Yesterday was one of those days in the Commons when you need to count the spoons. The two front benches were in complete agreement about the need to lend money to Ireland. They did not seem to mind that we do not know how much, at what interest rate or for what purpose or against what security. The European political classes have decided it is time to make Ireland borrow in public with some strings attached, after months of Irish banks borrowing in private from the European Central Bank. There was no explanation of why now is the time to switch from the one kind of funding to another, or why now is the time to drag the weaknesses of the Euro and some of its member states so prominently into the headlines.
When the main political parties agree it is often wrong. They all agreed that the Exchange Rate Mechanism would give the UK a “golden scenario”. Instead it gave us the predictable boom and bust. Labour and Conservative agreed about the wars in Afghanistan and Iraq. Now they agree that because we export a lot to Ireland it must be in the UK’s national interest to lend Ireland money, without stating the terms or the purpose.
Numerous MPs raised worries or pressed for some proper information to inform a decision. Why would the Irish bail out be more successful than the Greek one? Would the Irish bail out be the last Euroland one? Why does the UK have to help fund a Euroland problem? Couldn’t the Euro area handle this issue itself? What interest rate will we charge? What will the conditions be? As Ireland will face an IMF type package of spending cuts and tax increases, how will it work as she cannot at the same time devalue, a normal part of an IMF package? If overborrowing is the problem, how does borrowing more help? Why don’t the Irish banks sell more assets?
The official soundbites got in the way of sensible exploration of these issues. If you did not support the bail out you were thought to be unrealistic, turning your back on the problem. Parliament in this mood does not do subtlety and cannot examine more than one possible solution.
Meanwhile the markets did not suddenly think lending to Ireland a good proposition and pile into Irish bonds. UK and US shares tried to rally then fell. The politicians would be wise to watch the markets more carefully, and listen to what critics of their bail out scheme are saying about the future of the Euro and the need for a better economic policy. Then they might understand the force of the argument that troubled Euro countries need a work out more than they need a bail out. The attention should go into how you recreate stable banks and sustainable public finances in countries which cannot compete worldwide easily at current levels of the Euro. I fear this bail out is not the sudden resolution of the Euro’s problems, nor the complete solution to Ireland’s difficulties.
Given that the suffering countries seem to want to stay in the Euro they have to accept it means a sharp reduction in their costs of production to compete alongside Germany. That could be done by a breathtaking leap in productivity, or has to be done by reducing costs generally in painful way. The UK and US have done it less visibly by devaluation.