January 26, 2016 10:43 am

Auditors criticise European Commission over handling of bailouts

Jim Brunsden in Brussels

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The European Commission’s handling of bailouts in Ireland, Portugal and other nations hit by the financial crisis has been criticised as “generally weak” by the EU’s in-house auditors, who pointed to major inconsistencies in how different countries were treated.

In one of the most in-depth studies undertaken so far into how well the commission adapted to the challenges of the crisis, the European Court of Auditors raised a series of questions around the institution’s procedures, finding that the commission was unprepared for the difficulties it had to face in policing economic rescue programmes that ran to hundreds of billions of euros.

While acknowledging that commission officials had to learn quickly as the euro teetered on the brink of collapse, the report — which is likely to be avidly read in Dublin, Lisbon and other capitals in the eurozone — said it is “imperative that we learn from the mistakes which were made”.

Full report

Financial assistance provided to countries in difficulties

The European Court of Auditors’ analysis of the European Commission’s management of the financial assistance provided to Hungary, Latvia, Romania, Ireland and Portugal

Greece and Cyprus were not included in the study as they are the subject of separate upcoming studies from the auditors.
The study made embarrassing revelations about the commission’s own record-keeping and internal practices, describing the use of “cumbersome” spreadsheet software for economic forecasting with “limited” quality control.
The report also flagged up gaps in the commission’s files, with “key documents” missing even for the most recent bailout programmes.
The report from the Luxembourg-based watchdog is the latest episode in what has already been years of reflection on the EU’s handling of its debt crisis trauma — a period when governments and EU institutions fundamentally reforged the architecture of the single currency while simultaneously trying to put out fiscal fires in a number of its member countries.

In addition to the deep economic problems suffered by the 28-country bloc, the crisis has also politically transformed Europe by contributing to the rise of anti-establishment parties such as Greece’s Syriza, Italy’s Five Star Movement, Spain’s Podemos, France’s National Front and Germany’s Alternative für Deutschland.

The need to review the commission’s work is magnified by the gravity of what happened, according to Baudilio Tomé Muguruza, the chief auditor in charge of the report. “The effects of the crisis are still being felt today,” he said.
The report zeroes in on the technical management of many of the economic adjustment programmes rolled out during the crisis, which began with Hungary in 2008, and then continued with Latvia, Romania, Greece, Ireland, Portugal and Cyprus.

The commission, which is the executive arm of the EU, had a key role alongside the International Monetary Fund and the European Central Bank in the so-called troika that oversaw the implementation of the bailout packages.
The report pinpoints cases of countries being treated differently in a way that is “difficult to justify . . . by special national circumstances”.
One example given by the auditors is that later aid programmes tended to come with far more strings attached than earlier ones.

Whereas Hungary was required to comply with fewer than 60 unique conditions, Portugal was faced with about 400, according to the report, which added that these requirements “targeted widely different reform paths despite countries being in similar circumstances”.

Another inconsistency was that in some cases — such as Portugal and Ireland — nations’ deficit targets were calculated net of public money used to support the banking sector, whereas in others, such as Latvia, this spending was included in the calculations.

The study also ventured into the highly sensitive issue of how the ECB put pressure on Ireland not to impose losses on senior bondholders at its broken banks — a key moment in the country’s slide towards a bailout in November 2010.

The report pointed out that the ECB “did not provide the commission with its internal deliberations” on this point, despite its crucial importance, adding that subsequent studies by the IMF have shown that steps could have been taken to “contain the risks” from writing down seniors.
In a written response attached to the court’s report, the commission accepted some of the findings and recommendations, while challenging others. The report did not fully take into account “the fact that the actions of the commission were not undertaken in a vacuum but are framed by complex institutional settings”, it said. The role of the IMF, ECB and national governments was “underplayed”, it added.

On Ireland and the senior bank bondholders, it claimed that the commission and IMF accepted the ECB position as the central bank’s support was key to the success of the bailout programme.
“Developments since then have justified the choice not to bail in senior bondholders,” it said.