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Marc Coleman: We've a bad hand, but the poker game is not over yet

'And Spanish wine will give you hope, my dark Rosaleen." In Roisin Dubh, the poet James Clarence Mangan romanticised the eternal promise of help from Spain. Always just over the horizon, it kept hope alive in Ireland's darkest hours. Last week that hope returned.



Last Monday it tantalised us as Leo Varadkar spoke of any aid to Spain in relation to bank debt being applied retrospectively to Ireland. Then it started to taunt us.

German Finance official Martin Kotthaus announced that there was "no need for movement at the moment" and later in the week ECB President Mario Draghi said there was "no quid pro quo" for our positive referendum result. In theory he is right.

Then Leo appeared to change tack, announcing that no "angry demands" would be made by Ireland if Spain got a deal on its debt. Polite, firm ones would do just fine, actually.

Last Thursday Tanaiste Eamon Gilmore warned us against "hanging our hat" on Spanish hopes. So has the Government given up on a Spanish-related deal? If it has, it has done so just as such a deal is becoming a reality.

A warning by Spanish Finance earlier in the week that Spain would be "shut out" of credit markets looked foolish last Thursday when €2.1bn in Spanish bonds were sold in at auction. But when credit agency Fitch cut Spain's credit rating to near junk status on Friday, the cat was out of the bag.

Tomorrow the IMF will recommend an aid package of at least €40bn in aid to Spain's banks. And where Ireland had to meet the cost of its bank bailout alone, an EU summit in just a few weeks will discuss how to avoid doing that for Spain by using funds directly from either the European Financial Stability Fund or the €500bn European Stability Mechanism (ESM) that comes into operation next month.

And just as Ireland benefited from lower interest rates

agreed for Greece, there would be hell to pay if any deal on Spanish banks were not applied to Ireland. And contrary to what some say, an 'ad hoc' approach here is not in our interest.

Favouring bigger countries like Spain, an ad hoc approach would make it easier for the euro's big players to tell Ireland that we are a grand little country altogether and perfectly able to bear the cost of the bailout ourselves. Contrary to perception, Germany's way is in our interest: if direct aid to banks is rooted in a rules-based system, it has to be available to everyone.

And it is towards that outcome that the EU Commission, the ECB and most euro member states are working. But they can't say so.

As Austin Hughes put it last Wednesday, between Berlin and the ECB on one side and Madrid on the other, they are playing poker.

The Germans and the ECB don't want to reveal a willingness to help banks directly -- or cut interest rates -- until ESM rules have been put in place.

Actually this is more a game of bridge than poker: unlike poker, bridge players can send subtle signals to each other. After saying there was "no need for movement" on our bank debt, Kotthaus was careful to add a qualifier: "at the moment".

Nor did Draghi say a bank deal was impossible, merely that it wouldn't follow directly from the referendum (and he is right: whatever impression some on the 'Yes' side may have given, at no stage in the referendum campaign did the ECB promise anything).

Angela Merkel saying that she supports "more Europe" is also a sign that Germany will back a deal on bank debt, provided it is comprehensive and rules-based.

In a subtle north-south auction process -- and with the ECB as an intermediary -- the creditor and debtor nations of Europe are bidding towards just such a solution. Draghi must safeguard the ECB's independence and financial firepower, and Merkel must honour her constitutional obligation to safeguard German taxpayers from their taxes being used to directly recapitalise banks with no discipline whatsoever.

If this month's EU summit can address those concerns -- and they are under strong pressure from the G20 and G7 to get results -- direct ESM funding of a bank rescue can become a reality.

But there are two more cards to deal: the Greeks must elect a workable government that wants to stay in the euro. And French voters must give President Francois Hollande a legislative assembly that he can work with. Otherwise, all bets are off.

Meantime, Draghi had wise words in relation to indirect taxes. As last Tuesday's exchequer data shows, despite a strong boost from corporation taxes, bellwether VAT returns were just 2 per cent up in the year to May, despite the VAT rate rising by one-tenth.

The overshoot in government spending -- not to mention last Thursday's employment figures, showing an 18,000 fall in jobs in the year to March (caused largely by a 16,100 fall in public sector employment made necessary by the Croke Park deal's ban on pay cuts) -- are also both alarming. Having fallen 7 per cent to end 2011, GNP looks like continuing this trend in the first half of 2012.

As well as eroding demand and jobs, the VAT hike is pushing up inflation and this blocks the ECB from cutting rates.

Across Europe, bad austerity (cutting productive capital spending and raising indirect taxes) is being pursued instead of good austerity (cutting wasteful spending).

Instead of a win-win strategy, Europe's leaders are pursuing a lose-lose combination. Draghi was right to point out that there is only so far the ECB can go to boost growth. Countries like Ireland must still make hard choices between successful and failed policies.

If we don't give ourselves hope, no amount of Spanish wine will either.

Marc Coleman presents 'Coleman at Large' each Tuesday and Wednesday from 10pm on Newstalk 106-108fm. Follow @marcpcoleman

Sunday Independent