Coalition needs to keep its collective eye on the Brussels game…

All politics is local, except when it comes to an Irish banking crisis. As Paul Gillespie notes in today’s Irish Times:

Ireland is more deeply entangled with its partners in the European Union as a result of the banking crisis and the measures taken by the new Government to resolve it. That is part of a more general process called Europeanisation by writers on the subject. It makes European issues part of domestic politics. Politicisation of the issues makes them contentious and contested within that space.

As Fionnan Sheahan notes, the electoral policy of Fine Gael has been the first casualty of the Government’s negotiations with Brussels:

In its banking strategy, published at the beginning of the election campaign, the party warned it could unilaterally impose losses on unguaranteed senior bonds if some of its proposals for dealing with the banking crisis were not implemented.

Noonan consequently withdrew a threat to unilaterally restructure bank debt. By the end of the campaign, he was saying Fine Gael would only impose losses on senior bondholders as part of a European-wide framework. Ultimately, this was the route the party has now gone down in Government.

Fianna Fail’s riposte from exile came from Senator Darragh O’Brien:

“The banks have let everyone in Ireland down with their reckless lending decisions. The banks also spent the last few years misleading Government and frustrating efforts to sort out the problem once and for all. People will be angry at the cost of keeping a banking system in place but the truth is that our country and economy needs a stable banking system. This was always the case. It’s just a pity that Fine Gael and Labour misled the electorate during the campaign, creating a false hope that there was an easy way to achieve this.” [Emphasis added]

In fairness, they slipped back considerably during the campaign, getting softer and softer as it seemed more and more likely they would walk into Leinster House. And, as Dan O’Brien notes there is still some way to go yet, and doom is not the only inevitable destination:

A best-case scenario for the economy involves the Government getting ahead of the curve, a partial European-isation of the costs of bailing out the banks and the materialisation of jobs growth in the export sector. If all three things were to happen, greater domestic confidence would surely follow.

This would encourage people to save less and spend more – high levels of savings are the only immediately available pent-up source of demand in the domestic economy now.

This, in turn, would generate more growth and hence more tax revenues, reassuring international investors that the State will be capable of repaying them. The prospect of returning to the markets to borrow would then improve, making the exiting of the EU-IMF bailout more likely. Such a virtuous cycle remains possible.

Emphasis on the word possible. Moriarty was an opportunity for the opposition parties and the Media to make hay, but it is clear where the new government’s attentions need to be…

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  • Paule Gillespie’s article was published a couple of days after the News, circulating in Europe that all of Ireland’s banks had failed, very considerably, the latest stress tests.

    I cant find any reference to this news in the Irish newspapers but here it is in Der Speigel

    http://www.spiegel.de/international/europe/0,1518,754452,00.html

    The tests show that the Irish Banks will need at least €24bn further capital (on top of the €46 bn already pumped into the banks by the Irish taxpayer). However, the EU rescue package has already earmarked €35bn to cover the banks, which should be more than enough. The trouble is, that €24bn is only regarded as a minimal amount. Some experts have calculated that the cash injection may be as high as €55bn

    Later on in the article, Der Speigel refers to the negotiation to relieve debt which the Irish Government is currently embroiled in. At the moment, the Irish Government are asking that the shareholders (mostly foreign banks) should bear some of the losses.

    “So far, however, Dublin’s argument has run up against a brick wall. The greatest resistance has come from the ECB and Germany’s federal government, which has represented the interest of the country’s banks. The only things the two are willing to discuss are lowering the interest rate on the EU loans and extending their maturity dates.”

    But there are now increasing signs that Ireland will not be able to economically survive the sheer weight of what is expected of them. Der Speigel concludes:

    “But many economists are convinced that Ireland will crumble under the weight of its debts if at least some of the debts aren’t forgiven.”

    Ireland’s appalling weakness is actually its strength in the negotiations.

    They will only be able to shift the Europeans if they start planning a “Plan B” negotiation failure. That will involved planning for a banking meltdown, as happened in Iceland, telling the Europeans that they are prepared to do it if they dont get their way. The question is, has Kenny’s administration got the balls to do it?