While the world’s economic interest has focussed for much of the last month on seemingly unending negotiations in the US over the fiscal cliff and debt ceiling, certain Eurozone leaders have been trying to use this respite to make progress in resolving their own crises. Although political dramas such as those developing in Italy and Germany are attractive headlines, Ireland’s continued drive to secure relief on its publicly-held banking sector debt is undeniably the most important subplot facing Europe in early 2013.
The characterisation of Ireland as a “special case” has been used since last October to refer to efforts to shift debt incurred in recapitalising domestic banks off Ireland’s sovereign balance sheet. Following a decision taken by Eurozone leaders in June 2012 to facilitate direct European banking aid, Irish leaders saw an opportunity to ease the burden caused by the world’s most expensive banking sector bailout, in which $84 billion has been pledged or directly injected into the domestic financial system since 2008. There are plenty of plausible arguments as to why such special treatment should be extended in this case and, indeed, why broader Eurozone responsibility for bank recapitalisation can become a viable policy option in the near future. Government officials point to the fact that Ireland was the first member of the single currency to be compelled by external forces to recapitalise its banks following the collapse of Lehman Brothers, effectively submitting to a European dictat that, according to French President Francois Hollande, “deeply aggravated Ireland’s debt situation”. In light of the new crisis-fighting tools now at their disposal, it would seem to be the appropriate time for European leaders to make use of them for the benefit of a country that has, to date, become the veritable “poster-boy” for austerity. The positive effect that debt relief would have on Ireland’s ability to fully re-enter bond markets in 2014 could also be framed as a victory for the Eurozone’s formula of prudence and retrenchment.
There are deeper reasons too as to why the Eurozone can begin to shoulder the responsibility of protecting banks operating within its borders. Arguments that German and French taxpayers would be out of money due to the profligacy of Greek, Portuguese and Irish bankers will become far less persuasive as plans are unveiled to cement the European Central Bank’s new role as pan-European regulator of banks and other financial institutions. With new-found capacity to oversee the health and stability of the Eurozone’s banks, it can no longer be said that centrally-financed funds such as the European Stability Mechanism would be writing “blank checks” for reckless peripheral lenders. To put it another way, why should member state taxpayers be liable in the aftermath of future crises for lapses in banking sector oversight caused by a supranational regulator?
The difficulty, of course, is that promises of more prudent regulation by the European Central Bank in the future, and the potential for a Europe-wide response to emergency bank recapitalisation, do little to help Ireland’s cause in the immediate term. With the current International Monetary Fund/European Union bailout due to expire in 2013, there are few opportunities left to place Ireland’s sovereign debt on a more sustainable path. US leaders have, for the moment, averted possible catastrophe: policymakers need to act expeditiously before the glare of international markets returns to the Eurozone.