Inflation is a global concern now. If prices spiral out of control, they will damage European competitiveness, which is already weak. This will give rise to even more job losses across Europe. With unemployment in Ireland heading toward 500,000, the affect would be devastating.
Last week, the pressure forced the European Central Bank (ECB) to increase interest rates by 0.25 per cent. This rise might be the beginning. It certainly is not the end. The Government knew it was coming and yet it did not stand its ground in the EU. We were expecting interest rate cuts, but instead they are rising. By backing down, the door has closed on any meaningful financial negotiations until after European banks undergo their stress tests in June.
While we know our own senior bondholders include some of the main European banks, no one is saying who they are. The stability of the European banking system is dependent on them passing the more stringent capital adequacy requirements under Basel III. While we have been trying to plug the holes in our contaminated banks with ECB funds, banks across Europe have been building up their reserves. This has met with some success, but it is still volatile. In spite of the inherent problems in Irish banks, the stability of the European banking system as a whole is still under threat.
Ireland owes more than €300bn to other European banks. About two-thirds of this is to banks in the eurozone area. German banks are owed nearly €100bn. We owe even more to banks in the UK. In addition, complex financial instruments and even foreign government guarantees account for more Irish debts.
Even if the EU was willing to consider burden sharing by the bondholders, that might cause them to fail the next round of stress tests. For that reason, the EU is deaf to our pleas. The bondholders need to be named if we are to make the right decisions?
During the week, ECB president Jean-Claude Trichet said he was responsible for more than 380 million people in the EU. Ireland accounts for little more than 1 per cent. In the circumstances, what hope do we have of getting a fair hearing? We need to be more forceful with our demands. A burden shared is a burden halved. We are only asking for our counterparties to carry their share. Even the international financial community accepts the only option is for burden sharing with bondholders.
The Government has imposed upon us the most severe austerity measures anywhere. It has redirected funds needed for building schools and to rebuild our economy. Our hard-earned money is being used to cut the losses of foreign banks.
We are not being dealt with fairly and this will be our undoing. If the Irish banking system collapses, it could be the beginning of the end for other banks in the eurozone and the euro itself.
A collapse of the Irish banking system would make a serious hole in the funds that have been put in place by the ECB. If this happened, the contagion would most likely spread quickly and drag Spain, Italy and Belgium into the crisis. That would almost certainly bring down some major European banks.
Some of the European banks are recovering under their own steam. Their recovery is likely to create a disparity with those still struggling to raise capital. This could be a matter of concern for Germany in particular. The success of the strong may be the undoing of the weak.
Our Government shut the door on any burden sharing after only three weeks in office. It was like watching a boxing match. But when the bell sounded, they threw in the towel before striking a single blow.
Many of our developers are staying quiet and NAMA is old news. We need to revisit this and soon. We cannot let the banks and developers off the hook? Is that what NAMA was set up for? The burden that should have been borne by the developers has been transferred to the taxpayer.
We now know that the German taxpayer has no wish to lift this burden, and understandably so. Before we can expect to be dealt with fairly by the EU, we need to deal with the offenders at home. The EU, the ECB and the IMF will impose more austerity measures on us if we do not draw a line. With inflation rising globally, the EU banking crisis has moved to centre stage. The inevitable loss of our remaining sovereignty is imminent. We need a change in strategy. Between now and June we can restore some credibility.
Burden sharing by foreign banks goes hand-in-hand with wealthy developers coughing up to cover their own losses. The taxpayer cannot carry the cost. It will ruin our economy if those responsible are not forced to pay.
They have hidden behind the veil of "limited liability", they have transferred their assets to their spouses and they've removed their private jets from the gaze of prying eyes. There are even rumours that all is not as it seems in NAMA. Are bad deals being done within this cosy cartel? As long as it drags on, more rumours will spread and public confidence is zapped.
We need a financial solution to an economic crisis. Those who can pay should pay. They should be given no quarter. They used every trick to conceal their assets so as to avoid accountability. In the circumstances, they should not be allowed hide behind "limited liability" or to use tax rules to evade liability.
The Government needs to change the rules. For years our legal system has penalised the weak while protecting the guilty. We should demand justice. When we sort out our own problems we can reopen negotiations in the EU.
Enda Kenny's 100 days are running out. I wish I could say that an end was in sight. The fact is that our politicians are running on a treadmill and going nowhere. They have two months to reel in the wayward developers, stop the banks from screwing their customers and renegotiate the bailout. We may have a small voice, but the next words we speak in Europe could have all the power of a tsunami.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning