Or rather, the question everyone is asking: is the Euro the beginning of the end for Ireland? Not as a country of course. The Irish have suffered much worse and survived with both their sense of humor and Guinness production intact. But is this crisis the beginning of the end of an independent Irish sovereign state? That is the fear gripping many in Ireland and not a few elsewhere in Europe looking on.
Step back to the 1990’s and the lure of swapping what David Gardner in the FT calls the clammy embrace of a post-imperial Britain for the bright lights of the new European experiment was irresistible. The Irish opened their economy and the economy soared, earning itself the title of Celtic Tiger to denote rapid GDP growth and rising living standards. Ireland was a success and attracted huge amounts of inward investment, partly on the back of low corporate tax rates. The attraction for Europe was also a political one. Generations had struggled under or fought for independence from Britain and this was an opportunity to realize that independence like no other. However, political independence and economic independence are not the same thing. While Ireland (and the rest of Europe) enjoyed low interest rates by virtue of German responsible economic management the Euro and ECB came to be seen as German more than European its economy continued to operate in the same way as the mid-Atlantic anglophile economy that it was. Banks lent and developers borrowed on an unsustainable spending spree that has now left the country’s banks insolvent. Just as they would have done in the UK if that country had joined the Euro. Ireland’s sovereign debt, even today, is manageable, and although GDP is down a devastating 20% from its peak, the population is stoically bearing rising unemployment and taxes to manage the situation. The Irish state is sitting on a cash pile of $26 billion and a sovereign wealth fund of over $30 billion, and borrowing costs this year were, at 4.7%, pretty much the same as last year. The mistake Ireland made was guaranteeing its banks’ debts and it’s the size of those debts that are getting bond markets worried and the ECB trying to force funds onto the Irish government.
Well, like the few US banks that took funds in the wake of the 2008 financial crisis and then promptly gave it back when it was clear they didn’t need it (as opposed to those that took funds to survive), the Irish could take what is offered and everyone would be happy, right? Well, here comes the politics bit. Germany and France don’t want debt contagion fears to spread, but they also see this as an opportunity to further what Simon Heffer, writing in the Telegraph, calls the creeping “sovietization” of Europe. Their price for forcing Ireland to take the support it does not want is central control of economies from Frankfurt, with tax rates, deficits and spending run by unelected ECB bureaucrats – the first target is Ireland’s 12.5% corporation tax rate considered “unfair by France and Germany, poaching inwards investment from other EU countries.
So what options does Ireland have? Well, several is the expected answer, but all of them equally unpalatable. The country could leave the Euro, a prompt and massive devaluation would boost the economy and within a couple of years employment would be way down and growth strong except in the meantime, most of the banks would have gone bust and the country could end up like Iceland. A devalued currency but Euro denominated debts would make repayment prospects already wobbly near impossible. Our favorite British MEP Daniel Hannan rather tongue in cheek suggested on his blog that Ireland should adopt parity to the Pound Sterling tying itself into an economic model more suited to the realities of its structure and simultaneously announce its bank debts were being treated at parity to the Pound Sterling. The reality is, Ireland is no more likely to do that than leave the Euro, after centuries of British rule and dominance they would not elect to forge a dependence (or even co-dependence) on their old adversary whatever the economic merits. No, the most likely outcome is eventual submission to the power of Brussels and Frankfurt, acceptance of loan guarantees and the ousting of the Fianna Fail Republican party at the next elections. Closely followed by Greece, Portugal and possibly, some think, even Spain.