ON WEDNESDAY evening Portugal’s caretaker prime minister conceded that his country would need financial assistance from its EU partners. Just hours later, on Thursday morning, the European Central Bank confirmed that it was raising interest rates. Neither development is good for Europe. Neither development is good for Ireland.
In recent weeks, the willingness of international financial markets to fund the Portuguese state evaporated. By early this week, the country’s own banks stated that they would buy no more government bonds. Portugal had run out of road. The EU’s more solvent states will step into the breach, yet again, to prevent a sovereign default. But this cannot go on much longer. There are limits – financial, economic and political – to the number of countries that can be rescued. The euro crisis is the most serious challenge a unifying Europe has faced in six decades. The seriousness of the crisis was encapsulated by the recent blunt prognosis of the German chancellor. “If the euro fails, Europe fails,” said Angela Merkel. This was not mere rhetoric.
Portugal’s joining of Ireland and Greece in the ignominy of bailout makes it the third euro area member to need aid. Yesterday in Hungary, where the EU’s finance ministers met, the latest (Iberian) eruption of the euro zone crisis dominated discussions. The already difficult task facing Minister for Finance Michael Noonan in persuading his counterparts to make concessions on the terms of Ireland’s bailout, was made more difficult still as the terms of Portugal’s rescue dominated discussions. In almost a month in office, the new Government has nothing to show for its efforts to improve the bailout terms. Among other things, this will give those who question Ireland’s European vocation more reason to doubt.
Thursday’s decision of the ECB to raise interest rates will do little to endear the EU to hard-pressed Irish households. Sooner or later all the banks will pass on to consumers the higher rate that they have to pay for short-term money. Although only a quarter of 1 per cent, the hike will make the struggle to keep heads above water all the more difficult for households already struggling with income reductions and tax increases.
The ECB’s decision will also add to the strains between the strong centre of the euro and weak periphery, which includes Ireland. The bank would have been warranted in ignoring these strains if there was a clear and present danger of inflation running out of control. But there is very little evidence of such. Euro-wide underlying inflationary pressures are weak by all measures, including wages. With unemployment remaining stuck at an unusually high 10 per cent for the zone as a whole, wage growth is very weak. Even in Germany, where growth is strong and unemployment at its lowest since unification, wage growth remains well within the limits warranted by productivity growth. Having bolstered its already ironclad inflation-fighting credentials by this week’s rate rise, the ECB should pause until such time as there is stronger evidence of the need for tightening.