If Greece sinks, Ireland may be left with Stark alternative

EUROPEAN DIARY:Departing ECB figure's call for Ireland to cut public sector pay and welfare reflects concern that Ireland could suffer if Greece defaults

JÜRGEN STARK’S unsparing intervention in Ireland’s budget debate comes amid a drastic escalation of the sovereign debt emergency. His entreaty met a cool reception in Dublin but it reflects serious concern at the highest levels in Europe that Ireland could become unstuck anew by the wider tumult.

Greece is perilously close to disaster again as German support for its ailing bailout drains away.

The country has been near the abyss before, but default seems increasingly likely. Whether that triggers catastrophe for the euro is anyone’s guess, yet the portents are not good. When things go bad in Greece, they go bad for everyone. Two gruelling years of relentless turmoil show us that.

So the omens are not good. Stock markets are in uproar daily, bank shares are in freefall, Europe’s political leaders are paralysed by indecision and Stark’s own defection from the European Central Bank raises grave questions about its capacity to keep fighting the flames.

No one is in charge. Around Brussels, people in the know speak of drift, despair and danger.

EU leaders still hope to muddle through, but this is not a time for optimism. Although some form of currency union in Europe’s core is likely to survive the debacle, there are more and more reasons to doubt the durability of the 17-country euro.

This comes as Ireland sees a modest turnaround in investor sentiment. Notional borrowing costs have eased, leading European officials and senior people in government in other countries salute the valiant budget-trimming efforts of the doughty Irish.

While it would be wrong to say Ireland is back in vogue after years in the doldrums, the sense prevails that Dublin is more predictable and reliable than Athens when it comes to the delivery of promised reforms.

Hence the positive feedback from the EU/IMF “troika”, which says in its official reports that the recovery programme is on track. There is more. Although it almost came by accident, the Government managed to extract a lower interest rate on the bailout in July and still keep the corporate tax regime intact.

All of that is a boon to the Fine Gael-Labour coalition, which is trying to establish a reputation for competence after the appalling misrule of its Fianna Fáil-led predecessors. Spirits are up a little as a result. Confidence is fostered by warm words from ECB chief Jean-Claude Trichet and Klaus Regling, head of the euro zone bailout fund.

But any sense of security is utterly false. The Government remains shut out from debt markets and will do for some time to come.

Since the start of the year, Ireland’s sponsors in Europe and the IMF have approved the release of loans totalling €30.5 billion. Tens of billions more are to come.

Keeping the lights on in Dublin has never been more difficult. In that context, a superior performance to that of Greece hardly ranks as a glittering achievement.

If Greece is forced out of the euro – not beyond the bounds of chance in the present malaise – then Ireland and Portugal would inevitably come under similar pressure. Even if that does not happen, it is a given that a Greek default would make market investors less sympathetic to countries like Ireland as they weighed the increased risk of a similar collapse. Regaining access to market loans, already a challenge, would become more difficult.

Enter Mr Stark, who warns that sentiment could suddenly turn against Ireland all over again. To guard against that, he says the Government should quicken its austerity drive and tackle no-go topics like public and private sector pay and welfare entitlements.

This is deeply dispiriting for workers, welfare recipients and their families, and politically difficult for the Government. However, Stark argues that the greater good for Ireland would be served by moving soon to intensify the effort to restore order in the public finances.

The response from the Government was predictably blunt. In Brussels yesterday, the thrust of the rebuttal from Tánaiste Eamon Gilmore was that Stark had delivered no more than an outburst of improper ramblings from the sidelines. Stark was but an “officer” of the ECB who happened to be working out his notice. There was no pressure from the troika for quicker cuts, he said.

But Stark remains a man of clout and the precision in his remarks suggests the troika will be back for more cuts from Dublin sooner than later. What will the Government say then?

Stark has sent an unambiguous message to Dublin. From his perch in the ECB, he sees more than most people of the unyielding tension in financial markets. It is not a pretty picture. Take note.