Can Europe Survive the Euro Crisis

Address by Jim Higgins M.E.P at the Humbert Summer School

In the space of just over two years, a whole new lexicon has entered the ordinary mans conversation – words like subordinated debts, stress testing, good banks, bad banks, sub-prime lending, sovereign debts, bonds, NAMA, etc.  I think the Humbert Summer School has chosen an apt topic for this particular session – Can Europe Survive the Euro Crisis.

For my part I don’t believe that the EU as currently structured could survive a collapse of the Euro.  Euro-geddon would spell EU-geddon.  So what are the likelihoods of a Euro collapse.  There is an increasing number of European Economists who now think that the likelihood of a break-up of the Eurozone is a very real prospect.  Some would put the prospect at above 50% and the really frightening part is that some Governments and their Ministers refuse to see the writing on the wall and continue to whistle at the graveyard.  In Ireland we have been assured by the Minister for Finance and the Taoiseach that there are green shoots, that the recession is over and that we have turned the corner.  All one has to do is look at the statistics and it is as plain as the nose on one’s face that we haven’t yet reached the corner, never mind turned it.

Dutch Bank ING have warned that a complete break-up of the Eurozone would put the cost of the Lehman brother’s fallout in the ha’penny place.

While some disgruntled German politicians advocate the removal of Greece from the Eurozone, it is generally believed that such a drastic step will be the beginning of the end.  Once one of the bricks is removed from the Euro edifice it would be inevitable that others would follow suit and indeed head of the queue would be our goodselves given our economic recklessness which has landed us in our greatest ever economic crisis.

The consequences of the break-up of the Euro would be horrendous.  Governments would have to further bail out their banks.  Governments would have to revert to their pre-Euro situation of devising their own national currency.  While this transition and re-adjustment would be going on, there is every likelihood of a temporary but chaotic breakdown in a country’s payment system.  In Ireland’s case we would have to re-invent the Punt and the re-invented Punt would face a massive deflation of more than 50% against the newly minted German Deutschmark.  The deflated Punt would lead to massive inflation leading to a flight of investment from Ireland and other weak European economies.  We all know that the haemorrhage of jobs from here to Eastern Europe and further afield has arisen from a glaring lack of competitiveness.  Our wage spiral in the public sector further inflamed by the irresponsible benchmarking which added an annual €1billion to the public pay bill and put pressure on private sector employers to follow suit has been one of the components that has landed us in the economic mess in which we find ourselves.  Can you imagine the fall out for an Irish economy derided in the “Financial Times”, the “New York Times” and “USA Today” and other leading publications?  Can you imagine the consequences of an inflationary spiral leading to further wage demands to cope with its consequences, the additional cost of production for existing foreign, particularly US companies which provide such a huge tranche of our industrial and manufacturing employment?  It would be bye bye Miss American Pie.  As regards the prospect of attracting further direct foreign investment, you can forget it!  The lure and the magnet of our 12.5% Corporation Tax would be largely offset by the number of negative boxes ticked by little Ireland cut adrift as a solo cork on a turbulent world economic ocean.

Two possible consequences must be looked at.  Last week we saw the German performance – the highest growth and export figures in 20 years and achieved despite the anchor of reunification around its neck.  France, not doing too badly.  Sweden doing well.  Finland, a model of what early and decisive and enlightened intervention can achieve.  Likewise the Netherlands and Belgium and tiny Luxembourg.  In the relatively recent past, one of the concerns the smaller countries had in terms of the direction of the European project was that it could well develop into a two tier Europe – a bit like the Premiership and the Coca Cola Championship.  That was a scenario painted long before the arrival of the global economic crisis and in our case the death of the Celtic Tiger.  It was a prospect because of the tardiness of some States in buying fully into the European project i.e. Ireland’s rejection of Nice I and our suicidal rejection of Lisbon I.  The danger now is that the Member States which have got or are getting their acts together in terms of dealing with their recessions might well be tempted to retain the Euro as their currency, work within the framework of the European Central Bank and leave some of the rest of us to wallow with our Punts and Drachma’s, while still part of the European Union but with the status of little more than associate Members.

I was elected to the European Parliament in 2004.  It was nice to be lauded as an MEP representing Europe’s most successful economy.  When fifteen months later ten new Member States mainly from Eastern Europe joined the EU, inevitably their MEPs queried as to the Irish economic miracle – what magic ingredients had we to transform an economy from one of the poorest in Europe where our largest export was our people where we were now inviting and welcoming people from many of these new Member States in order to feed our manpower needs, particularly in the service sector.  I am no economist but I remember in 2006 as Fine Gael Spokesperson in the Seanad warning Brian Cowen, who was then Minister for Finance, that there was going to be a crash landing based on the simple premise that we were super saturating the property market by the unrestrained building of houses for which there would be no occupants and the obvious likelihood of negative equity given the reckless lending practices of our banking sector.

At the outset, I mentioned a few of the new coinages that have entered our every day verbal currency.  Toxicity in terms of banking is one that I omitted.  There is no justifiable case for the State’s continued support of Anglo Irish Bank.  Next month the EU Commission will decide whether or not Anglo can be allowed to continue to exist as a financial institution.  I have written a very strong letter to Commission President Barroso urging the Commission not to approve the continuation of Anglo Irish as a financial institution.  It must be done.  The €24 billion guarantee should immediately be withdrawn but not before the depositors are refunded the monies that they deposited with the bank in good faith.  The whole lunatic project should by then scrapped.

The speech this week by Central Bank Governor Patrick Honoghan in Hong Kong in which he described the bailout of Anglo Irish Bank as “costly but manageable” is infuriating.  Like a lot of people I thought that Mr Honoghan’s appointment – somebody coming to the position for the first time from outside would bring a freshness of thinking and approach by comparison of that of his predecessor.  Of course Mr Honoghan is right – the bailout is manageable but at what price?  It is being managed by cutting vital finance from the Health Service – closed wards, growing waiting lists, surgical postponements while we prop up an arrogant and unaccountable HSE juggernaut.  We are managing the bailout by raising taxes, reducing spending and taking money out of the economy.  We are managing the Anglo Irish bailout by ramping up unemployment and forcing our best and our brightest to emigrate.  We are managing the bailout so well that our 2010 deficit is heading for 20% of GDP possibly the highest in the world.  We are managing the bailout so well that every working person is now being saddled with a debt of €19,600 just to bailout Seanie Fitzpatrick’s builders and developers bank.  We are doing it so that we could continue to borrow the €1.5billion by way of the sale Government Bonds on Tuesday last in order to enable Anglo to pour more of our money into the increasing Anglo Irish black hole.