Europe and the euro,
Ireland and Gerry Adams
Another week and another crisis: this time Europe and
Ireland. The banking crisis in Europe, for that is what
it really is, has been bubbling away since the credit
crunch like molten lava. The European banks have over
€2 trillion of PIIGS government and private sector debt
on their books, and unimaginable quantities of
derivatives. At the time of the first banking crisis the
euro nations announced they would underwrite their
private sector banks, so it became inevitable that their
ability to do so would one day be challenged. This is
recognised by Ireland’s apparent negotiating stance in
the developing crisis, which simply put is that she
believes she can face up to her own government finances,
but not her private sector banking liabilities.
There are four possible outcomes or combinations to this
problem: Ireland loses her fiscal sovereignty to the EU,
the ECB bails out the Irish banks, Ireland leaves the
euro, and Ireland defaults. We can rule out Ireland
leaving the euro for the moment for analysis at a later
date if required, which leaves us considering the other
three. Broadly, the EU will want to direct Irish tax
policy as a quid pro quo for financial and ECB support,
while Ireland merely wants ECB support without EU
interference. The ECB meanwhile has seen that Greece’s
rescue package has already come unstuck and will insist
on having greater control over Ireland’s affairs.
It
would be a mistake to view EU involvement as a purely
economic rescue, because its interest is driven by
political motives. For example, it will want Ireland to
raise corporation tax from 12.5% to European levels as
part of a rescue package, not because it will help close
the budget deficit (which it won’t) but because they see
this as unfair competition with their own high rates.
This approach betrays the socialist instinct to enforce
socio-political outcomes at the expense of sound
economic solutions, thereby supporting the interests of
the major Euroland nations. The last thing Ireland
needs is to cripple her private sector with higher taxes
at Brussels’ behest, and Ireland would be wise to reject
this approach as being contrary to her own
self-interests.
Ireland is yet again being bullied to accept the
playground’s unwritten rules, but if she is prepared to
stand her ground, she is in a stronger negotiating
position than at first appears. If she does not obtain
acceptable terms from Euroland, it will not be the end
of the world for Ireland, but it may be for Euroland.
The
downside for Ireland on no agreement is default, which
actually may have attractions compared with the
long-term misery of being screwed by Brussels. We can
further provoke this thought by considering a simple
rhetorical question: who will emerge from their
difficulties first, Iceland, or a Brussels-subordinated
Ireland? Iceland, by going through her process of
default is bound to recover from this painful process
within a year or two, because her government is forced
to face economic reality to the exclusion of
socio-political preferences. Ireland under Brussels will
not take the necessary economic measures, because she
will be merely kept alive by the drip-feed of Brussels
subsidies.
The
downside for Euroland is considerably more serious. Her
private sector banks and the ECB would have to write
down or write off large amounts of Irish debt, followed
inevitably by Portuguese and Greek debts. With Ireland,
these would be only the first three dominoes to fall in
an escalating crisis, eventually forcing all Euroland
nations to bail out their own banks.
There is another good reason why EU control over Irish
sovereignty should be resisted. The Irish struggled for
centuries to rid themselves from the British, and they
are unlikely to live with the reality of rule from
Brussels for long. The independence movement and the IRA
would have a new focus with all the horrors entailed.
Perhaps it is not just coincidence that one of the
shrewdest political operators in all Ireland, Gerry
Adams, is resigning his parliamentary duties in Northern
Ireland and Westminster to take a shoe-in seat in the
Dail. He will be well-placed to spearhead an IRA revival
with a campaign refocused against Brussels.
The
Irish government almost certainly sees the threat from
Gerry Adams, in which case she must insist on her
position against the Euroland bullies. Logic suggests
the Euroland bullies will eventually back down because
they have most to lose. But if Ireland gives in, the EU
risks a revival of separatist violence, possibly
encouraging other movements such as Spain’s ETA. But
there is little time to settle this because bond
investors and the ECB are facing a rapidly deteriorating
situation.
16
November 2010
