The chief economist of Citigroup says the Government should "play hardball" in negotiations over the Banking Union, to try and get some relief on the debt incurred in bailing out the banks.
Willem Buiter said the negotiations on a specific part of the Banking Union - an instrument for the direct recapitalisation of banks - presented Ireland with an opportunity to press for relief on the €30-€60 billion in debt the state ran up in the bank crisis.
He said reasoned argument has failed and that now is the time to use leverage, suggesting the bank recapitalisation instrument could be that leverage.
The economist said setting up a financial instrument to recapitalise banks would require unanimous agreement of the 18 countries of the euro area, and urged Ireland not to sign up to the instrument without a specific amount of debt relief.
He said the statement by Eurogroup President Jeroen Dijsselbloem that he wanted a bank recapitalisation instrument in place before the European elections in May was a rare opportunity for Ireland to exercise leverage over the Eurogroup.
It was vital for Europe to have a bank recapitalisation instrument and a resolution mechanism in place in time for the bank stress test that are to be finalised by the ECB in November, Mr Buiter stated.
He also said that without some relief, the banks would continue in their "zombified state" for several years to come, and would act as a drag on the economy, as they would not be in a position to support firms through lending.
The debt relief would be for the sovereign, and it would be for the sovereign to decide how best to use that relief, especially when it came to providing credit to the SME sector.
On Ireland, Mr Buiter said that Citi is now taking a more upbeat view of the economy and is forecasting growth of 2.1% this year, rising to 4% by 2018.
He said that much of this would come from a sustained recovery in the US, the UK and the Euro area, and was a case of Ireland getting the upside of its large exposure to the developed world rather than emerging markets.
He also urged the European Central Bank to do more to help promote recovery in the Euro Area, and forecast a cut in interest rates to 0% by the summer.
The economist also wants to see the ECB move to buy up securitised loans to the corporate and SME sectors as a way of injecting more money into the economy, and do more to push up inflation to its target level of 2% in every state of the Euro Area.
Without this inflation, he said even getting back to Euro Area real growth of 2% to 3% will not be enough to outgrow the Euro Area's debt.
