Agendas clash in Irish rescue ballet
In the murky ballet over a financial rescue for Ireland, the agendas of the key players in Europe are often at odds, clouding the message to markets and deepening the sense of crisis in the euro zone.
The latest country in the currency bloc to come under bond market pressure over its finances, Ireland is resisting a push from some European officials to apply for assistance out of an avowed determination to preserve its sovereignty, but probably also due to electoral considerations.
The European Commission and the European Central Bank have an interest in an early resolution to prevent contagion causing a wider euro area meltdown, as it threatened to do at the height of Greece's debt crisis in April.
Ireland's position is different because it is fully funded to mid-2011 and does not need to tap the markets immediately. But its state-guaranteed banks, weighed down by bad loans granted during a property boom, are largely shut out of inter-bank lending and heavily reliant on ECB funds.
Dublin's European partners have mixed motives, with fears of contagion balanced by domestic resistance in Germany to another bailout, and a tactical interest among weaker euro zone states in keeping market and EU attention focused on Ireland rather than on their own problems.
Here is a look at some of the avowed and unavowable motives of the players in Europe's Irish stew.
The government says it is defending the independence of the Irish Republic, which celebrates 88 years of freedom from British rule on December 6, a day before a crucial austerity budget.
"It's been a very hard-won sovereignty for this country and this government is not going to give over that sovereignty to anyone," Batt O'Keefe, minister of enterprise, trade and innovation, told national broadcaster RTE on Sunday.
Prime Minister Brian Cowen's battered cabinet is especially keen to avoid the humiliation of having to go cap-in-hand to the European Union and the International Monetary Fund before a crucial by-election on November 25, Irish politicians say.
Finance Minister Brian Lenihan is putting the finishing touches to a four-year 15-billion-euro deficit cutting plan to be announced later this month. While EU officials are involved in those discussions, they would have more power to set the terms if Ireland were under an EU-IMF program now.
Like other countries on the brink, Ireland may be able to obtain easier rescue conditions by playing for time and using the contagion risk if aid is delayed to wring concessions.
The government may also want to pin the blame on Brussels or Berlin for unpopular spending cuts or humiliating tax rises such as any increase in Dublin's iconic ultra-low 12.5 percent corporate tax rate.
Ireland's opposition parties want Cowen's administration to take the blame for the most unpopular austerity measures before they force a general election which opinion polls suggest they should win by a large majority.
Their interest is to make the government look weak in having to run to the EU and Germany for aid, and dishonest in denying the existence of talks on assistance.
The center-right Fine Gael and center-left Labour party, likely partners in the next Irish government, may also want to dodge responsibility for putting up corporation tax, which a Labour finance minister cut to its current level in the 1990s.
European Commission and ECB
The European Commission and the ECB share a concern to move quickly to avoid contagion in the euro zone, which may partly explain reports from EU sources late last week that Dublin was already in talks on a possible rescue.
ECB Vice-President Vitor Constancio, speaking in Vienna on Monday, highlighted the Irish banks' problems while making clear that the EU rescue fund could only lend to states, not banks.
"The facility lends to governments and then the governments of course may use the money to that purpose in similar lines that exist for Greece. The same could be done for Ireland," he said, while stressing it was up to Dublin to apply.
The Brussels executive has an institutional interest in making sure the Commission, and not the IMF or the big EU member states, sets the terms of an assistance package.
Both the Commission and the ECB criticized German demands, accepted reluctantly in principle by EU governments last month, to change the EU treaty so that private bond holders share with taxpayers the burden of any future financial crises after 2013.
Some in Brussels and at the ECB may be hoping a backlash among euro zone countries may force Berlin to retreat, but Berlin has domestic imperatives for pressing its demand.
The ECB has an interest in getting Ireland sorted out fast to avoid derailing its own exit strategy from crisis measures such as government bond purchases and liquidity assistance to troubled banks.
Some reports have cited Germany as a key player pressing for Ireland to accept EU aid, but Berlin's denials seem plausible.
Chancellor Angela Merkel faced huge public opposition to bailing out Greece in May and in agreeing to a broader financial safety net for other troubled euro zone countries.
Talk of a second bailout comes at a time when the German Constitutional Court is considering the legality of the existing rescue mechanism in light of the EU treaty's "no bailout" clause, and with Merkel's party trailing in opinion polls before another key regional election next year.
"With each new crisis, with each new bailout, public opposition in Germany to the euro project will grow. This is a balancing act for the government that it won't be able to survive over time," said Wolfgang Nowak, director of the Alfred Herrhausen Society, a Deutsche Bank think-tank.
Berlin too has an interest in avoiding contagion in the euro zone, and its banks are among the most exposed, along with Britain's, to Irish bank debt, according to official data.
After being blamed for foot-dragging in the Greek rescue, it does not want to be made a scapegoat for Ireland's woes.
German politicians have made no secret of their longstanding desire to force Ireland to raise its ultra-low corporate tax, a thorn in the side of Europe's higher-tax states and long regarded as unfair competition from a country that used to be a major beneficiary of EU regional aid.
Berlin, Europe's biggest paymaster, will want to call the shots on the terms of any assistance program for Dublin. But Merkel may need to shield Ireland from market pressure to convince EU partners to go along with her demand for "haircuts" for private bondholders in future bailouts.
Other EU States
All euro zone states share an interest in avoiding contagion that is affecting their borrowing costs and market credibility.
France and some other south European states are keen to draw the political lesson that Ireland's low-tax, deregulated economic model was the root of its downfall and is inappropriate for the rest of the euro zone.
Greece, which despite draconian austerity is falling short of this year's deficit target agreed with the EU and IMF, has an interest in keeping policymakers focused on Ireland's problems rather than its own shortcomings.
Portugal, as next in the firing line, has the strongest interest in making sure a line is drawn under the Irish crisis.
One of biggest dilemmas is for non-euro Britain, which opted out of the euro zone rescue fund but now finds itself and its state-aided banks exposed to the Irish crisis.
London is bound to face strong pressure from the continent to participate in any rescue for Ireland.
[Source: By Paul Taylor and Noah Barkin, Reuters, Paris and Dublin, 16Nov10]
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