That Flushing Sound You Hear
Kevin O'Rourke Via Brad DeLong
This post was written by Kevin O’Rourke
Colm McCarthy makes some important political points in today’s Sunday Independent. He points out, quite correctly, that the ECB’s policy of favouring an Irish sovereign default later over a private banking default now (and it is important to be clear that this is exactly their position, whether or not they publicly admit it) is going to make it very difficult, if not impossible, to get public buy-in for the further austerity measures coming down the line; and is also virtually certain to lead to increasing anti-EU sentiment here (and in the rest of the periphery as well).
But it’s worse than that. By confusing fiscal and banking crises in the public mind, the ECB is also fuelling anti-EU sentiment in the core, since core taxpayers understandably resent the notion that they should subsidize feckless peripheral taxpayers. By contrast, greater honesty about the fact that we have a Europe-wide banking crisis would make taxpayers everywhere realise that they have common interests, and a common enemy, namely an out-of-control financial sector. In such a scenario, ‘Europe’ might be seen by ordinary voters as having something positive to contribute, since cross-border banking requires cross-border regulation. Right now, however, ‘Europe’ is seen as a big part of the problem, in the case of the ECB correctly so.
Like Colm says, it really is a slow motion train wreck.
Economist Paul de Grauwe has argued that the very design of the eurozone created high risks of sovereign default for non-core EU members who were rash enough to join the single currency.
It is patently clear that these risks were under-appreciated in Ireland but it is dispiriting to have to listen to lectures from ECB officials who appear to regard the European banking crisis as essentially a morality play about fiscal policy.
At some point, Irish taxpayers are likely to get tired of paying off those (mostly foreign banks) who were dumb enough to lend money to badly managed private Irish banks, and it's likely to happen elsewhere too.