Irish problems highlight euro faults

Irish problems highlight euro faults

26 Nov 2010

stefan-auer-thumb Dr Stefan Auer
Email: s.auer@latrobe.edu.au

First published in The Australian on November 24, 2010.

It required tremendous courage to embark on the project of a European common currency, the euro. More courage will be needed still for European politicians to admit that the euro is not working.

The alternative is a disorderly demise not just of the euro zone, but potentially of the European Union as such. The changing fortunes of Ireland are as depressing as they were predictable. The recipe for its success is proving a recipe for disaster.

A low-taxation regime with a smart, English-speaking workforce and easy access to the vast EU common market led to Ireland's transformation from one of the poorest countries of Europe to one of the richest. In contrast to Greece, the country was able to translate generous EU subsidies into consistently high levels of economic growth. Its per-capita GDP is still about 20 per cent higher than in Germany.

Until recently, Ireland was presented as a textbook example of how beneficial EU membership has been particularly for small member states. Traditionally, Irish people viewed Europe as a welcome counterweight to the influence of Britain.

Enter the global financial crisis. Its impact on Ireland - an open, globalised economy - was exacerbated by the fact that by losing control over their currency, the Irish had severely limited tools to adjust to radically changing conditions. In fact, the common currency can be partly blamed for the Irish housing bubble, which is at the heart of current problems in the banking sector.

The availability of cheap credit, made possible through the euro zone, led to the overheating of the Irish economy up to 2008, making the sudden decline so much more painful. The package negotiated between Ireland, the IMF and other euro-zone members might pacify the markets, at least in the immediate term, but it will permanently damage both the Irish perception of Europe and European perceptions of Ireland.

Once again, the European common currency that was created to bind the nations of Europe closer together will end up strengthening underlying prejudices and mutual hostilities.

Eurosceptic sentiment is not new to Ireland. Despite palpable economic benefits, the Irish electorate has been increasingly wary of European integration, fearful of supranational tendencies advocated by Brussels.

Twice in the recent past, the Irish people rejected major treaty innovations out of fear that they would further undermine their sovereignty: the Treaty of Nice in 2001 and the Treaty of Lisbon in 2008.

Twice they were encouraged to change their mind following reassurances from Brussels and European partners that they would maintain control in areas that matter to them, such as neutrality and taxation. They voted yes in 2002 and 2009.

Irish concern for sovereignty partly explains the strange developments that preceded the deal reached in Dublin. It almost seemed that Ireland had to be forced to accept outside help.

While the high-powered delegations of the IMF and the European Central Bank were arriving in Ireland, preparing for negotiations about the bailout, Irish politicians maintained that they didn't need any help. This was not irrational posturing, but a well-founded fear that money comes with conditions attached that will amount to denying Irish people control over their own destiny, if they ever had it.

Whether Ireland will have to increase its extremely low corporate tax rate (12.5 per cent), which is resented by other euro-zone countries, particularly by France and Germany, or further reduce its spending on services, either will smack of foreign domination.

This is what makes the common currency so explosive politically. Not surprisingly, Irish citizens feel betrayed by their political elites. What is worse, however, is that they might also feel harshly dealt with by their European partners, or, to be more specific, by Germany. This is the troublesome constellation towards which Europe is heading: Germans are not happy to be Europe's paymaster, but pay they do. Yet, in return, hostility towards Germany is growing.

Marek Cichocki, one of the leading Polish commentators on EU politics, observed a few months ago, not without schadenfreude: "If Germans want to rule, they must pay."

They don't want to rule, actually, but because they are paying they cannot escape responsibility for ruling.

Alas, that is the perverse result of the euro zone. It was meant to embed Germany even more deeply in Europe but it ended up turning it into a reluctant hegemonic power resented by its partners.

Stefan Auer is a senior lecturer in history and politics at La Trobe University, Melbourne, and holds a Jean Monnet chair.

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