In an opinion piece published on Tuesday in The Financial Times, Lorenzo Bini Smaghi, a member of the board at the European Central Bank (ECB), wrote that Irish taxpayers should not complain about having to foot the bill to bail out their banks.
Reuters reported that Bini Smaghi laid out the case that since Irish taxpayers elected the officials who oversaw the Irish banking system and also benefited from bank expansion during the boom years before trouble hit, once domestic oversight proved to be insufficient, those taxpayers were rightly on the hook for the price of rescue. He went further, saying that domestic oversight of banks with subsidiaries in other countries was inadequate, and should be transferred to at least a euro zone level, or perhaps a European level.
As the Irish government pushes for a restructuring of its bailout package so that it is less burdensome to citizens, it has also raised the issue of bondholders accepting losses. The ECB has strenuously opposed this course, fearing that it will ignite a new crisis with debt contagion spreading throughout the euro zone.
In his article, Bini Smaghi wrote, “The principle of ‘no taxation without representation‘ should work both ways. If taxpayers have the right to share in decision-making, they must also accept the consequences.” He went on to say that while in principle it was correct that shareholders, bondholders and managers should be the ones to bear the burden of restructuring, in practice it did not work because of systemic risks and the inherent possibility for failure of a nation to see those risks in its own banks.
Regulation on a higher level, he added, while it might make euro zone taxpayers fear the eventuality of bailing out banks other than their own, would also provide them with assurance that all banks in the zone were subject to the same scrutiny and that excessive risk-taking would be reined in.
“Recent events,” he concluded, “have shown that, as long as the accountability of supervisors to taxpayers is primarily a national affair, and discretion in the implementation of national financial regulations and supervision is allowed, then there is a high risk that taxpayers will foot most of the bill. They should not complain when it actually happens.”