BIG BOYS GAMES, BIG BOYS RULES 1007 XVII

“BIG BOYS GAMES, BIG
BOYS RULES”

A process of change has begun which seems destined to alter
fundamentally the Eurozone. Precisely where this will end is not clear, but
there have been  mutterings from the German Chancellor that the entire European
project could be at risk unless firm remedial action is taken. The cumbersome EU
decision making machinery is now beginning to grapple with the
task.

Recent weeks have not been good. The sticking plaster solution
designed to bail out Greece and forestall bankruptcy failed from the off to
inspire international confidence. With fears growing of  potential threats to
Portugal and Spain it became necessary to revisit the situation . A much larger
rescue plan was hammered out involving agreement on a bailout fund of a trillion
dollars to be financed  partly by the IMF and reluctant agreement by the
European Central Bank to buy government bonds from the weaker Eurozone
economies.

The brave face  put on the plan was that it would forestall
speculation and thus might never have to be activated. The omens are not good.
Overall deficits (i.e. more borrowing) continue to mount, there is evident
resistance in the weaker economies to the spending cutbacks and extra taxation
being demanded and clear differences between and within countries on the best
approach to follow. The plan’s call for increased monitoring from the centre on
individual annual budgets of member states has had a mixed reception.

Economic comment has been that Europe has bought time – the suggestion
being three years – but in a globalised economy this may prove over optimistic.
Market reaction has seen the value of the Euro drift down against the Dollar and
Sterling, shares fall and worry that the international economy may be
precipitated into the much feared “double dip” recession. This last would, of
course, cancel all bets for the short term, but assuming it does not there is
little doubt that the Euro saga has some way to run.
.
The nuclear
reform option would be full or decisive fiscal control from the centre over
individual countries’ budgets. This is feared, particularly in Ireland, as
opening the door for eventual central control over national taxation,
threatening our advantageous – and vital – rate of company taxation and with it
our attractiveness to foreign investors. The anti-Lisbon lobby has now
re-emerged to shout “hands off”, citing threats to our sovereignty. The
government has uttered reassurances that no change to our fiscal independence
within the EU is on the cards and pointed to our continued power of veto over
taxation issues.

This is true in respect of the EU. Whether and for how
long it will apply within the context of membership of the Eurozone is another
matter. Ireland continues to borrow $450 million per week just to run the state
– including  generous provisions for unemployment benefits and (untaxed)
children’s allowances. Our continued ability to borrow rests ultimately on the
confidence of lenders. If there is no confidence there will be no money. This
was about to happen with Greece. Hence the rescues. Hence also the need to
address the emerging weaknesses in the Euro.

Crucial to this confidence
is the attitude of Germany and what happens to the Euro. There is a big picture
here, one that is not immediately apparent and is often overlooked. The last 40
years have seen the slow emergence of a European superpower built primarily
around Germany and her economy. This emerging power is within but not synonymous
with either the European Union or NATO. At times its progress has been slow or
stagnant. At times it has made quantum leaps, which have then had to be digested
and accommodated. Its institutions and borders are incomplete or ill defined yet
their general shape is emerging.

Veteran observers of the Brussels scene
will be familiar with the landmarks in this process. In the 1970s the
transformation institutionally of the EC with the creation of the European
Council structure and the groundwork for a common EU foreign policy (now  a
common foreign and security policy). Next the establishment of regional and
cohesion funds to assist poorer areas, the first groping towards a system of
economic and monetary union and the launch of the Single European Market in
1992, aimed at eliminating internal national  barriers to trade.

In
foreign relations there was the opening of serious dialogue with the communist
bloc, through the CSCE, which, at a non-military level acted as a stimulus to
dissent and fragmentation of the bloc. When communism collapsed there came
German reunification.
The EU then moved swiftly to begin a process which
led, in just over a decade (2004) to a major expansion incorporating most of the
former communist states of Central Europe, with the promise of more to follow.
Under the Schengen Agreement most continental EU members, including the
newcomers, as well as Iceland and Switzerland, have relaxed or eliminated border
controls (one visa fits all). Britain and Ireland have remained outside.

There was also, most importantly, the launch of the Euro, with Euro
currency circulating from 2002 in (now)16 of the 27 EU states. One major player,
Britain, has stayed outside, and most of the 2004 accession states are not yet
ready to join. Here’s the rub. The original rules for the Euro, including fiscal
prudence, have proved inadequate, hence the current crisis. Germany, which gave
up its beloved Deutschemark for the Euro, and prompted by an increasingly
impatient electorate, is pressing for greater controls over national budgets
with enforceable sanctions for laggards.

There is a clear division
within the Eurozone, with the PIGS plus Italy, the major offenders, with yawning
budget deficits and heavy national debt. In recent negotiations the carrot
option seems to be out; the stick remains, with modalities to be worked on in
the coming months. There are emerging public differences between the German
Chancellor and the President of the EU Commission on the need and desirability
of revising the Lisbon Treaty. Given the way Europe normally disposes of
problems, in the short run a compromise solution seems likely. It may prove
unpalatable, but one that can be lived with, for now.

But if the Euro is
to survive, more radical measures will eventually be called for. At a certain
point in this process, possibly sooner rather than later, all cards are likely
to be on the table. The Eurozone is a major plank in the world’s financial
structure with four of the world’s ten largest economies in it. Ireland is a
minnow. The German and French economies are  roughly 15 and 11 times the size of
Ireland’s. It would be naïve to assume that our sensitivities will count for
much if the very future of the common currency, fundamental to the European
project, is at stake.

It should not be forgotten that  our existing
favourable company tax rate itself has evolved from zero, under pressure and
after negotiation. Europe has been good to Ireland, and we have been lucky,
partly because we are small. At present our budgetary strategy has found favour.
We cannot go it alone. We should be wary of declaring  anything unacceptable
from the outset.”

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