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IT is no longer impossible that we will wake up some frosty morning to be told by a tired and hoarse Enda Kenny that the other eurozone leaders have decided to scrap the euro or eject insolvent countries -- such as Ireland and Italy -- in a last-ditch effort to save the euro.
A few weeks ago, such a scenario seemed far fetched but the Franco-German threat to force Greece to leave the euro has opened a can of worms that will never be closed again -- by making it clear that the euro's largest members now believe membership is optional and reversible. French President Nicolas Sarkozy went a step further this week when he speculated openly about a two-tier eurozone, with some countries effectively pooling financial decision-making.
His comments were followed by a chilling report from Reuters on high-level talks to throw some countries out of the eurozone.
The news agency has often been the first to report major changes in policy during the sovereign-debt crisis -- reports that have often been met with official denials (as the latest report was) and then confirmed by reality. Our own bailout -- first revealed by Reuters and denied by Brian Cowen -- is a case in point.
The consequences of any forced or voluntary departure from the euro would almost certainly include immediate food and energy shortages -- as European countries stopped trading with one another -- until the details were worked out.
Ireland's abundant supply of food would probably prevent widespread hunger but our complete reliance on imported fossil fuels would ensure widespread power cuts in the immediate aftermath and make it very difficult for farmers to bring their crops into the cities.
In the build-up to World War Two, Enda Kenny's predecessors drew up a list of 10 products essential for national survival, including tea leaves and tobacco. It is hard to know what a 21st-century list would include but it is time to start thinking about such things again.
Of course, there are good reasons to believe that it won't come to this. As German Chancellor Angela Merkel remarked yesterday in response to the Reuters report, a new German currency would harden and destroy many German companies in the process. Her country has benefited from the single currency more than most and it is still difficult to believe that the majority of German industrialists would want a return to the Deutschmark.
The problem is that political leaders, citizens and industrialists don't always think with their heads. Germans actively dislike the euro and some of the country's most influential industrialists -- such as the likable Hans-Olaf Henkel -- are campaigning actively against the single currency.
Preparing for life after the euro is no easy task because the global consequences are almost incalculable. HSBC, Europe's largest bank, said in September that a euro break-up would be a disaster, threatening another Great Depression.
The bank concluded that the economies of the eurozone had become so deeply entwined -- with cross-border holdings of assets and liabilities -- that there was now a tangled web of mutual financial dependency.
The reintroduction of national currencies would force a very rapid disentanglement, undermining financial systems, generating massive currency moves, threatening hyper-inflation in the periphery and triggering economic collapse in the core.
It would also send shock waves around the globe, shifting the balance of geopolitical power in ways that are almost impossible to predict.
At the risk of clutching at straws, Ireland would probably fare a little better than other eurozone countries because our economy remains far more exposed to countries outside the eurozone. But there is no doubt that there would be chaos.
The worst-case scenario would be a decision to simply force Ireland to leave the euro. Many will protest that this would be impossible because it would breach all sorts of treaties but treaties can be broken by large countries whenever they choose.
There really would be very little we could do if we Germany, Finland, the Netherlands, France and Austria decided they did not want to remain in a currency union with the other nations. They could leave or we could be ejected; the outcome would be much the same.
The silver lining would be that we could plausibly wipe out most of our debts; nobody could expect Ireland or any other country to honour debts to the European Central Bank if we were forcibly ejected from the euro. This would force the Government to bridge the gap between spending and taxes quickly but also save the State up to €3bn a year in payments for Anglo Irish.
A slightly different, and more plausible, scenario, would be for Germany and the other solvent countries to agree to a so-called transfer union, which would create a European version of the US Federal Reserve in return for one-size taxation and spending policies. This idea, floated by Mr Sarkozy on Wednesday, would force the Irish Government to abolish the 12.5pc corporation tax rate and low taxation popular here.
This is not an option that will be popular with Irish voters or their leaders. At the moment Finance Minister Michael Noonan is calling for the ECB to create a "wall of money" to prop up Italy while resisting any attempts to harmonise any type of tax -- especially corporation tax.
A choice between tax harmonisation and euro membership would present the Government with a dilemma with no easy answer. The two cornerstones of our industrial policy for the past few decades has been to attract US companies to Ireland and to ensure that Ireland remains as close as possible to the heart of the European project.
Those two objectives are becoming increasingly incompatible as the sovereign-debt crisis deepens.
In the end, I suspect that an Irish Government would probably decide that Boston mattered more than Berlin and take measures to stay outside a much closer single currency. However, it is by no means certain that future US presidents would allow US companies to continue to use their Irish operations to evade tax. If this happened, we could fall flat on our face as we tried to steer a middle path between Europe and the US -- and we'd end up with nothing.
SUCH scenarios still seem unlikely to me for several reasons. The first is that it is not in Ms Merkel's long-term interests to break up the euro because Germany has benefited far more from the single currency than any other country. Another reason is the behaviour of the markets; both the euro and share prices have held up remarkably well over the past few months, which tells us that currency traders and equity investors do not expect a major crash.
The final reason is the evidence visible almost everywhere that Europe is slowly coming to its senses. The Government's decision yesterday to scrap wasteful and uncosted infrastructure projects is just one sign that we are all slowly coming to our senses. Still, despite the many reasons for optimism, the Government would be guilty of negligence if it did make some basic preparations for a far less benign outcome. The world is changing so quickly and ominously that we must prepare for all eventualities.
Irish Independent
