Why we have to support Ireland
— Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own. —
Supporting Ireland to the tune of a few billion quid must look like a no-brainer to the British Government. We should not make the same mistake as the Germans, who managed to get the worst of both worlds over Greece – forced by the scale of their bank exposure to support Greece, but providing the money with ill will, causing bitterness rather than gratitude – and now repeating the error in the Irish case.
Our wonderful British banks are more exposed than those of any euro zone member to the Irish debacle, with, at the front of the queue, the usual suspects: RBS and Lloyds-HBOS, the two big nationalised banks. So the answer to those who ask why we are contributing to the rescue package is that it is nothing more than the latest (and probably not the last) instalment of the cost of the bank bailout.
This is something to remember next time you hear one of the banking sector’s apologists crowing about how little the bailout is actually costing and how great a killing we taxpayers are ultimately going to make on our bank shares – and don’t forget to add in the cost borne by us all as bank customers, with the gap between borrowing and lending rates at their highest level in history.
There are of course other economic reasons for supporting Ireland. As we have been repeatedly reminded in recent days, Ireland is a major market for UK exports, three times as important as China and five times as important as India, so we stand to benefit considerably from a revival in its economy.
But economics is by no means the whole of this story. I have no idea what the Great British Public thinks about the support, though I suspect that, given the deep-rooted links between UK and Ireland, it is moderately sympathetic. But whatever the mood, it does no harm at all in terms of the battle for hearts and minds in Britain to see our PM playing the benefactor to a stricken neighbour, serving at one and the same time to exaggerate the difference between us and Ireland (which, as I have argued in previous blogs, is smaller than most people realise) while simultaneously warning that we ourselves would have been the ones holding out the begging bowl, if the overwhelming majority of the chattering classes, including my professional colleagues, had been able to drag us into the euro zone.
What happens next? Portugal, if it has to be taken into intensive care too, is small enough to be manageable. The nightmare is Spain, which is far too big for anything like the same treatment, or even Italy, which is not far behind and, just to make matters worse, could be facing a period of political instability over the next few months.
At this point, readers will be expecting me to discuss the breakup of the euro zone, so it may be worth making one point absolutely clear. If the euro zone had a clearly marked exit door, either Germany would already be looking in that direction and might even have announced its departure date, or Greece would have been expelled, or both. The problem is that to the best of my knowledge nobody has any idea about how to make the break. Even with good will on all sides, which is clearly absent now and for the foreseeable future, it is unclear how a divorce could be implemented.
For example, if Greece were expelled, it would almost certainly walk away from its existing euro-denominated debts, costing other Europeans – mainly banks – tens or hundreds of billions of euros. Any benefit for Greece, however, would be offset by the difficulty of relaunching the drachma which would be, to put it mildly, awkward because the circumstances would mean that the new currency had to earn credibility initially by being even harder than the euro. With the credit markets closed, the implication for Greece would be a regime at least as tough and probably tougher than the one they now face.
What about Germany? What is stopping Germany walking away from a monetary union where it now finds it has been saddled with the role of piggy bank of last resort? Again, the question is how to get from here to there. If Germany simply turned its back on the Economic and Monetary Union, it would probably have to kiss goodbye to most of its outstanding loans to other member countries and their banks, creating an immediate crisis for Germany’s own banks, which would need large scale refinancing. Any remaining euro assets would presumably be rapidly devalued as the currency depreciated.
Almost certainly, the other member countries would decide immediately that the game was up, and a euro zone without Germany, lynchpin of the union and home to the European Central Bank, was no longer viable. This would be the cue for a series of high level conferences to rebuild Europe’s monetary architecture, probably culminating in a relaunched Deutschemark for Germany, but very likely adopted by Austria, Netherlands, and possibly other Central/East European countries too, and a reborn Franc controlled from Paris, but also used by ClubMed.
Of course, this outcome would seriously damage the prospects for the long term EU project, which until now has always managed to avoid being derailed by obstacles, particularly those posed by irrelevant factors like popular opinion.
For those who think this whole scenario is a little far-fetched, a slightly more plausible thin-end-of –the –wedge solution would be for Germany to relaunch the Deutschemark alongside the euro. Back in 1998, I believed that the Europeans would have been best to launch the euro alongside the national currencies, allowing currency competition for at least an interim period until the euro zone had been established. However, what may have been reasonable at the inception of monetary union is altogether a different matter at this late stage. The devil, as always, is in the detail. Under this dual currency system, would Germany use the DM to finance its trade while it continued to use the euro for capital account transactions within Europe? What about the other member countries? Would the new DM be internationally convertible?
Maybe it’s not an economist we need after all, it’s an experienced divorce lawyer – but not an Irish one. After all, according to legend, it was an Irishman who, when asked the way to O’Connell Street, could only reply “well, I wouldn’t start from here if I was you.”