INSIDE POLITICS:AS EUROPEAN leaders belatedly inch towards a deal to save the euro, the Irish Government and people are soon likely to be faced with a fundamental choice: what price are we willing to pay to stay in the euro zone. Logically, the decision should be a no-brainer.
While the budgetary discipline required to stay with the euro will certainly be tough, it will give the country a reasonable long-term prospect of retaining the prosperity that has characterised the past two decades.
The alternative will be to opt out of the euro zone and risk all on an uncertain future that could so easily descend into economic and political chaos. Yet the siren voices who have been so incessant in making the case for burning bondholders and avoiding hard budget choices are likely to become even louder in arguing the anti-treaty case.
These arguments will have an appeal for a big part of the electorate, desperate for some magic solution to the country’s woes. Voices from the far right and left are already painting an enticing picture of how an Irish currency decoupled from the euro and linked to sterling would bring us to a better world.
Far from being the road to prosperity, however, it is more likely we would quickly drift back to real poverty, on the scale of the 1950s, if we reverted to being a satellite state of the UK with monetary policy set by the Bank of England. How we would go about paying our massive euro debts with a devalued Irish currency is just one of the problems such a scenario would create.
Over the next few months, if all goes well, there will be agreement at EU level to a series of binding budgetary disciplines. This will probably require treaty change and, even though that may result in a bitter referendum, it is very much in Ireland’s interest that it happens. In the long run, such a development will ensure the Irish people will be saved from a repeat of the economic indiscipline and political incompetence that characterised the Bertie Ahern years.
Irish politicians and the media are already focusing on the threat to Ireland’s 12.5 per cent corporation tax rate as if it is the only important issue for debate. While President Nicolas Sarkozy has certainly targeted low corporate tax rates, Germany has taken a very different view, while the UK and the countries on the eastern side of the EU will all block the French threat from their own perspectives.
Whatever treaty changes emerge, harmonisation of tax rates is unlikely to be one of them. What Irish negotiators need to focus on is not just what we want to block but what kind of treaty changes we favour. EU institutions’ loss of power to the governments of the big powers is a trend that we should work to have reversed.
The Irish Government will face a massive task in selling whatever package emerges to a battered electorate. The Coalition has not helped its own case by incessantly blaming the troika for the austerity required to get the structural deficit under control. These measures would have been essential even without outside political pressure. Otherwise the bond markets would have quickly reduced us to the status of another Argentina.
A great deal of nonsense has been spread about economic sovereignty since Ireland was forced into the bailout a year ago. How much economic sovereignty did this State have between 1922 and 1979, when we were linked to sterling? The Bank of England did not consult governments in Dublin on monetary policy. Once the Irish government started going to international bond markets to pay for budget deficits in the 1970s, our sovereignty was eroded from another direction, as a dependency on borrowing exposed the country to the vagaries of the bond markets.
The fact our EU partners and the International Monetary Fund stepped in with the bailout a year ago has given us the chance to sort out our public finances over a number of years. If we had insisted on economic sovereignty, cuts of close to €20 billion in one go would have been on the menu. The political, social and economic chaos that would have ensued from such a shock would have tested our democracy to its limits.
That is the background against which the adjustment of €3.8 billion that will be unveiled next Monday and Tuesday should be judged. Hopefully Minister for Finance Michael Noonan and Minister for Public Expenditure and Reform Brendan Howlin will be able to make a convincing case for whatever adjustments finally emerge.
The uncertainty generated by the leaks and kite-flying of Minister for Social Protection Joan Burton and Minister for Health James Reilly have only made their jobs harder.
While any cuts in public spending are always unpalatable and will throw up hard cases, it is worth remembering a few facts.
During its period in office between 1997 and 2010, the Fianna Fáil government increased the standard old age pension by 120 per cent, unemployment benefit by almost 130 per cent, child benefit by an astonishing 330 per cent, while the public service pay and pensions bill rose by almost 400 per cent, from €5.6 billion to more than €20 billion. The cost of living increased by 40 per cent in the same period.
The big rise in spending was based on unsustainable taxes from the property boom and it ultimately brought the country to its knees. The banking crisis has added another chunk to the debt, but it can be dealt with more easily over an extended period once the public finances are brought into balance.
Spending cuts and tax increases are the only way the economy can be put on a sustainable basis. The Coalition needs to get off to a convincing start next week so it can bring the rest of the programme along the road to sustainable public finances by 2016. It would also indicate an ability to live with whatever disciplines are agreed at EU level.