“Euro steady” run morning headlines today following ‘agreement’ between European finance ministers in Brussels on heading up a EUR85bn bail out for Ireland. That the Irish government have in the end welcomed the deal despite seemingly grumbling over the rate to be charged is hardly that surprising given that they had absolutely no choice. Damned if they did and damned is the don’t who’d be in the shoes of the Irish coalition government right now as it prepares for even more public and press wrath! The question – Is Ireland done and dusted now and particularly with close to 40% of the EU/IMF loans deemed by the EU to be going to support some very troubled Irish banks? Assuming the Irish budget gets passed, assuming the political situation stabilises, assuming the public anger over how the Irish government had allowed the banks to get into such a mess can start to go off the boil and that each and every Irishman and woman accepts the level of likely pain that each will suffer, provided the Irish government whichever party or coalition is in power six months from now buckles down to ensure that current high public spending levels are trashed, that both personal and corporate taxes rise then the answer would have to be yes – well for the next three years anyway. Chances are though that just like Greece not many of the above combination of requirements will be accepted by the public and that if the government’s own budget plan fails maybe in less than three years time the Irish may be back looking for more.
For now though the European politicians can at least go back to their own Parliaments telling them just how well the ministers working together in Brussels this weekend have done. Great isn’t it but just because Ireland has been stitched up hardly means that a few more days or weeks from now markets will be about to give up relentless underlying concern that they clearly have over stability of Euro area debt. Indeed, given that strong hints that emerged from the Brussels confab this weekend suggesting that there are many in Europe who believe existing bondholders – those that have propped up Irish and other banks for so long – must in future be required to share future pain and also that ministers appear to have agreed that there are limits to the amount of printing of Euro’s and of which I might the current high value when set against that of dollar, yen and pound can hardly be hardly justified judging by the economic mess spread across the whole Eurozone area suggests to me that markets may well take and far more hardened view in the weeks ahead.
Far from halting Contagion then it seems to me that by words rather than any actual deed of specific Irish bailout agreement European ministers may almost unknowingly just have succeeded in making a very bad situation even worse. Certainly they have sown more seeds of more discontent that when grown out will play down hard on the future course and scale of Euro membership and maybe even harder still on the future of the European Union itself.
Did the virtues of the EU peak at Maastrict? Probably it was making Lisbon little more than a bad joke. Forget what the technical analysts say on the Euro, no matter what artificial value it is currently held it too is on the way down albeit quite probably not completely out. Be certain too that with political and monetary union being now as far away as ever to the point of being seen by most as an impossibility it is noticeably that almost by the day the future course of both the Euro and European Union appears to be being dictated by Germany in the form of one very powerful woman – Angela Merkel. No longer will Germany bear the burdens of financial hardship that are caused by pains of its fellow EU members it seems. No longer will bail-outs be automatic and they must encompass bondholders sharing the pain. Careful to avoid new frictions and with a leader who is probably the least popular of any in living memory France stays alongside Germany watching, waiting but failing to give any new lead. Bearing its own heavy economic burdens Britain kowtows with its partners for now careful to avoid upsetting the applecart. It could hardly do anything else but what I wonder will Britain do when and if the Spanish situation finally blows? Perhaps it is here that we will see a new inquisition!
Markets will as they have always done have the upper hand. Ignore them at your peril is the message to EU member governments and don’t think for a moment that they can be bought off with political rhetoric. Let us dream what could yet become a reality – for now it may just be words but who knows when and what specific event will lead to a dramatic downsizing of the Euro. It seems almost banal to say that a one size fits all strategy was never going to work but let us at least give them the credit for spending twelve years attempting to find out. Sure no matter what we should believe that the Euro will survive in some form or another but my guess is that five years from now membership may consist predominantly of what we call Northern European members. The big question and the one that is and will remain difficult to answer is whether a partial break up of the Euro would leads to the breakdown of the European Union? Of course, should they be called upon and having confirmed that the stability fund that please remember was one that was really never supposed to be used means that if required they and the IMF will assist poor old Portugal without as much as a cough or a shout. But when and if it comes to a debt market implosion in Spain EU ministers would find that they have a situation on their hands that may well be well be well beyond their ability to resolve by agreement. Back to reality – are we witnessing the early stages of a break down of the Euro and indeed, possibly the European Union as well? Chances are that we really are!
