Euro Summit makes some progress but huge questions remain

Social Justice Ireland welcomes the Euro Area Summit (June 28-29, 2012) conclusion that "it is imperative to break the vicious circle between banks and sovereigns". This is a development we have advocated for almost four years. However, the specifics of how this is to be done and what its impact will be on Ireland's budgetary situation are not clear. 

As always the devil will be in the detail. The more carefully we examine the text of the statement issued after the summit, the more questions are raised about how the proposed measures will actually work. What the statement says is: "When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly" (emphasis ours).  So once a supervisory mechanism is in place the ESM could have the possibility of taking such action. 

The devil as usual will be in the detail. The more carefully one examines the text of the statement, the more questions are raised about how the proposed measures will actually work.

The German Finance Minister has insisted that there will be no increase in the size of the ESM. This position has not been changed at the summit The German Chancellor has repeatedly insisted that there will be no “joint financing” of Eurozone debt (e.g. through Eurobonds) before full fiscal union has been put in place. This position too has not changed as a result of the summit.,

It appears that the summit has given the ESM new responsibilities but has not provided the additional money required to act on those responsibilities. The summit statement remains obscure.

On Ireland, the summit statement states: "The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally." 

What does this mean in terms of Ireland’s debt? There is nothing in this statement that would suggest the debt Ireland is carrying due to the bank bailout will be shared or reduced. As Social Justice Ireland has constantly argued reducing the debt is the key issue.  Ireland and its citizens are carrying a €64bn debt to bail out banks – a debt that was not our debt, should not be presented as our debt and should not be accepted as being our debt. What we get is a fund which will loan money directly to banks. The fund will not absorb losses. The fund will want its loans back. So who is going to pay?

It is also important to note that nothing in this deal was achieved by Ireland's negotiating stance; rather it was achieved as a result of much better negotiating tactics (than Ireland was prepared to use) by the Spanish and Italian governments.

Euro Area Summit Document can be downloaded below