaty and call for a change of direction in policy by the Fine Gael-Labour coalition and by the other members of the European Council.
Sinn Féin is in favour of investment in jobs and growth. On this basis we are opposed to the Austerity Treaty. We will continue to oppose the failed policies of fiscal federalism and crippling austerity. In the forthcoming referendum we will be campaigning in every constituency in the state for a no vote.