Not in Ireland's interest to stick out like sore thumb


OPINION:Rejecting the EU fiscal treaty could leave the Republic in a very dangerous position at a perilous time

THIS WEEK brought the most serious rumblings in the euro crisis in four months. The only surprise is that the lull lasted as long as it did. Almost every relevant factor points to a return to full-blown crisis – sooner or later.

The partial reigniting of the euro zone crisis this week had its epicentre in Spain. Speculation grew that the Iberian state would join Ireland, Portugal and Greece in the euro area bailout club when its government failed on Wednesday to entice investors to lend to it all the cash it was seeking.

The risks for Spain have long been elevated. It had the rich world’s second biggest building boom. When the crash came, hundreds of thousands of construction workers were laid off. That sucked demand out of the wider economy. Now, almost one in four people is out of work. With the economy sliding back into recession, more jobs will be lost.

Among other things, shrinking employment will worsen the fiscal dynamics, which have deteriorated more rapidly than any of the other large euro zone economies since 2008. Add to that growing concerns about Spanish banks – one of the largest of which reported plummeting profits this week – and the loss of international confidence in Spain in recent days is readily explained.

The politics of budgetary consolidation in Spain complicates matters further. De facto fiscal federalisation over recent decades means that hitting budgetary targets is as much about what happens in the regional capitals as what the ministers in Madrid do.

The rise in tensions among Spain’s 17 autonomous regions over budgetary issues mirrors the strains among the 17 members of the euro zone.

While Mariano Rajoy, Spain’s premier, attempts to rein in overspending regions, he is resisting pressure from northern Europe to make even more cuts in central government spending to ensure Spain meets its overall budgetary targets.

Both he and his counterpart in crisis-racked Italy, Mario Monti, have ruled out additional budget-tightening measures this year to meet their targets if veering off course is caused by weaker growth. Unlike small, bailed out peripherals, Italy and Spain have the clout to take on the northerners. And if it does come to a confrontation, Rajoy and Monti will – first and foremost – face off against Germany’s Angela Merkel.

German politicians of every hue never tire of telling others these days that their economy is doing well because they made lots of painful reforms in the past. Germans are now enjoying the benefits, their leaders say, and they want everyone else to follow their reforming lead. Almost nobody denies that lessons can be learned from Germany, but the euro area’s colossus economy needs to listen to valid criticisms of the role it plays, or has not played with sufficient vigour.

If Germany is sometimes accused of sadistically imposing austerity on others, a fairer criticism is that it is masochistically forgoing the fruits of its own export boom, to everyone’s detriment.

German workers have only recently begun enjoying wage hikes after a long period of pay stagnation. If they were recompensed as their decade-long competitiveness gains warrant, they would have more money to spend. That would allow them to enjoy life more, and in the process buy more from their southern neighbours (and everyone else). That, in turn, would bring everyone’s exports and imports closer to balance – a vital part of the solution to stabilising the euro zone.

Germany-bashing, which has become de rigueur from Athens to Dublin, would be less frequent if Merkel and her colleagues acknowledged their role now as consumers of last resort in the euro zone.

If relations among the euro zone bigs are in danger of worsening, the most problematic of the smalls is becoming ever more problematic. In Greece, it is now politics rather than economics that is driving uncertainty.

A general election was called in Athens this week. It will be held on May 6th. If the outcome reflects recent opinion polls, Greek politics will be transformed. The dominant parties – Pasok and New Democracy – have passed power back and forth since the end of dictatorship in the 1970s. But their duopoly is crumbling and if the vote fragments as much as anticipated, the next parliament will be a patchwork of parties, many of which are extreme and most of whom want more concessions from other EU countries on the terms of the country’s bailout. But as trust in the Greek political class among its counterparts long ago disappeared, even reasonable requests for changes to the bailout terms are likely to fall on deaf ears. Radical changes that heap more costs on the rest of Europe will be rejected out of hand.

That would be bad. Worse still would be no government at all being formed after the election. That is a real risk.

The Greek electoral system has delivered single party rule over decades. There is, therefore, no tradition of coalition. This, and an already weak political culture, would make cobbling together a multiparty coalition (and holding it together) difficult even in normal times. Under economic conditions as severe as those being experienced now it may be impossible. That would move the euro zone closer to the point of unravelling.

Greece has been a haemorrhage point for the euro zone for two years. Without a government, the chances of stopping the bleeding would diminish further. Amputation could easily come to be seen as the least bad option by others in the currency union.

If the scalpels come out for Greece, it is not unlikely that some will make the case for more extensive surgery. Why not cut out all the bad bits in one fell swoop? Might that not improve the chances of the patient making a more rapid and fuller recovery?

Portugal would almost certainly be a candidate for the chop. As one of the countries already bailed out, Ireland would too, despite its economic fundamentals making it better suited to monetary union than the Meds. But consideration of which countries are causing the euro zone’s problems is unlikely to be based on economics alone. The rejection of the fiscal treaty next month would make Ireland very problematic.

While being the only one of 17 not to implement the new rules need not be a calamity for the euro zone, it would raise many questions that do not have ready answers.

Sticking out like a sore thumb is not in Ireland’s interests. It could be very dangerous if the knives come out for Greece.

Dan O’Brien is Economics Editor

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