The last week has seen a gripping struggle for power between the EU and one of the smaller member states. It began when Frau Merkel, probably for German political reasons, undermined confidence in Greek and Irish bonds by saying that Euroland “sovereigns” might have to cut the interest or capital they owed to bondholders. It continued with strenuous efforts by the EUauthorities and leading member states to get Ireland to discuss a refinancing package for the country. Ireland protested loudly and in public that it did not need any money, and had its finance arranged through to the middle of next year. Despite this the EU continued with its deliberations, leaks and press statements in a way which was bound to destabilise markets further pending an outcome. Now we learn that Ireland is being persuaded that it needs money from the EU to help it to recapitalise its banks more rapidly.
Why would members of Euroland want to do this, as all the public debate about crisis and the need for emergency responses is bound in the short term to make things worse.? All the talk of contagion just puts the idea into the market that the problems might not end with Ireland. Either the Euro powers that be are incompetent, and do not understand how they can induce falling markets by saying too much and doing too much, or they are out to ensnare Ireland into new controls and conditions, to strengthen the EU’s hand in economic governance. The EU has never liked Ireland’s attractive low Corporation Tax rate, and would dearly love to be able to force that up.
The UK should make it clear that we are not part of any Euroland rescue or facility. We should say we do not think they can use EU disaster relief provisions to offer Ireland more cash. If Ireland does not wish to take any EU money, the UK should be Ireland’s ally. The stated Irish wish to see their own way through their own deficit problem is wholly admirable. Let us hope the EU does not make it unrealistic, by their market destabilising statements.
You do not make a currency area stronger by taking money from the heavily borrowed to give to the overborrowed. The heavily borrowed have to borrow more themselves to prop up the overborrowed. If done on a large scale, that migth weaken them dangerously. You do instead need to bring deficits and in due course the debt down. You do not do that by borrowing more collectively.
The EU spin suggests Ireland is being selfish by refusing the money. They argue that if Ireland does a deal soon it will remove the risk of the problem spreading to other Euroland states. This argument ignores the fact they told us that when Greece accepted a deal. Markets sometimes take a hint – if pushing hard produces a subsidy or favourable borrowings for one country, why not push on another weaker country and do the same all over again?