ANALYSIS:THEY DON'T like the term bailout in Europe, preferring to draw a distinction between bailouts and other forms of support, writes PAT McARDLE

Whatever it’s called, it all began with Ireland a year ago. Then, we were in extremis, with the markets reluctant to lend to us and interest rates spiralling. The additional interest paid by the Government, as represented by the spread over 10-year German bunds, widened from less than half a per cent to 3 per cent, giving a total cost of funds of about 6 per cent. At the time this was the highest in the euro zone, though Greece was not far behind (see chart).

Expressions of support from various EU spokespeople, not least the German ministry of finance and the president of the European Central Bank, started the ball rolling and Government action in the form of Nama and the April emergency budget did the rest. With hindsight, we were fortunate to have gone down the road we did. The alternative of job creation schemes or expansionary measures would have been disastrous. Had we attempted to “give the two-fingers to Brussels” as one critic memorably put it, our current situation would likely be similar to Greece.

Greece came under fire when the new government revealed that its predecessor had concealed a rapid deterioration in the fiscal deficit – there were two elections last year. The current government was elected on a populist manifesto and for a few months seemed unable to come to terms with the scale of the task it faced, reminiscent of the situation here in late 2008/early 2009.

Though the European Commission produced various plans, doubts remained about the ability and/or willingness of the Greek authorities to implement them. Market confidence continued to erode and the Greek spread over German bunds widened inexorably to 4 per cent late last month. However, by then change was in the air and the news that the commission believed the Greek austerity plan was demanding but achievable got a positive reception.

Incidentally, this plan envisages lowering the budget deficit by 4 percentage points in one year. This is more than twice the 1.8 percentage point cut in our deficit delivered in December’s budget. The effect was an immediate alleviation of market pressure and Greek spreads fell back to 350 basis points.

However, the attention immediately shifted to other weak peripheral countries, notably Portugal. By now, we were into what Paul Krugman calls “contagion effects”, the spread of crisis to economies with seemingly tenuous links to the original victims. Portugal suffered the most but Spain also came under attack. Stories about the possible break up of the Economic Monetary Union began to appear.

The great European experiment was under attack in a way never seen before and the risk was that the rot would eventually spread to the UK and even the US.

It has long been suspected the EU has a plan for this eventuality but was not prepared to unveil it until absolutely necessary. It seems that time has come.

Again, the Germans were first into the breach. On Tuesday, FT Deutschland cited officials as saying the German government was preparing an assistance package for Greece which could include bilateral aid as well as internationally agreed action at the EU level. At the same time, outgoing Commissioner Joaquín Almunia called on the EU heads of state to make a statement at the EU summit today offering support in exchange for a clear commitment from Greece to put its house in order.

Though nothing has yet been announced, the impact on the markets was dramatic. Both Greek and Portuguese spreads narrowed sharply and the euro regained some poise. The follow-through will be important.

While there are Greek strikes, these are similar to our current public sector action and are unlikely to have much impact.

Some of the measures proposed are dramatic – Greece is trying to do in two months what it should have done in the last 10 to 15 years.

In reality, the EU measures need to focus on stopping the rot and it would be a mistake to introduce measures that are specific to Greece alone.

Article 122.2 of the Treaty provides “Where a member state is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council . . . may grant, under certain conditions, Union financial assistance to the member state concerned”.

It is critical that whatever is done be both effective and be seen to be effective. Otherwise, we shall be back to square one before long. This argues for the creation of a standby facility, funded by one or more member states, and made available to any member facing exceptional funding problems. The conditions attached to any such facility will be as strict as anything the IMF would dream of but it is extremely unlikely that the IMF will have any formal role. It is important that the EU shows it is capable of solving its own problems.