'Easy' Solutions Turn Costly
Georgi Angelov, Senior Economist at the Open Society Institute Sofia, reflects on Ireland's bailout scheme and the sentiments among European politicians
Two years ago Ireland's Finance Minister Brian Lenihan came up with a guarantee scheme for all banks in the country, saying this was "the cheapest bailout in the world so far". In fact this may turn out to be the most expensive bailout so far.
That was the hype in the European Union and the United States at that time - banks' bailout was considered to be the quickest way out of the crisis. Trillions of dollars have been spent so far on bailouts and state guarantee schemes worth much more have been launched, which inevitably poses further risks for the stability of the public finances ( at the moment this is most clearly seen in Ireland, but the situation is the same in other countries as well).
All in all, viewing state guarantee schemes as something that comes free of charge, is common. In Bulgaria the supporters of the nuclear power project Belene doggedly argued that providing state guarantees for the offered funding costs nothing, but saves on the interest rate costs.
The opponents of this view say that state guarantees are too expensive and can lead to catastrophic consequences.
There is one exception to this rule – Iceland let its banks go bankrupt and guaranteed all domestic deposits in Icelandic savings accounts. The other savers were not covered and they lined up in the list of creditors, hoping that the sale of the banks' assets will be sufficient for their money to be paid back.
In the spring of 2010 European leaders – in a clear breach of rules – forced the European Central Bank to buy bonds in a bid "to stabilize the market". We are talking here about buying government bonds issued by Greece, Portugal, Ireland, Spain. The move only eased the market pressure on these countries.
Now it is already obvious that this move not only failed to provide a solution to the problem, but even exacerbated it
Firstly, because it artificially calmed these countries – instead of implementing radical reforms and fast budget consolidation under the pressure of the market, they calmed down and started to drag their feet.
Secondly, because the European Central Bank holds more and more bonds of these countries, which means it will be incurred losses in case of depreciation. And it is no good for the euro when the ECB registers losses.
Thirdly, because in political terms the independence of the European Central Bank is violated - independence, which is supposed to keep monetary policy safe from political pressure for "easy money".
In the summer of 2010 the major European banks were put to healthy checks, the so-called stress tests. Two of the biggest Irish banks participated in the test and did not fail. Jest a few months later the Irish banks drove the Irish budget to the brink and it has to pour more and more money to bail them out.
What kind of a stress test is this if it can be passed with flying colors even by banks, pestered by problems? This is a PR event, rather than actual efforts to bring stability to the eurozone.
As if to prove the short-sightedness and narrow views of European politicians, the French finance minister said recently that it will take advantage of Ireland's critical situation to pressure it into increasing tax rates.
If they manage to pressure Ireland into upping taxes, they will try to do the same with the Eastern European countries as well.
This would spell the end of hopes for quickly narrowing the gap between the rich and poor countries, for achieving prosperity. But who cares about the small countries? All the big ones are interested in are their short-term dividends.
The only ones, who really care about the fate of the small countries, are the small countries themselves. If they back uncritically every folly of the European Union and don't defend their own interests, they are doomed to harsh and drawn-out suffering.
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