Notes on the Front

Day by day it gets weirder. 
First, the EU commits itself to breaking the link between banking and
state debt.  This was described as a
‘game-changer’ and led some in Ireland to believe that not only would future bank
debt be borne by someone else, but that same someone else would also repay us for
our past bank debts.  Oh, happy days.

But recent announcements suggest that just the opposite.  The ECB states that where banks fail the
upcoming stress tests and they cannot raise capital in the markets, then
national governments will have to pick up the tab.  And now an argument is being put about some
European capitals that the European Stability Mechanism will only be a last
resort for countries with bank debt problems – only after individual
governments have come up with the money. 
All this means that national governments will still be responsible for
their own banks’ debt and capitalisation requirements; and if they get into
fiscal trouble, they can use the ESM as a 
. . . bail-out mechanism. 

So breaking the link between banking and state debt may end
up strengthening that link. This is what passes for common-sense in the Eurozone.

Still, there is a logic in all this that the Irish know only
too well.  In a previous post I pointed
out that the Eurozone could be on the hook for nearly €900 billion in banking
debt.  Much of this is contingent and
wouldn’t make its way on to public books.  But the problem is that we don’t know
how much.  And this is before the bank
stress tests.  The Irish people have
rightly complained they shouldn’t be responsible for private banking debt.  So why should the Dutch or the Finnish or the
Austrian people?  What would lead them to
take on board on unknown but potentially large amount of liability?  If it’s not the Irish people’s debt, it’s not
their debt either. 

The responsibility for paying for this crisis lies with those
sectors that created the crisis.  And
this crisis started, and continues, in the financial sector.  It has had a devastating impact on the
productive economy and public balance sheets. 
To break the link means putting the responsibility back where it belongs
– where it originated.

That’s
why UNITE’s proposal has such considerable potential.  The union’s proposal has two parts:

• First, the Ireland should sign up to the Financial
  Transaction Tax (FTT) – a fractional levy on financial transactions which
  eleven EU countries have already agreed to introduce.

• Second, that Ireland should negotiate that a portion of the
  revenue from the FTT goes to repaying bank debt that the participating EU
  countries have already incurred.

In short, revenue from a tax on financial institutions
should go to compensating those countries that were hit by the financial
institutions. It’s a fairly straight-forward formula.  How would this work?  Let’s take a crude example.

The EU Commission estimates that FTT revenue for the eleven
countries that have already signed up would be approximately €30 billion (it
would be about €57 billion if all EU countries signed up).  If only a quarter of those proceed were set
aside to repay the countries that have suffered bank debt – it could be
ring-fenced in a bank debt compensation fund – Ireland could expect
approximately €2 billion in annual repayments over the long-term, until the
bank debt is fully paid off.  Given that
Eurostat assigns us an official bank debt level of €39 billion – repayments would
be made over 20 years (with no inflation factor).  Of course, there are different repayment
formulae – for instance, the repayments could be front-loaded; or poorer
countries such as Portugal, Greece and Slovenia could be prioritised.  There are any number of repayment schedules
that could be developed – the first stage, however, is to get the principle
adopted.

Ideally, the revenue from the FTT should be ring-fenced for
comprehensive debt write downs – and not just for the participating EU countries
and not just for state debt; and not just for the past but the for future as
well.  There could (and should) be provisions
for

• Developing
  countries debt:  while there has
  been  some progress made in writing down
  debt levels in the developing world, many countries still remain mired in a
  debt trap where basic services and infrastructure must be sacrificed in
  order to service foreign debt repayments. 
  Using part of the proceeds of the FTT to assist these countries would
  give evidence of real solidarity with our fellow citizens.

• Household
  debt:  the financial crisis did not
  just undermine the balance sheets of governments but of households as
  well.  Private debt can be just as
  damaging to economic growth (and in many cases, even more) as state debt.  A programme of writing down or restructuring
  household debt, including SME debt, would constitute a significant stimulus and
  provide relief for households throughout the participating EU countries.

So what needs to be done? 
First, we must campaign to get the Irish government to sign up to the
FTT.  The Government claims that the FTT
would undermine our financial sector; however, they have produced no evidence
to support this claim.  Not surprising
given that the tax is fractional (on a €1 million derivative transaction, the
tax would be €100).  And given that VAT
is not applied to such transactions, it is hard to see what the complaint is
about.  In any event, only a portion of
the activities of financial institutions would attract the levy.  Given that financial institutions benefit
from a low-tax regime, it is hard to see where they could go to get a similar
beneficial treatment even factoring in the FTT. 

But all this has to be seen in the context of the potential
gains to the Irish economy.  There would
be a permanent stream of revenue – estimated to be between €500 and €700
million annually.  Though this would be
reduced if a portion of total revenue was assigned to bank-debt compensation,
there would be the gains of getting back some if not all our bank debt.

UNITE has specifically stated that they are putting this
forward for discussion – not as a specific policy position.  This is the correct way to do this.  There may be other, better ideas to get the
bank debt off our collective backs.  The
important thing is to start that debate – and put bank debt back on the agenda.

The benefit of the UNITE proposal, however, is that it
decisively breaks the link between bank and state debt.  The debt is not ‘shared’ or ‘mutualised’
among governments and, so, working people. 
It is put back on to the shoulders of the financial sector.  This might be a more appealing route to bank
debt compensation in other EU countries – knowing that their balance sheets
will not be affected.

And with the proceeds, Ireland and other countries could
retire debt (generating savings on interest payments), or launch investment
drives, or a combination of both.  This
could help stimulate growth in countries and regions which are working under considerable
debt burdens and low growth.

The UNITE proposal deserves to be widely debated.  All proposals to reduce our bank debt burden
deserve attention.  For one thing is sure
– people are still being burdened with a debt they did not cause.  This is socially inequitable and economically
efficient.

Remove the debt, grow the economy and put people back to
work – that is the new banner under which we should all rally to.

NOTE:  Debt and Development Coalition Ireland and Ballyhea Says No
will be hosting two meetings this Saturday in Charleville – at the Charleville
Park Hotel.  The DDCI meeting is during
the day and Ballyhea Says No meeting is in the evening.  So try to make some or all of it for
discussions on how we can proceed in the future.