Breaking the link between Governments and the Banks: Tales from Statusquoland

The Irish Taoiseach, Enda Kenny, is in Brussels at the European Council with 2 aims: (1) ensure that Ireland has access to an emergency line of credit (the "Enhanced Conditions Credit Line") with as few conditions as possible to smooth Ireland's exit from the bailout programme, and (2) to have the European Council re-agree what they agreed back in June 2012.

That's right: a major win for Kenny would be the re-agreement of something that the European Council already agreed over a year ago! I'm not joking.

Back in June 2012, the European Council agreed that a Banking Union was the way forward (PDF). The banking debts had to be severed from sovereign debts because Member State governments cannot bear the cost of this most Europeanised of market sectors. The Banking Union should also create a way for banks to be re-capitalised or wound up on a Eurozone basis, so that the debt crisis would not happen again. The European Council even decided to review the case for breaking the link between sovereign debt and existing bank debt - something that would do wonders for the balance sheets of the Irish and Spanish governments and ease the burden on their people considerably

This outbreak of good sense didn't last very long. In September 2012, Germany, along with The Netherlands and Finland, declared that not only will past banking debt not be severed from sovereign debt, but the European Stability Mechanism would not recapitalise banks instead of governments. Instead the order for recapitalising banks in the future would be: private funds, then Member State governments, and only then would the ESM step in. So three Member States had decided to completely void European policy agreed between 27 countries just 3 months ago, and they completely ruined the idea of a Banking Union. Why should countries bankrupt themselves saving banks, for the Eurozone to help out the banks directly more than the countries? It would be pure madness.

So now Kenny wants to return to the June Agreement:

"Speaking at an event in the National Gallery in Dublin celebrating the 50th anniversary of charity group Chesire Ireland, Mr Kenny said he would again urge European leaders to fulfil their pledge to break the link between sovereign and bank debt.

“One of the failings or inadequacies of the European Council over the years has been an inability to actually complete programmes where decisions are made,” he said

“In this regard, I refer to the decisions that were made last year in respect of banking union. For Ireland and for other countries, it is absolutely critical that we follow those things through to completion before moving on to any other agendas.”"

It's a farcical position to be in and it shows how little progress is being made, and it shows that Merkel is perhaps the most conservative Chancellor ever: she literally does not want to change anything, and will only sanction limited change if its aim is to make sure things stay the same. Once, Merkel described the internet as Neuland - "New Land" - but even as  the digital agenda is being discussed in Brussels, it feels like Europe is stuck in the twilight of Statusquoland. Even the German powerhouse economy can only expect 0.5% of growth this year.

So as Ireland, the Eurozone's star pupil, is preparing to leave the bailout programme, it's hard to be optimistic. Austerity has hardly worked wonders on the Irish economy, with government debt higher than at the start of the progamme, and employment soaring after 5 years of cuts. Without even the rewards of agreed Eurozone reform, many question how worthwhile the status of "star pupil" really is.

Statusquoland: If at first you don't succeed, apply the same rules more strictly.