All roads lead to a painful landscape

There is a fault line running through the eurozone’s spine, writes Bill Hobbs

Banjaxed, stripped of economic sovereignty, we must we wait helplessly for Godot to arrive at the crossroads of European Monetary Union. Those who maintain the Euro was designed to be irreversible, write of the horrendous consequences of its breakdown, arguing it’s an appalling vista no one should willingly opt for. Yet one of our roads leads to a hellish landscape should we have to go it alone.

There is a structural fault line running down the spine of the Eurozone every bit as dangerous as a string of interlinking volcanoes. Some like ours have gone critical. Unless it’s decided to force bond holders to share in Eurozone bank losses, more will go critical including the Spanish caldera. To stop this chain reaction, Germany and France may have to cede economic sovereignty to a US style fiscal and monetary system. Politically unwilling to do this for now, we must wait bleeding at the cross roads.

Environment Minister Gormley’s revelation that the banking guarantee had been decided on before and not on that most infamous of nights goes to the heart of what has since been passed off as economic planning. Apart from his revelation implicating his party in the most deceptive periods in Irish political history, it illustrates a fundamental failure to recognise that ours was no ordinary recession but a deflationary depression caused by a bursting asset bubble where the usual economic recovery rules do not apply.

Our Government opened a Pandora’s Box without understanding the consequences. We lost our sovereignty that night. It took two years to formally write it up in an ECB-sponsored, EU-influenced IMF bail-out agreement. An agreement that most observers say will inevitably lead to sovereign default as we simply cannot afford to repay the scale of private banking’s debts taken onto the public balance sheet from future tax revenues.

Bond investors who knowingly provided funds to our banking system to make the boom time, boomier must have quite vicious haircuts applied if this country is to stand any chance of economic recovery. Nationally and internationally, the economic commentariat are ad idem on one issue. Adding more unaffordable debt to unaffordable debt won’t work. Unless the true bottom is reached on valuing bank assets and property values, our banks will parasitically suck lifeblood from the economy.

But unilaterally reversing out of the bank guarantees and forcing bondholders to share in losses would mean telling Godot to get lost and walking away from the EU and ECB. Such a move would trigger a flight of capital as the current slow run on deposits would become a rout with ordinary depositors shifting their money of shore - this process is already well underway as smart money is moved to safer havens.

To stop a rout and preserve the banking and national payments system Government would have to pull out of the EMU and euro. This would mean declaring a bank holiday, shutting the banking system down for at least a week, while the printing presses rolled off millions in new bank notes.

At the same time banking systems would have to be configured to handle the new currency. By the end of this, all legacy banks would have to be encased in a debt sarcophagus in which bond holders are forced to bear losses. One or two new banks would have to open holding retail deposits and good loans. The new currency would be devalued at about 20% to 50% of the euro and could possibly peg to sterling. Rigorous exchange controls would have to be re-introduced. An emergency budget would have to brutally cut expenditure and raise taxes to close the €20bn revenue spending gap. All this would trigger rampant imported inflation and higher interest rate costs.

It would mean living within our means, or what would be left of them. Does anyone want to do travel this road? As we wait banjaxed at the cross roads for our erstwhile pals to arrive in the hope they bring good tidings of recovery in our time, we may have to at least plan for it.

Rebuilding confidence in Ireland abroad will not happen until confidence at home is rebuilt in four areas. We need new working banks and they will not be the ones we have at this time. We need to have a reformed political and public service with a ruthless determination to eradicate state sponsored cronyism. We need new political, public service and regulatory systems, fit for purpose to economically manage for an equitable and just society.

Finally a new economic model must be built, one based on long-term sustainable growth with no dependency on compulsive consumerism. All this might mean becoming more German than the German’s themselves – that’s if Godot ever bothers turning up at the cross roads.

A version of this article appeared in the Irish Examiner, Business Section, Monday 6th December 2010.