We are about to discover how worthwhile voting is if you are both in the EU and in the Euro. The Irish election threw out the ruling party, which crashed to third place. A new Coalition is likely, made up of parties who wish to renegotiate the terms of the Irish loan and bail out from the EUand IMF.
The mood music from Berlin and the other leading Euro capitals is not favourable to the two main demands of the potential new government. There is a reluctance to concede much if any cut in the interest rate Ireland has to pay for the money she borrowed. There is a frisson against the proposal that bond holders in the main Irish banks should take more of the losses.
The other main Euro area governments do not see why they should subsidise the Irish borrowing rate any more, as the rate agreed was well below the current market rate for Ireland to borrow . Nor do they relish the idea of unsettling bank bond markets at a time when the European banks need to borrow large sums to refinance themselves. The Irish crisis was created by the European Central Bank’s insistence that it cut back the amount of money it was lending to Irish commercial banks. They do not wish to go back to a crisis where they might be called upon to lend more to the Irish banks again. They want the bond markets to take more of the strain of refinancing.
Both sides face a problem. The new Irish government has to achieve something by way of renegotiation. If they do not it looks as if the election was a waste of time, and leaves the new government following more or less the same policy as the old government. If the EU gives too much ground it fears it could undermine the attempts of the European Central Bank and the Eurozone leaders to install some more discipline into public and bank finances, and to wind down the special measures used during the crisis.
If there is too long and public a spat over this it will be bad news for stability in the Eurozone. Last year there must have been a run of bad briefings against weaker member states and banks, which created a crisis atmosphere concerning the peripheral Eurozone members. So fat this year there has been more discipline which has helped take it off the front pages and calmed nerves a bit.
Now they have to show how the EU responds to a democratic expression of anger about the consequences of an economic failure made worse by being locked into the single currency, and having to deal with the European Central Bank as the lender of last resort to the Irish banks.
The implied level of cuts and tax rises to meet the requirements of the loan will be difficult to achieve, especially if there is little growth owing to the stress in the banking system and the deflationary policies being followed. Ireland, like some other countries, needs to grow its way out of debt and deficits. It cannot devalue to promote exports, nor can it easily create more credit in its banks owing to the way they are now regulated by the EU authorities.