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Brendan Keenan: Face it -- we need the financial discipline that Europe imposes

IT'S a choice between our default or Europe's default, said Paul Sommerville, the Independent candidate for Dublin South East. I couldn't have put it better myself.

Not that I'm yet ready to put a 100pc bet on any default. Not even the markets are doing that -- although their odds are pretty high. It's the choice that was aptly put.

As you would expect, Mr Sommerville would prefer to have a home-grown default.

You might not expect that he would have as many apparent allies among the leading politicians in this choice. Yet the squalls of an election campaign have blown many of them on to that surprising shore.

We have been bruised, even humiliated, by the economic collapse but not, it would appear, humbled. Bertie may have gone, but Bertieism will be harder to shift.

That philosophy can best be summed up as holding that there is an easy way out of everything and it will somehow be all right on the night.

The siren call of the easy way out is everywhere to be heard. The bulk of the population need have no fear of income tax rises. There will be a property tax only on places where you don't live.

Pensioners will be protected, including those with six-figure pensions and tax-relief schemes. And Europe will give us more money to help pay for this, provided that we are nasty enough to them.

Central issue

There were few predictions at the start of the campaign that Europe would become in many ways the central issue. Not just Europe's handling of the economic crisis, but often, it appears, Europe itself.

Mr Sommerville's view, it seemed to me, was that handling the debt crisis nationally was likely to work out better than being part of a European resolution. We know that a European resolution is likely to be long drawn out and messy.

The ability of single national governments to act quickly and decisively looks attractive in comparison. The speed and scale of the US response to the banking crisis is a case in point. A recent Bloomberg analysis seemed quite clear that Iceland had handled things much better.

We will never know what a standalone Irish government would, or could, have done about the banking crisis, but we know Europe had a large hand in what actually happened -- although not in the first, crucial blanket guarantee. So perhaps there should be no surprise that membership of the euro, even of the EU, has been a subliminal issue in the campaign.

Inevitable struggles over corporation tax and binding deficit rules can only add to this, especially since the bulk of voters are too young to remember pre-EU Ireland.

Forty years ago, it would have been the natural starting point for the majority that doing almost anything nationally would almost probably be worse than doing it in a European system. Bitter failure had instilled plenty of humility.

The near-total economic dependence on Britain meant the country was tied to the least successful major European state. It was also the most inflationary state, with regular devaluations halving the value of the pound against the German mark by 1970.

Irish progress could be dated from the decision to open the country's economy to the rest of the world -- especially the rest of the world's capital. Opening to Europe's market would surely mean further progress?

Growth rates

So it has, but a couple of other things happened along the way. Britain ceased to lag behind the rest of Europe quite so badly -- or rather the other countries' growth rates slowed from their post-war surge.

Sterling stopped its secular decline and, partly as a result, Ireland never shed its inflationary tendencies. The desire for income greater than productivity allowed saw more devaluations and, after the creation of the euro, a steady fall in competitiveness.

Now, those fundamental questions of the 1970s and 1990s must be asked again -- but now in less favourable circumstances.

The current situation is more difficult, not just because of the economic crash -- although that must loom large in the discussions -- but because the eurozone of the future will be a very different place from the one we joined.

As summarised by the recent report from the Oireachtas Committee on European Scrutiny, members of the single currency will face more onerous obligations to reduce debt levels, spending and debt limits as a new principle of prudent fiscal policy making, and a broadening of the range of formal and financial sanctions.

There is an echo here of the old arguments about membership of the euro. What would happen in a single currency, it was asked, if we failed to curb our inflationary tendencies and profligate public spending habits?

Well, now we know. It is a sorry thing to have to say but it is hard to believe that monetary independence for Ireland would mean anything other than a return to regular debasement of the currency in order to keep the real value of incomes in line with real output.

Looking at the election campaign, it's hard to believe that the political system has changed its spots, even after two national bankruptcies.


The State will not be able to borrow excessively for a long, long time but that will not prevent it continuing to transfer national resources from the productive sector and individuals to the vested interests, both public and private.

The hopes that membership of a hard, low-inflation currency would impose discipline and realism on Ireland have been dashed.

Just as access to the financial markets in the 1970s was abused to fund excessive public spending and income growth, so too was the access to cheap euro credit in the 2000s. Twice means it is not just coincidence.

If it all goes wrong with the euro -- as it might -- we may not get a third chance to do things better. If we do, the new regime will include another reduction in national freedom of action. Unfortunately, the evidence suggests that we need it.

Perhaps these constraints will finally lead to better allocation and management of resources, where open markets and euro membership did not.

The new belief in the virtues of Irish economic independence still looks like the triumph of hope over experience.

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