Not even Brian Lenihan’s special adviser could argue with Klaus Regling’s damning report on the Irish banking crisis. His next port of call is to save the euro-zone, writes Arthur Beesley, European Correspondent, in Brussels
KLAUS REGLING inflicted deep personal discomfort on Brian Cowen this week by drawing a direct causal link between the Taoiseach’s policies when he was finance minister and the implosion of the banking system. Now he is set to take command of a risky €440 billion scheme to avert the threat of any euro country going bankrupt. Who is this fellow?
Regling, a gruff German in his late 50s, was for many years the top civil servant in the European Commission’s economics department. He honed his financial expertise in the upper reaches of the German finance ministry and the International Monetary Fund (IMF) and in the 1990s was a central figure in the creation of the single currency.
He is an earnest man, uncompromising, and has scant time for the trivial aspects of life. Not for him the wink-and-elbow language of the fudge. He is a blunt critic.
This he demonstrated with verve in his assessment of the banking debacle with his colleague Max Watson, a former IMF deputy director. Published alongside an equally unsparing examination by central bank governor Patrick Honohan, the report depicts a system in the grip of property mania that had its roots in easy money, permissive regulation, careless management and arch political folly.
He takes aim at “exceptional financial exuberance” in Ireland, “governance weaknesses of an easily recognisable kind”, and “a tidal wave of uncritical enthusiasm” for real-estate lending. Remarkable for its concision – it is no longer than 49 pages – the report says the breakdown was in crucial ways “homemade” even though it bore the clear imprint of global influence.
IT DOES NOT reflect at all well on Cowen – or, for that matter, his predecessor Bertie Ahern and Ahern’s long-time financial lieutenant Charlie McCreevy. Although Regling doesn’t go so far as to name names, he says successive budgets added fuel to the flames. The point is clear.
“Fiscal policy heightened the vulnerability of the economy. At the macroeconomic level, it should have done more to dampen the powerful monetary and liquidity impulses that were stimulating the economy,” he says.
“Budgets that were strongly counter-cyclical could have helped to moderate the boom, and would also have created fiscal space to cushion the recession when it came. But budgetary policy veered more toward spending money while revenues came in.
“In addition, the pattern of tax cuts left revenues increasingly fragile, since they were dependent on taxes driven by the property sector and by high consumer spending. Ireland was also unusual in having tax deductibility for mortgages, and significant and distortive subsidies for commercial real-estate development, yet no property tax.” All of this is in keeping with Regling’s reputation as an independent-minded individual who sees supreme virtue in being fiscally proper. Property became a “national blindspot”, he says ruefully.
“It was in this sense at least a wide political and social phenomenon, and some of the underlying misjudgements about debt and property were so embedded in collective psychology that this can be imagined, perhaps, to mitigate institutional failures to some degree.” The key word here seems to be “imagined”, which suggests Regling has no great sympathy with the argument.
Little is known about his private life, although he neatly fits the profile of the dogmatic German technocrat. Attached to rules and not known for any sense of humour, he is described by a former colleague as a “reserved” personality but “outstanding professionally”. Such values will be crucial when he assumes control next month of the European Financial Stability Facility (EFSF), a loan-guarantee fund to prevent any other euro country repeating Greece’s death-dance with insolvency. After his appearance yesterday before an Oireachtas committee, he is now free to concentrate on his new job.
The €440 billion man? Regling would be the last person to describe himself so, although his appointment this week was designed to boost the credibility of a plan that will be crucial to the euro’s fate.
The fund – backed by euro countries, including Ireland – comes with an additional €250 billion from the IMF and a further €60 billion from the Commission. The very scale of these numbers is emblematic of the pressure weighing on the EU authorities as they confront what seems more and more like the defining test of European integration.
Regling, who has long been immersed in this milieu, is said to be proud of his role in the euro’s establishment and defensive against criticism of the currency.
Some who know him in Brussels maintain he has been outshone by Marco Buti, who succeeded him in 2008 as director general of economic and financial affairs. However, informed sources suggest his was the first name mooted by Luxembourgish prime minister Jean-Claude Juncker when he chaired a meeting of eurozone finance ministers last Monday evening.
“Regling is one of the foremost experts in international and European finance. With him as chief executive, the EFSF’s quality and credibility are secured from the start,” Juncker said.
Regling easily filled the criteria to lead the fund because ministers wanted “someone who knows how to manage public debt, how markets, states and institutions function”. His appointment is especially convenient for German chancellor Angela Merkel, who faces public hostility about financial rescues for errant euro countries and internal dissent within the ranks of her own coalition.
“I would have difficulty imagining any high-profile job in the public arena that people would say: ‘Nah, not Regling.’ He has quite a wide horizon on many issues in many areas,” says a senior German government source.
German respect for Regling is all the more significant because of his battle with Merkel’s predecessor, Gerhard Schröder, over a widening of the budget deficit early in the last decade. Regling had been sponsored by Berlin when he took his post in the Commission in 2001. To Schröder’s unvarnished chagrin, he refused to be lenient as the chancellor broke the EU’s budget rules two years later.
“It’s never comfortable when you find yourself as a Commission official being criticised by your own government, or the government of the country you know best as we call it here. It was personally very difficult for him but he handled it with the utmost decorum,” says a senior official in the EU executive.
But Regling is nothing if not direct. Not long after he took up office, Italy’s economy minister Giulio Tremonti made an unexpected television appearance in which he said the country’s 2001 budget deficit could be three times higher than the EU’s. Economy undersecretary Vito Tanzi received a phone call the next morning from Regling, who wanted to know whether Italy would be meeting their fiscal commitments.
He was never a man to lightly cede budgetary breathing space. Audacious claims for leeway from Paris and Rome in the weeks after the euro was established drew his scorn. “Those with the old views are coming out like rats out of the wall.”
If this withering turn of phrase suggests he does not lack for self-confidence, his tongue has landed him in trouble in the past. His claim four years ago that Germany had finally overcome the burden of reunification provoked uproar in the east of the country, where unemployment was much higher than in the west.
It was Department of Finance officials who suggested Regling examine the banking flameout for Minister for Finance Brian Lenihan. Regling was also known to Lenihan’s special adviser, Alan Ahearne, through their mutual involvement with a Brussels think-tank.
Ahearne says current banking policy has been vindicated, although he agrees with Regling’s analysis of the collapse.
“You can’t quibble with any part of it. It’s almost like a primer for the Irish public as to what happened here.”
He recalls attending a conference in Beijing with Regling some time back. Italian and French delegates were still grazing at the breakfast table when Ahearne, five minutes late, dashed for the bus that was to take them to their first appointment.
The vehicle was empty apart from Regling, who was sitting in the front seat. “I’m on time, I’m German,” he said.
