Relief in Brussels with crisis becalmed
Ireland’s EU position stronger, but big risks remain
If all does go to plan, Ireland will exit its bailout at year’s end and the kudos will keep coming. Much of the earlier reputational damage will have been repaired and stocks of goodwill replenished.
It is hard to overstate the importance of this. For small countries, reputation and goodwill determine the capacity to influence. That is particularly the case for a small country in a vulnerable position.
Ireland will be in a very vulnerable position if an extension of the current bailout becomes necessary or if a second rescue is needed further down the line. Goodwill will be vital in determining the terms of any new bailout.
Economic growth and bank losses are the two most important factors in determining whether further help will be needed. There is little anyone can do to guarantee growth. Bank losses are another matter.
The objective of breaking the link between banks and sovereigns was made explicit by EU leaders on June 29th last. But row-back began almost immediately. It was in evidence yet again at yesterday’s eurozone finance ministers meeting.
The Government has kept plugging away to keep the issue alive – Enda Kenny’s address to the Brussels forum on Wednesday was suitably unsubtle in its repeated references to the EU leaders’ statement of 51 weeks ago.
Worst is yet to come
The best that can be hoped for now is that options are not closed down by those countries who favour a minimalist role in bank rescues for the European Stability Mechanism. Whatever about retrospective recapitalisation, keeping alive the possibility of the ESM directly recapitalising Irish banks if they take further losses (as is likely) is imperative.
A word is also warranted on the holding of the EU presidency. While Ireland’s diplomatic service may not be cram-full of strategic thinkers, running a presidency plays to its strengths – delivering efficiently and without unnecessary drama. Daniel Keohane of the think tank Fride noted the successful term has contributed to the putting of more blue water between Ireland and the other troubled peripherals in the Mediterranean.
That is vital, not least because if the euro and/or eurozone fragment, Ireland will want to have the option of remaining in a northern rump union.
And break-up remains a real possibility. As the always clear-thinking French economist Charles Wyplosz put it plainly on Wednesday “the worst is yet to come”.