The release of the correspondence between the European Central Bank (ECB) and the Irish government in the run-up to Ireland’s entry to the bailout programme in November 2010 fills in an important gap in our knowledge of this key period. We now know more about the extent of the pressure on the government, and the direct message from Frankfurt that we must enter a programme or see the supply of emergency funding to the banks turned off. The ECB has been too slow in publishing this correspondence, although it is welcome that it has now done do. Its rationale, published along with the letters, for its actions over the period is also an important contribution to the debate.
The ECB is correct to reject the assertion that it, alone, was responsible for pushing Ireland into a bailout. By mid-November, events were only heading in one direction. The story of how we got to that point is depressingly familiar. As the ECB points out, Irish policy failures were at the heart of much that went wrong. All this does not mean that the ECB was correct to try to directly push a particular course on the government. It is not the role of a central bank to dictate to governments what to do in terms of overall economic policy. The issue throughout the euro crisis was that, effectively, nobody was in charge, with member state governments, the European Commission and the ECB all fighting to fill the vacuum. And just because the ECB was correct in its analysis does not mean it should have communicated in the way it did. It is part of a wider pattern which also involved the central bank taking a role in directing events in Italy, Cyprus, Spain and elsewhere.
Anticipating the next phase of the debate here, the ECB also outlines its case for not wanting senior bondholders in the Irish banks to be penalised. Clearly the ECB feared that this would hit financial stability both in Ireland and across Europe. Certainly by the time Ireland entered the bailout, this argument appeared questionable, even if – as the ECB points out – there was no clear mechanism then in place to allow targeting bondholders. The problem for Ireland has been that the ECB and others blocked any move on senior bondholders and then EU governments failed to follow through on an apparent commitment to help Ireland deal with the resulting debt. It is important to put this in context. The ECB has provided support for the banking system through the crisis. Moving on bondholders would have reduced our debt levels, but they would have remained high.
It is important to have a balanced assessment of that chaotic period. The ECB’s decision to publish the letters and put its case is welcome. Ireland’s eventual collapse into the bailout may indeed have been inevitable, but there is much about the detail of what happened that requires continued questioning and debate.