Monday 22 July 2019

It's fun to love Europe right now, but foolish to trust too much

Leo Varadkar makes a coherent case for Europe but this love affair could prove ephemeral for Ireland, writes Colm McCarthy

Leo Varadkar makes a coherent case for Europe but this love affair could prove ephemeral for Ireland. Stock picture
Leo Varadkar makes a coherent case for Europe but this love affair could prove ephemeral for Ireland. Stock picture
Colm McCarthy

Colm McCarthy

Writing in these pages before Christmas, Leo Varadkar expressed the view that Ireland's natural home was in the European Union. He wrote: "Over the past few weeks the support we received from the EU negotiators and fellow Heads of State and Government was invaluable and was the clearest possible illustration of the values of the European Union, and why small countries are better off in a big union. It puts beyond any doubt that our future lies in the European Union at the heart of the common European home that we helped to build."

Compared to Britain's very public and unresolved nervous breakdown about its role in the 21st Century world, this is a coherent point of departure for Ireland's foreign policy. The Taoiseach though must surely understand that Ireland's love affair with the European Union could prove ephemeral. Support from Brussels for the retention of an open border post-Brexit has enthused both Government and Opposition politicians and deflated the small band of Irish Eurosceptics. But support from Brussels on this critical issue comes a few short years after the country was the victim of a straightforward stick-up, perpetrated by Jean-Claude Trichet's European Central Bank in Frankfurt with the knowledge, and for all we know, the active connivance, of the French and German finance ministries.

Trichet threatened two successive Irish governments with the withdrawal of liquidity support to the banking system in 2010 and 2011, unless the government paid numerous billions to unsecured and unguaranteed bondholders in bust banks which had already closed for keeps. There were justifiable suspicions at the time, never subsequently dispelled, that Irish taxpayers were subjected to an arbitrary levy, when the country was already in an IMF programme, designed to reassure lenders to the broader eurozone banking system and to the benefit, among others, of fragile French and German banks. The ECB manoeuvre was opposed, at the time and subsequently, by officials at the IMF, non-Europeans and the only members of the troika with no dog in the race.

It has never been tested whether these ECB actions were legal and within its statutory powers. It does not help that the eurozone has since reversed engines - the new bank resolution regime would protect taxpayers from future stick-ups. Indebted countries at the receiving end of on-the-hoof ECB decisions (Cyprus and Greece suffered similar treatment) understandably felt too vulnerable to antagonise the ECB through challenging its actions at the European Court.

In Ireland's case, the damage was not just financial. The Fine Gael-Labour government which assumed office in March 2011 was humiliated in its very first weeks and struggled to regain public confidence. It is not easy to explain the need to collect even small amounts in water charges, no more than the TV licence fee, when the electorate knows that several billions have been gifted to undeserving hedge funds in London and New York under threat from unelected European officials.

Thus the full cost of the Trichet affair was not just the money. The 2011-2016 government lost heavily at the polls, despite exit on schedule from the bail-out programme and the commencement of a strong economic recovery. It can be argued that Trichet's Irish legacy includes, in addition to the debt on the State balance sheet, political instability and a minority government. There is no future for the European political project if unelected and unaccountable officials at the ECB or elsewhere can impose damage on the national democratic systems of faltering member-states without even the pretence of political legitimacy.

Enda Kenny's Government was assured, at a European Council on June 29, 2012, that: "We affirm that it is imperative to break the vicious circle between banks and sovereign... When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the European Stability Mechanism could, following a regular decision, have the possibility to recapitalise banks directly. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally."

This statement was a fudge but was interpreted by Mr Kenny and his colleagues as a commitment that Europe would pick up the portion of the bill for stabilising the eurozone banking system imposed improperly on Ireland, a member state already struggling with a public finance crisis and reliant on official lenders. The Eurogroup never delivered and presumably never intended to deliver. In hindsight, it is clear that statements of intent from 'our gallant allies in Europe', to quote the 1916 proclamation, are open to subsequent backsliding by the aforementioned gallant allies.

The lesson is straightforward. When important national interests are at stake in the European Union, intermediated in practical reality by French and German civil servants, it is unrealistic to expect the interests of small European member states to prevail, or even to be accorded any particular priority.

It was ever thus: small countries are small. Allies are not gallant, they are just counterparties, sentiment never prevails and interests dominate. Ireland got screwed by Trichet's ECB, not because the continental Europeans hate Ireland, but because, in an emergency, it was small enough to screw. Spain got into serious trouble too, as did Italy, and both were able to exert greater influence for the simple reason that these are not SETF (Small Enough to Fail) countries.

The deal last month in Brussels which facilitated the next phase of the Brexit negotiations contained another Euro-fudge about the border with Northern Ireland. This fudge has correctly been seen as the best that Irish politicians and diplomats could achieve in the circumstances. But the Brexit negotiations will in due course involve important trading interests for France, Germany and the rest of continental Europe. The likelihood is that Britain has failed to minimise the damage and there will be no 'soft' Brexit, with Britain staying inside the European Economic Area in a Norway-style deal, or a customs deal a-la-Turkey, or both. Britain, in so far as one can see through the London fog, is headed for third-country status, a free trade deal on the Canadian model which means some form of harder border with Northern Ireland.

But it also means that there will be a free-for-all about the nuts and bolts of the post-Brexit deal from every protectionist lobby group in Europe. The notion that the major continental European countries are nature's free traders is an illusion. The Brits are quitting and the Irish, natural free traders as are all small countries, will lose an important ally. French and German business lobbyists are entirely capable of using Brexit as an opportunity to regress into a style of protectionism restrained during the years of British membership. A good example is the common aviation area: both Air France and Lufthansa have already signalled their joint intention to exploit Brexit to inhibit UK-based airlines in the European market.

With the Brits departing the club, a further centralisation of EU political decision-making becomes likely, involving issues crucial for Ireland like tax policy and the exclusion of the IMF from any effective role in eurozone countries. It's fun to love, but foolish to trust, your 'gallant allies in Europe'.

Sunday Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss