Peter Jones: EU fuelled Irish folly to kill the tiger

IN THE wave of elections across Europe, which so far have shown popular rejection of austerity, one imminent vote has been forgotten about. Next week, Ireland will vote on acceptance of the proposed European fiscal stability treaty. The outcome could have a profound effect on the eurozone crisis, but which way it will push is hard to tell.

However, if current polling is correct – that approval of the treaty will be given by a margin of around three to two – one thing is certain. Ireland will be giving up, almost at a stroke, much of the independence it fought for centuries to gain, a lesson which in turn will have an effect on the independence debate here in Scotland.

For much of what follows, I am indebted to Tom Gallagher, professor of politics at Bradford University and a long-time student of nationalist politics. He sent me a copy of a paper by him published last week which argues that while Irish politicians may be partly to blame for the financial crisis which engulfed their country in 2009, EU politicians and institutions should really be carrying the can.

Ireland, he notes, has the dubious distinction of going from EU hero to zero in quick time. After Ireland joined the euro, it boomed. In 1985, per-capita GDP was about 60 per cent of the EU average, but by 2005 it was 130 per cent of the average. Population numbers swelled from 3.4 million in 1981 to 4.2 million in 2006. Unemployment plummeted from 16 per cent in 1994 to 4 per cent in 2000.

These were the years of the “Celtic tiger”, when the world, including SNP politicians, flocked to learn the lessons. Then came the financial crisis. Anglo-Irish Bank was fully nationalised, Allied Irish Bank and Bank of Ireland were nationalised, and as their losses in the collapsing property price bubble became known, the Irish government took a €85 billion bail-out from the EU.

Unemployment soared to 14 per cent, pensions and welfare payments were cut, real per-capita income fell, property values halved, and the spectre of emigration of the brightest and best reappeared to haunt the Irish people. If ever there was an example of the excesses of boom and bust, it is Ireland.

Prof Gallagher acknowledges Irish folly of allowing Irish banks to lend two to three times the country’s national income, the corrupted cosy links between politicians, bankers and real-estate interests which allowed that inflated lending and an unsustainable property price bubble, and the total failure of Irish banking regulators.

But he argues, the EU bears a lot of the blame too, cheerfully permitting French, German, and Belgian banks to lend money to the Irish banks (who had run out of deposits to lend) to fuel property lending without being at all concerned it was causing an astonishing bubble – house prices in Dublin rocketed by 500 per cent inside a decade.

This lending, however, was the reason that the Irish government, to prevent a potentially disastrous run on its banks, guaranteed not just deposits in them of its own citizens but also the money loaned by foreign bondholders. Unlike Iceland, which effectively repudiated foreign deposits in its banking crisis, Ireland was a member of the euro and a similar move by Ireland would have caused a European banking crisis.

But the price of this guarantee, argues Gallagher, and the cost of the consequent €85bn EU bail-out is now being borne entirely by the Irish people who are looking at a future “of unrelieved economic decline marked by plunging living standards, mass unemployment, and emigration.”

This verdict, looking at current forecasts of Irish economic growth this year of between 0.5-0.9 per cent (not dissimilar to UK growth forecasts), is a bit apocalyptic. Nonetheless, a similar view among the Irish people ousted the Fianna Fail government in February, installing Fine Gael and Enda Kenny as Taoiseach.

Mr Kenny promised to renegotiate the terms of the EU loan. Indeed, he achieved it, getting the 5.7 per cent penalty interest rate on the main loan reduced to between 3.5 - 4 per cent and a 2.9 per cent rate on a subsidiary part of the loan cut to nil in 2011, saving his government about €1bn a year in interest payments. The lengths of the loan periods were also doubled.

Prof Gallagher argues, with some justice in my view, that the EU should have recognised its own part in Ireland’s downfall and been prepared to see Ireland’s foreign creditors pay some price for their folly in fuelling the boom. But in a bloc where saving the banks from their own stupidity and preserving the euro have become the dogmatic norm, such solutions have become unthinkable. Indeed, the Irish seem willing to accept that, as will probably be shown when they look likely to vote ‘yes’ to Europe’s fiscal stability treaty.

Television pictures of soup kitchens on Athens streets seem to be quelling any thoughts of rejection. This will have interesting consequences post-June 17 when the Greeks may well elect a government determined to renegotiate their bail-out.

The Greeks could credibly argue that they merely wish to emulate Ireland and the relative stability the Irish re-negotiation appears to have achieved. On their other hand, EU leaders may reject such moves, arguing that the Irish people have accepted the austerity their bail-out entails.

While we wait to see how that plays out, the central fact is that the Irish are accepting that their government’s tax and spending policies will be not just scrutinised, but subject to amendment by Brussels bureaucrats.

A sign of just how tight the reins will be came last November when members of the German parliament’s budget committee saw, and leaked, details of the Irish government’s budget plans, which were not due to be announced until December.

There was uproar, to no avail, in Dublin. The hard lesson for nationalists, whether Irish or Scottish, is that in a currency union, whether euro or sterling, is that there ain’t much independence.

An independent Scotland, because it would inherit a large national debt, would have to submit its budget to Brussels or London scrutiny and, potentially, a veto.