David McWilliams: Budget a mere sideshow to Merkozy's grand plan
In the past 24 hours, three dramatic developments have taken place, each of which will have a profound effect on your life in the next few years. Although all three are related, it is not quite clear which one will be most significant.
First, of course, is our own Budget. It has been well flagged, much leaked and seems to be more of a holding exercise than a decisive move one way or another. Many will argue that there is little point in talking about "austerity" while sticking broadly to a plan which sees state spending running at €57bn while State revenue is €20bn less than that.
Others will point out that if the State doesn't fill the gap by spending then nobody else will. The fact is that people are not spending, which means that the economy would contract even more if the State cuts too quickly.
This argument will rage, but it can't be seen in isolation because the legitimacy of the ''cut now or cut later'' discussion is linked to what is going on in Europe. If the Europeans fail to save the euro, then what -- you might ask -- is the point of us being good boys in the eyes of the EU elite? If you believe that the euro will not survive the next few months, then it would be sensible for Ireland to put in train plans to default and devalue, sizzling foreign creditors and starting again. This would mean cultivating a much closer relationship with the IMF because, after all, this is what the IMF does and has done over and over again in the past: it manages these big moments.
So our Budget has to be seen against the background of the second development this week.
The second development and one that may affect you more than any decisions from Merrion Street is the deal hammered out to save the euro by France and Germany on Monday. Germany is the main player here and it is interesting to note the divergence between Ms Merkel's language and her actions.
Last week, she said Germany would do whatever it takes to save the euro; yet she is doing precisely the opposite. In fact, everything Germany has done up to now, makes saving the euro harder, not easier.
Monday's Franco-German pact is likely to be the basis for the EU Summit on Friday.
It envisages a "golden rule" inserted into each country's constitution, which prevents a country from running a budget deficit of more than 3pc, irrespective of the economic cycle.
Such thinking reveals a spectacular misunderstanding about how the economy actually works, how business cycles develop and how recessions affect everything from the money supply to the level of tax generated. Such a fiscal straitjacket guarantees more trouble ahead for the currency.
The second major feature of the Franco-German deal is that no investors will lose any money in the European government bond market ever again.
This is an extraordinary move because it means that the iron rule of capitalism has been turned on its head -- but only for investors. It is now a case of "heads you win, tails I lose" and obviously the bill for subsidising investors will have to be paid by taxpayers. This will happen because recessions do happen.
And if in the course of this recession, European states can't borrow to fill the void left when the people stop spending, then there will be more defaults. If the people are supposed to accept cuts in their services and accept the bill for wayward investors, where is the incentive for the market to lend prudently in good times?
But quite apart from the dodgy economics, it looks likely that the French/German deal demands treaty change in Ireland and therefore a referendum.
A referendum on closer European integration with the promise of more prosperity may stand half a chance of getting passed; but a referendum on closer European integration in order that you pay the gambling debts of professional investors hasn't a hope. This referendum is likely to fail and where will we be then?
The third significant development is the move by S&P to downgrade the debt of six countries at the core of Europe. This is a huge deal, not because the rating agencies have much credibility since their shameful involvement in the subprime disaster but because, maybe as a result of that experience, they are alert to the fact now that there is too much debt in the world and this debt will not be paid in full.
When you take a bit of altitude, you see that the EU is moving to save the banks in Europe and is putting the interests of the eurozone's banks over and above the interest of the citizens. This has been the policy all along and it has failed.
Unless there are large debt writeoffs which are paid for by the creditors of banks, the whole of Europe will end up like Ireland with a zombie banking system which needs to be recapitalised over and over again.
Rather than accept this financial truism, the EU leaders are talking of more and more austerity. But the austerity is not unrelated to the "rigor mortis" in the banks and this is where the three moves in the past day or two converge in a dangerous, self-reinforcing dynamic.
Without bank lending, credit dries up and with less and less credit there is less and less money around, so there is less and less tax revenue, which means more and more austerity.
As growth falls in Europe, what is happening in Ireland will be repeated -- not just in the peripheral countries, but in the core countries too. This is what the rating agencies are worried about. So you can see the direct connection between what is happening in the head office in New York of Standard & Poor's, what is happening in Berlin and Paris and what is happening today all over Ireland as we mull over the Budget.
All eyes are now on Friday and the summit. Germany is clear that it wants a Europe that is more German and this means treaty change. Countries that don't like it can lump it. The German position now with the "golden rule" has become more rigid than ever.
This is not about to change. One thing is sure -- if we are hoping that being the best boys in the class is going to get us anywhere, it is not. We are now part of a German Europe with strict rules applying to all aspects of the economy. That's what the referendum will be about.
And if there is one thing we know, we should never sign treaties with Germany in the hope that Germany is going to become more flexible.