Watch your back in Europe,Enda
As the Government seeks to change the bailout deal, we face the good, bad and the ugly of Europe, writes Louise McBride
Published 13/03/2011 | 05:00
NEW Taoiseach Enda Kenny has his work cut out for him over the next few weeks as he tries to hammer out a better bailout deal in Europe. The fate of our country -- and the new Government -- is on his shoulders.
If he can't ease the burden of the €67.5bn IMF-EU bailout, the country will have to cough up about €3.9bn a year in interest. A bill like that will cripple Ireland and make the task of reversing our fortunes all but impossible.
Kenny attended his first EU summit as Taoiseach on Friday. He was largely doing the groundwork for the EU summit of March 24 and 25 -- which will be his real test.
That summit will decide the shape of a new bailout fund for the EU and will ultimately determine whether or not we get a cheaper bailout deal.
Ireland's fate is now at the mercy of several EU bureaucrats. Some of these sympathise with our economic plight -- but others clearly couldn't give a damn.
The European Commissioner for Economic and Monetary Affairs, Olli Rehn, didn't win a place in Irish hearts when he visited Dublin last November. He was here to urge politicians to support the harsh four-year plan of the then Government.
However, it could be Rehn who persuades European finance ministers to cut the interest rate on our loan. Last week, he told Irish MEPs that the European Commission supported a reduction in the interest rate on the European portions of the bailout.
He also said last week that Ireland should have a longer time frame to repay the European portion of the loans.
"Rehn does not want to see the eurozone collapsing and is more open to Ireland and Greece's case than others would be," says Alan McQuaid, chief economist with Bloxham Stockbrokers.
Along with the EU and IMF, Sweden, Britain and Denmark all lent money to Ireland.
The average interest rate on the EU-IMF loans is 5.8 per cent. The interest rate on the Swedish portion of those loans has not yet been set as negotiations on it have not concluded.
However, the sympathetic stance taken by Swedish Prime Minister Fredrik Reinfelt in a recent television interview suggests that the interest rate could be less than the 5.9 per cent charged by Britain on its bilateral loan.
"If we don't create a solution to this, we will also see the effect of the (Irish banking) problems coming to us," said Reinfeldt.
Asked whether or not Ireland should give up its corporation tax rate, Reinfeldt said: "We should deal with Ireland the way we would like to see ourselves dealt with in a similar situation.
"It is important that Irish people and the Irish Government take their own decisions. I don't think we should intervene from outside to tell them what to do."
JOSE MANUEL BARROSO
European Commission President, Jose Manuel Barroso, held nothing back last January when Irish MEP and now TD Joe Higgins accused the EU of destroying Irish services and living standards.
A clearly enraged Barroso retorted: "The problems of Ireland were created by the irresponsible financial behaviour of some Irish institutions and by the lack of supervision in the Irish market. It was not Europe that created this fiscally irresponsible situation and this financially irresponsible behaviour."
Despite his January outburst, Barroso appears to be behind a cut in the bailout interest rate. After meeting Kenny last week, Barroso expressed an understanding that the interest rate was a major issue for Ireland and that the European Commission supported us.
The president of the European Central Bank (ECB), Jean-Claude Trichet, is all too willing to see the cost of the bailout deal shoved on to the shoulders of Irish taxpayers. It was the ECB which ruled out any prospect of senior bondholders sharing some of the cost of the bailout deal when it was negotiated last year.
Trichet is well aware that a decision to hit senior bondholders with a haircut could trigger contagion in EU financial markets as such bondholders include major banks and insurance companies. Others argue, however, that bondholders are investors who should know what they're getting into -- and be prepared to swallow losses should their investment turn sour.
Over the last month, Trichet (who was paid €367,863 last year) has shot down suggestions that the deal is open to renegotiation, insisting that Ireland stick to the agreed plan. Some believe that Trichet -- president of the ECB since October 2003 -- has contributed to the economic woes of Ireland and Europe.
"From 2000 on, British, German, Belgian and French banks and banks of other EU countries lent irresponsibly to the Irish banks in the hope that they too could profit from the Irish construction bubble," said former Taoiseach John Bruton in a lecture at the London School of Economics last week.
"They did this nothwithstanding the fact that they had lots of information available to them about spiralling house prices in Ireland.
"They were supervised by their home central banks and by the ECB, who had the same information available to them too and who seemingly raised no objection to this lending."
German Chancellor Angela Merkel is proving to be as pigheaded as any of her Teutonic forebears. Alas, it is the Brunnhilde of Berlin who will call the shots on any renegotiation of our bailout deal. She doesn't care if Ireland has to pay a crippling €4bn a year in interest. Her priority is to survive this year's German state elections.
She knows she won't get votes by cutting the interest rate. German public opinion is firmly against bailouts and that includes any moves to make bailouts cheaper.
"Public opinion in Germany doesn't understand that Europe's banks are totally interdependent and that the failure of a bank in Ireland will affect other EU banks," says John Bruton.
In early March, Merkel ruled out the possibility of the new Irish Government being able to renegotiate a lower rate on its bailout deal, saying that it would be unfair for other struggling countries to borrow at expensive interest rates while bailed-out countries received cheaper aid.
Merkel set an ominous note ahead of last Friday's EU summit when she made it clear that Ireland would have a price to pay for a cheaper bailout. The German Chancellor said she would be prepared to ease the burden of the bailout terms -- but only if Ireland compromised on its corporation tax rate.
"Germany is the paymaster and will ultimately call the shots on how things play out," says McQuaid. "Merkel's hands are tied to a certain degree. She has to play to her electorate.
"Germany -- along with Austria and The Netherlands -- don't want to see a watered-down version of the bailout deal. They believe that if you cut the interest rate, you encourage lax policies."
Europe is currently discussing the beefing-up of its EU bailout fund -- and it is this which will be the focus of the summit in late March. A lower interest rate on the Irish bailout deal could be an offshoot of these discussions -- but, again, Merkel will be calling the shots.
"Germany is the biggest economy in Europe by a long distance and it will be a major part of the decision (to beef up the bailout fund)," says Bruton.
"The biggest assistance (for the fund) will come from Germany. Within Germany, there's already a big transfer of money from one state to another.
"The last thing the Germans want to do is to move more money out of Germany."
Give the French President Nicolas Sarkozy any chance to attack our corporation tax rate and he'll jump at it.
So it's no surprise that Sarkozy teamed up with Merkel to set preconditions for the new EU bailout fund. Along with a common corporation tax rate, these include a higher retirement age and a reduction in the labour costs of countries with competitiveness problems.
So if Sarkozy, who earns a whopping €231,972 a year, gets his way, Irish workers could have to swallow more pay cuts and wait longer for their State pension.
Sunday Indo Business