Dublin pays the price of euro’s poisoned chalice
Well, the game is over — or at least it will be in the next few days. Even a week ago the Republic’s Government thought it could get by without external support.
But things move very fast in financial markets and the gap between a government being in control of events and losing control is a tiny one. It is a salutary lesson for us all.
So how can a country that does not need to borrow from the markets, has a current account surplus, is starting to grow again and certainly is seeing solid demand for its exports, find itself in this position and what are the implications for the rest of us?
The immediate reason was that Ireland was bounced into seeking support by its partners in the eurozone. Stories were leaked by officials in Brussels that it had started talks on a loan. These were furiously denied by Dublin but it didn't make any difference. The IMF played it straight, saying it had not been approached for help, but with Europe piling on the pressure, the country had to fall in line. We will see to what extent Ireland retains some control over its policies — and its red line is the 12.5% corporate tax rate — as the negotiations proceed in the days ahead.
There is, however, a second reason why the Republic could no longer go it alone. Its banks, though guaranteed, indeed part-owned, by the state, faced a steady loss of deposits. Investors were taking their money home. So the banks became increasingly dependent on support from the European Central Bank. What has happened in Ireland is well within recent historical experience and had it not been a member of the eurozone it would probably have been able to avoid the most extreme elements of the boom and now be able to work its way though the crash. But the ECB, as many of us warned, had to set interest rates at the best compromise it could for the whole of Europe, resulting in too loose a policy for fringe countries such as Ireland and Spain. The one-size-fits-all interest rate did not fit Ireland.
To say this is not to excuse Irish policymakers. They could have done better with the tools they had. But euro-membership made matters far harder. In the short-term the euro had been good for Ireland. It cut borrowing costs and encouraged inward investment. But it proved a poisoned chalice. One of the main reasons why the UK is chipping into the Irish pot is because it is in our self-interest that it should be stable and prosperous. It is not to support the eurozone.
And the consequences? I can see at least three. The most positive is that the Irish economy will continue to recover. It would have probably recovered anyway but getting all this stuff out of the way will give a boost to confidence both within the country and externally.
The second consequence will be less agreeable. We have to wait for the detail but if the bond-holders of Irish banks don't get back their full entitlement that will make it harder for banks in all fringe countries to raise cash. The consensus is that the bond holders should suffer, at least on some categories of debt.
The third consequence will be contagion. Two down — Greece and Ireland — how many to go? The eurozone will, I am sure, be pulled together for a few more years, but there will be further political ructions against austerity, further tensions in the markets, more crisis meetings in Brussels, more bail-outs. Not good, not good at all.