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Ireland: Time for the Celtic rebel

Gavin Hewitt | 11:29 UK time, Friday, 4 March 2011

For a few weeks the crisis in the eurozone has faded from view. It has been eclipsed by other events but it never went away. It is now due for a return.

By the end of the month Europe's leaders have promised that a comprehensive deal will emerge to fix the problems with the single currency once and for all. Expect some late nights.

The curtain-raiser for these negotiations is a meeting in Helsinki today. It features Europe's conservative leaders who have gathered in the Finnish capital to talk, but not decide. That will come later.

Even as they float plans on how to prevent Europe's single currency from being buffeted in the future the fact remains that the current debt crisis has not been settled.

Greece and the Republic of Ireland were bailed out and put on a life-support machine. Their debt mountains, however, edge only higher. The day of reckoning may have been delayed, but it hovers on the horizon.

In Ireland the view is that the medicine prescribed by Brussels risks bankrupting the economy.

Among those turning up in Helsinki will be a mild-mannered 59-year-old former teacher. Enda Kenny now has the European stage. He is Ireland's prime minister-in-waiting. He rode to power promising Irish voters that he would renegotiate the Irish bail-out deal. The people found it humiliating. Mr Kenny wants to see the interest rate on the EU part of the deal - currently 5.8% - lowered. He wants the repayment terms lengthened. He also wants some investors (senior bondholders) in the banks to share in the losses.

Enda Kenny with voters in Co Mayo, 26 Feb 11

Now before the election Enda Kenny was regarded as uninspiring, bland, charisma-free. In a way that Napoleon would have valued he is, however, a "lucky" man. The voters were out to take revenge on his predecessors, who had presided over the wrecking of the Irish economy and then had bent the knee to the European Central Bank. Mr Kenny was handed power.

So even while he is still coalition-building he has now to deliver on his promises. In Helsinki he hopes for an audience with the high priest of the European economy, Angela Merkel.

His trip was not off to a robust start. "I'll certainly get a few minutes," he said before leaving Ireland, sounding like a man who was waiting to doorstep Chancellor Merkel. The Germans were not encouraging, briefing that a one-on-one meeting might not be possible because of a tight schedule.

But Mr Kenny may be underestimating the strength of his hand. He has a mandate from the voters. The people of Ireland want the terms of the deal changed. He can say that Ireland is not prepared to go along with what was signed last November. Governments play hard ball all the time.

Angela Merkel has already fired some warning shots. Europe, she said, can't "artificially reduce interest rates". In her view there should be no easy money for the reckless.

Maybe, but Ireland unilaterally could force some investors to take a haircut. The voters would like that.

The Europeans may insist that, in exchange for a loosening of the bail-out terms, Ireland abandon its low corporate tax rate. That, however, is part of the Irish brand and Mr Kenny can afford to say "no deal".

The crunch is that Ireland is under huge pressure to begin de-leveraging its banks. There are real fears in Ireland that this would end up as a fire-sale, selling assets into a distressed market. As one prominent businessman said, "fire-sales don't just stop in banks; they jump to every other kind of business".

That pressure will grow in the weeks ahead with a fresh stress test pending. Ireland could end up yet again having to put more capital into its banks.

Ireland would like a European solution to deal with its banks. It needs help, but it need not be muscled. Its bank debts are somewhere between 150 and 200bn euros (£128bn-£170bn) and the largest amount of capital is from German banks.

The Irish prime minister (Taoiseach) carries a grenade in his pocket. It is marked "default". The Irish bank governor says that Ireland defaulting on its loans was not an option that was "attractive to any part of Irish society". That may be true. But the EU fears an Irish default. It believes it would destabilise the entire currency zone. It would demonstrate that the current medicine of austerity and deficit-cutting has not worked.

But Ireland with a robust real economy might decide that the pain of a default would be relatively short-term and preferable to a bail-out that imposes austerity for a generation.

Danny McCoy of the Irish Business and Employers' Confederation was in Brussels this week and made an impressive case that the real Irish economy - away from the banking system - was surging. Exports are booming. The Irish balance of payments is in surplus. Unit labour costs have improved dramatically. Companies are expanding, although that has not led to a sharp pick-up in employment. Ireland remains an attractive country to invest in. It has flexible labour practices, it is business-friendly, with a well-educated workforce.

The question is whether those early green shoots will be allowed to grow or whether they'll be strangled by the terms of the bail-out and the debt that remains in the banking system.

So Mr Kenny should not hope for his few minutes with Chancellor Merkel. He can demand time. He can play the Irish rebel. He holds the cards. During the election he said the bail-out was "bad for Ireland, bad for Europe". During the Irish campaign he presented himself as a fighter for Irish independence. His moment has come.


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