Path out of crisis will mean far closer ties to EU neighbours

ANALYSIS:Despite mutually warm feelings, Germany won't be a pushover in Irish bid to secure debt relief

SINCE IRELAND entered its EU-International Monetary Fund bailout in 2010, a chorus has emerged in Irish life that is determined to project most if not all of the State’s recent misfortunes on to Germany.

The property bubble? Reckless German banks lending too much money. The bailout? A crass claw-back of German money by usurping national sovereignty. The fiscal treaty? An attempt to insert Germanic economic doctrine into its neighbours’ statute books.

In this narrative it is always the Germans, alone, who impose, demand, block and refuse.

Fair-minded bailout critiques of Berlin have been stripped of nuance and context to pack a populist punch: the slumbering German giant has awoken and is discovering once again its long-dormant urge to dominate the Continent.

This newspaper’s Ipsos MRBI poll suggests this attempt to shift public opinion in Ireland against our largest European neighbour has failed. Despite the shadow of crisis, neither side has lost sight of the other’s true face.

Some 46 per cent of Germans think Ireland is trying hard to fix its economy, while almost two-thirds of Irish people believe Germany is being asked to do just enough or too much in the crisis. Even the careworn cliches – German love of our landscape and pubs, Irish regard for Germany’s strong economy – have survived the crisis intact.

As we face into an awkward autumn, however, it would be naive to presume all is well.

Irish officials face an unenviable task in the coming weeks when they tour European capitals trying to nail down details of the financial relief for Ireland to which leaders committed at their June summit.

Such relief is crucial to retaining market confidence as a brutal budget looms, Irish officials will argue. But German finance minister Wolfgang Schäuble is not yet convinced, telling this newspaper Berlin will not back “anything that generates new uncertainty on the financial markets and lose trust which Ireland is just at the point of winning back”.

The best minds on Merrion Street and in Iveagh House have to find a formula that delivers real fiscal relief in Ireland without appearing elsewhere to be a second bailout, triggering a negative response from markets and taxpayers in donor countries.

Like elsewhere in Europe, where attention is on Greece, Berlin’s view of Ireland’s prospects remains stubbornly optimistic. Delicate diplomacy will be required to present a more nuanced image of Ireland’s circumstances without destroying its hard-won reputation on reform.

Spelling out the political consequences – on all sides – of a debt-relief delay may concentrate minds. If Germany wants its bailout success story to continue prospering, agreement on relief is needed before bailout fatigue in bailout donor countries tips over into exhaustion. The window of opportunity is closing.

Solving the euro zone crisis has been delayed not just by conflicts of national interest, but also misperceptions and poor tone. The Irish are not alone in complaining that the German position comes across as patronising – its moralistic tone more suitable for a pulpit than a negotiating table.

Talk here of Schuldensünder, or debt sinners, who “have to do their homework”, reflects a disparaging social attitude to debt, but also Berlin’s framing of the crisis as a peripheral party being bailed out by the blameless core.

This has left politicians struggling to explain to German voters why they may need to make an even greater contribution to a final euro zone deal. The expanding ranks of Germany’s bailout sceptics are ready to exploit this opportunity at next year’s general election. So far, Germany’s political mainstream believes this challenge can be seen off with threadbare European platitudes.

On the Irish side, meanwhile, there is a popular claim that Germans harbour flawed notions of euro zone economics. There are some interesting arguments here, such as the huge boost to German competitiveness at its neighbours’ expense thanks to an under-valued euro. These observations never get very far in Germany, however – packed as they often are in a withering dismissal of German economic dogma that is at odds with the European Keynesian mainstream.

Berlin’s insistence that crisis countries can cut their way back to competitiveness and growth may aggravate its partners, but it goes to the heart of an economic tradition that has served Germany well. A similar problem arises when Germany’s critics, in Ireland and elsewhere, accuse it of misreading its own history to block a crisis solution. It was 1930s austerity that opened the door to Hitler, the critics say, not 1920s hyperinflation. But historical experience is a chain of events, not self-contained bubbles of cause-and-effect.

Germany’s recent history, from the 1920s to unification, has been a narrative of economic extremes from which its people have drawn their own painful conclusions. Suggesting that a country’s take on its own history is flawed is unlikely to raise the tone of the debate. Few in Ireland would welcome German economists announcing that high levels of Irish home-ownership is an irrational obsession based on a misreading of its own history.

As someone with an eye on both sides of the debate, it’s interesting, if depressing, to watch each side accuse the other of hindering a solution to the euro zone crisis.

Berlin says its neighbours in effect want to solve Europe’s problems with German money today – with no interest in the consequences for tomorrow. Germany’s critics, meanwhile, say Germany is fiddling over plans for the future of Europe while Europe itself burns.

Each side has to move and, after years of stalemate, matters are coming to a head. The coming months will see talks on a new European banking regulator, a condition for Germany to back further bailouts to Spanish banks. To much relief around Europe, Berlin has agreed to sever the link between banking and sovereign debt.

The European Central Bank is expected to present proposals next week to buy sovereign bonds and stabilise euro zone borrowing costs in exchange for reforms. Later this month the European Stability Mechanism bailout fund, the cornerstone of euro zone crisis-fighting, will be put through the legal wringer by Germany’s constitutional court.

There is little doubt now that Ireland’s path out of the crisis will lead into a very different European Union, with far closer ties to our neighbours than ever before. The crucial question is how Ireland wants them to be regulated.

EU crisis management has been characterised by inter-governmental deals, hammered out at all-night summits. Critics say such direct deals between leaders favour large members at the expense of smaller states.

A new European treaty, as called for by Berlin, would give fresh impetus to the so- called community method. This is the EU’s traditional way of doing business, refereed by the European Commission, where countries such as Ireland believe they are more likely to get a fair hearing. But going down this route would require further transfers of sovereignty to Brussels. Criticising one path while blocking the other is a road to nowhere.

Ireland has to decide what it wants in Europe, how it plans to get it, and what it is prepared to sacrifice along the way.

Derek Scally is Berlin Correspondent