I was no fan of the Irish bail out. I thought it would be bad for Ireland as well as for the rest of the EU. So far the markets have come to the same judgement.
Last week Irish debt suffered a hefty downgrade to baa1 – a long way below AAA which sovereigns expect. The market price for Ireland to borrow 10 year money was around 8.7%, compared to 3.1% for Germany in the same currency. These events imply that markets are not convinved the bail out will help Ireland.
As I sought to make clear, I did not favour leaving Ireland in the lurch. I thought it wrong of Mrs Merkel to talk down weaker bonds, and wrong of the ECB to seek a refinancing of its advances to Irish banks at such a tricky time. Of course Ireland needs to be able to borrow money,and Irish banks should be supported by the ECB all the time the EU authorities regard them as solvent, as they currently do. The words and some of the deeds of the EU in the last two months made the situation worse.
Over the last three years Irish real GDP has fallen by 13% and nominal GDP by almost 20%. This is a huge fall. That is why Ireland finds balancing the books difficult. Tax revenues have been badly damaged by the decline, and unemployment has risen, increasing social security costs.
The inability to devalue makes exporting more difficult. The inability to print more money makes keeping the Irish system liquid more difficult. The required cuts do not complement a growth strategy for the private sector, which Ireland badly needs. At least the Irish government defended the attractive Corporation Tax rate, which helps a bit.
Instead of arguing about Treaty amendments and future bail out funds, the EU needs to be arguing about a growth strategy and how to resolve the problems in Euroland banks. If they do not take sensible action to head off a Spanish banking crisis, then the full folly of the current Euroland model for crisis management will be unleashed on us all.