Ireland won’t get what is fair or best – we will get what we negotiate
The new Irish government needs to be able to answer these questions: “What is the minimum acceptable debt settlement with the EU that will be sustainable? And what will we do if we can’t achieve that level of settlement?”
Barring a real shock, the Irish General Election is sleepwalking into an inevitable conclusion, where Enda Kenny of Fine Gael will be the next Taoiseach. The only question of some interest is whether or not he will need the support of a minority party and/or independents to form that government.
The election is merely a prologue to the next act in Ireland’s drama. With the near-certainty that Kenny will be Ireland’s new Prime Minister, we must turn to the renegotiation of Ireland’s debts. In voting out the incumbent government, one which committed the country to the current IMF/EU bailout, the Irish people have effectively rejected that deal. However, the mealy-mouthed words of Fine Gael and its leader on the issue of debt restructuring (and in particular the issue of paying bondholders) as well as the cosying-up between Kenny and Merkel/Barroso in recent weeks, means that the EU probably will not see the mandate in the same way.
As has been argued here and elsewhere (most notably by David McWilliams), a referendum is likely the only way to ensure the mandate of the Irish people is clearly understood. But before we get there, we need to think more deeply about the negotiation that will begin soon.
If you spent any time on an airplane in the 1990s and leafed through the inflight magazines you will remember the Chester L. Karrass adverts for negotiation classes. The tagline was “you don’t get what you deserve, you get what you negotiate”. That has always been true and the key to great negotiation is effective preparation – understanding the nature of the negotiation, the motivations of those involved, and the potential outcomes available.
When I watched Enda Kenny interviewed by Ursula Halligan on TV3 on Monday 21st February – whilst allowing for the usual politician’s desire to stay on message – I didn’t get the feeling that our new government are adequately prepared for the negotiation to come. (What of the civil servants or permanent government? They didn’t do a great job last time around…)
One of the key aspects to preparing your negotiation is knowing the “Best Alternative to a Negotiated Settlement”. In plainspeak, this means the position at which you will walk away and suffer the consequences of not reaching a deal. The challenge with the Irish debt negotiation is that the default position is the current deal – which we all agree to be unacceptable. That means we have to have a planB as Ursula called it in the Enda Kenny interview. It means we need a “nuclear option” that forces our counterparts in Europe to a position that is more acceptable to us.
That nuclear option would be to walk away from our existing debts (banking at least, possibly sovereign) and deal with the consequences.
You can only use the nuclear option in a negotiation strategy if your counterparty believes you are willing to carry it out.
We could spend a whole post debating the consequences of the nuclear option. What would be the political fallout in Europe? Would Ireland have to leave the Euro? Where would we get the money to bridge the sovereign deficits that we will certainly continue to run? Someone in government needs to be working very hard on this scenario – the planB.
Of more immediate concern is for Ireland to decide what is an acceptable deal. This is tricky. A referendum, as with the recent Icelandic case, could easily reject anything that involves paying banking debt with Irish taxpayers money. We all know that the best deal for us is to have the slate wiped clean and all banking debts – future and already borrowed against – forgiven for us. Our only debt would then be the sovereign debt we have built ourselves as citizens (still a major challenge as Ronan Lyon points out on thepeopleseconomy.com site Day9).
So we need to look very closely at our “walk-away point”. What is the minimum acceptable debt settlement that experts like those supporting ThePeoplesEconomy.com would advise to the Irish people “this is sustainable and the best deal we are likely to get.”
We have heard people talking about two main variables – the interest rates on the debt, and the principal of the debt. Our government needs to work out what objectives would be a satisfactory outcome for us. Is it to borrow money at approximately the same rates as the ECB is getting it (about half Ireland’s current interest rates)? Is it to give bondholders a haircut of 50%? 30%? 80%?
And what will we be prepared to give in return? In any negotiation you always look for things that are “cheap to you, dear to them”. What can we trade to the EU (and in particular the French and Germans) so that they will do the deal that we need?
For example the corporate tax rate is a key bargaining chip. Are we prepared to raise it? In fact, don’t we NEED to raise it in order to help plug the financial gap? Have the government worked out a corporation tax rate that will give a key “win” to the EU, but also have the positive effect of raising Irish tax revenues without (and this is key) being such a hike so as to cause businesses to leave the country or reduce investments. What other things can we concede to help us get to the right deal?
This is a key set of negotiation variables that the government must understand quickly – and the people of Ireland need to understand too, lest they be asked to vote in a referendum whether they think that Enda has got us a deal that we are willing to accept.