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Kenny was never going to be popular in EU anyhow – but Ireland needs to seize this moment

by Aaron McCormack on March 31, 2011

Now that Portugal and Greece are coming to the fore again, Ireland can no longer threaten to be the first and biggest domino in a Euro collapse but Irish leadership should use the shockwaves from today’s stress tests to significantly, and selfishly, up the ante in Europe – relationships be damned.

The Irish banking and debt crisis, made worse today with the bank stress test results, seems set to force the country to¬† a choice of two stark places- continued “extend and pretend” within a general Eurozone crisis, or a “nuclear option” that sees the country threaten to leave the Euro and be willing to act on that threat.

Since Enda Kenny became Taoiseach (Prime Minister) in early March everything that could go wrong seems to have gone wrong. First, the various EU summits have not gone well, culminating in a very frosty reception for Kenny from the German and French leaders in particular. Faisal Islam (follow @faisalislam on Twitter) has had an inside scoop on the EU meeting (presumably from British officials) and has indicated that Enda Kenny has already burned bridges with Sarkozy and Merkel.

In addition to that, today’s bank results, stress tests and subsequent fallout shows that Ireland has not fully accounted for second-order mortgage default issues that sit behind the general banking malaise. This puts a further $30bn hole in Irish sovereign finances if the state continues to apply a blanket guarantee.

If we accept that the “extend and pretend” option, even with some adjustments to principal and interest, will be unpalatable to the Irish electorate over time, it seems that the nuclear option is called for.

Let’s be clear – whilst Ireland has some room to increase general taxation (and should consider some movement in the totemic corporate tax rate) the mathematics do not look good. The best examination of this is in David McWilliam’s piece a few months ago…
(http://www.davidmcwilliams.ie/2011/02/23/bit-of-something-is-better-than-all-of-nothing-for-ecb)

The choice for the Irish people and thus, one would hope, their leadership, is to decide if their local pain is worth it in order to help the Franco/German axis defend a currency and monetary union that may already be doomed.

Like the Icelandic people, there will be a price that they will be willing to pay to be part of the club. But that price already looks far too high – it will be interesting to see if the Irish people are given a democratic instrument to express collective rejection of the current path.

The nuclear option means that Ireland has to at least threaten to leave the Euro – with all the havoc that will wreak on i’s current Eurozone partners. This would be a completely selfish act – but in some respects so is France and Germany’s insistence that Irish taxpayers have to pay the gambling debts of private French and German banks.

Ireland needed to take this approach from the get-go. I have already outlined in previous posts that unless we handled the negotiation with great precision, we were doomed. Kenny has ended up with the worst of all worlds – he has broken relationships with the Germans and French without being serious enough about the threat of bringing down the Euro. Now that Portugal and Greece are coming to the fore again, Ireland can no longer threaten to be the first and biggest domino in a Euro collapse. But because Ireland has a fundamentally sound economy it can still threaten further havoc in order to get terms that its people can live with – if we have to leave the Euro, we have the credibility to go it alone.

Irish leadership should use the shockwaves from today’s stress test to significantly, and selfishly, up the ante in Europe – relationships be damned.

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