With sovereignty eroded, we must now repair the collateral damage
ANALYSIS:As EU leaders meet today in Brussels, Ireland has a rather weak hand to play to try to regain credibility in the eyes of its partners
TAOISEACH BRIAN Cowen travels to Brussels today to attend a European summit, the first since Ireland’s €85 billion bailout by the EU and the International Monetary Fund (IMF). The deal fundamentally changes Irish-EU relations, eroding Dublin’s standing among its partners while “anti-European” sentiment in domestic debate causes anxiety in Brussels. As an unwinnable election looms, it will fall to Cowen’s successor to start repairing the damage.
It will be an arduous task. In political and economic terms, Ireland lies grievously wounded by the cataclysmic events that led the public finances and the entire banking system into Death Valley. Influence is crucial in Europe but Ireland’s capacity to exercise any leverage in key debates has diminished to obscurity.
To think otherwise would be delusional.
This is important because unresolved tension in debt markets still threatens the stability of the wider single currency and casts a heavy pall over Portugal, Spain, Belgium and Italy. The scene remains highly volatile, with potential for renewed disruption in every new piece of raw economic data. Difficult questions will be raised for Ireland.
At this summit, EU leaders will bow to a push from German chancellor Angela Merkel to make a narrow revision to the Lisbon Treaty to facilitate the creation of a permanent rescue scheme for distressed euro countries. Dublin believes the move will not necessitate another Irish referendum as the essential powers of the EU institutions will not increase. Still, other uncomfortable questions loom.
Take the debate on the issuance of sovereign bonds with a common euro zone guarantee, a notion Merkel has ruled out for now but one certain to resurface. In the diplomatic world, senior figures believe Berlin will ultimately warm to the idea of creating “eurobonds”, as such guarantees would be likely to reinforce confidence in the wider single currency. There would have to be a quid pro quo, however, and this would have implications in the Irish context.
For example, the Financial Timescarried an opinion piece yesterday in which leading figures in Germany’s Social Democratic opposition – Frank-Walter Steinmeier and Peer Steinbrück – called on Merkel to drop her opposition to eurobonds to signal the irreversibility of monetary union. To achieve that, they said, there would have to be tighter European control over economic stability including “common minimum standards” on policies such as wages, welfare and corporate taxation. Dublin might well oppose that, but its hand is especially feeble.
Nevertheless, Steinmeier and Steinbrück did say the holders of Irish, Greek and Portuguese debt should take a “haircut” on their receivables as part of a new compact. That has certain attractions, although Dublin’s weakness compromises its power. It was that way when the rescue deal was done, with the possibility of forcing senior bank bondholders to take a share of bailout costs ruled out for fear of disrupting wider markets. With taxpayers left on the hook for soured bond investments, the powerlessness is palpable.
The same goes for lingering unhappiness in Government circles over the forces which ultimately tipped Ireland over the edge last month. In Brussels and Frankfurt, the sense remains that survival was all but impossible once the bank bailout bill reached €50 billion. In Dublin, however, it still rankles that the European Central Bank (ECB) let it be known on the weekend of November 13th it wanted the Government to take aid.
The fact remains, after all, that Ireland’s problems were largely home-grown and flowed from a dangerous lending bubble which fuelled the exchequer’s addiction to unsustainable tax revenues.
Given the State’s inability to fund its own operations – a catastrophic failure of sovereignty – the prime task now is to win back credibility.
That will be a painfully slow process. It can’t be done overnight and the short lifespan left to Cowen’s administration means it will not be open to the current crop of Ministers to recoup lost confidence.
At its root, this task centres on the fulfilment of difficult policy pledges made to Ireland’s benefactors in Brussels, the wider euro zone and the IMF. The cruel irony for Fine Gael and Labour is they are likely to be left with this dirty work, subject to international review every 12 or 13 weeks for the next three years. These conditions are severe: loans will not be released if they are not met.
This helps explain claims they will seek to renegotiate the fundamental terms of the rescue, a prospect dismissed in diplomatic circles as unrealistic.
That said, the extension of the timeframe for the completion of the Greek rescue points to flexibility in the longer term.
With both the main Opposition parties voting against the bailout pact in the Dáil yesterday, there is quiet concern at high levels of the Brussels bureaucracy at the force of “anti-European” rhetoric in the Irish debate.
The argument flows from the sense the bailout loans are too expensive, damaging to already-weak growth prospects and unjustifiable given the pain borne by citizens as a €6 billion austerity budget builds on cumulative annual cuts and tax measures totalling €15 billion since mid-2008.
From Brussels, however, comes the response that Dublin itself signed up to build dissuasive cost into the bailout scheme when it was created last summer.
But these are local issues now. On the wider stage, EU leaders are engaged in deep discussion around the possibility of enlarging the bailout fund and giving it powers to buy sovereign bonds. While European debate has moved on from the Irish rescue, the tremors from that intervention continue to reverberate at home. It will be that way for some time to come.