Mats Persson

Britain may not be able to avoid bailing out the Irish

Britain may not be able to avoid bailing out the Irish
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This morning, it sounds as though Ireland has finally buckled to demands that they accept a bailout from the EU. Their central bank governor, Patrick Honohan, has said that he expects a "very substantal loan" from Europe – although the details, and debtees, are yet to be clarified.

In the UK, of course, backbench MPs and others have been quick to condemn any move which would force British taxpayers to cough up cash under the EU’s various bail-out arrangements. Only problem is: the UK may not have a choice. The part of the eurozone bail-out package which Britain could be underwriting to the tune of £6-7 billion - the so-called European Financial Stability Mechanism – is not protected by a UK veto. This means that the mechanism can be triggered by a majority vote amongst EU ministers, and that the UK could be outvoted.

 

This comes courtesy of Alistair Darling who signed the deal during that super-weekend back in May, when the UK Coalition government was being formed and the EU/IMF agreed its shock-and-awe €750 billion euro rescue package, bending various EU laws to breaking point in the process (to be fair to Darling the decision to establish the ESFM was also based on majority voting so George Osborne may not have fared much better). 

 

That such a decision – which effectively makes taxpayers in one country liable for the debt of a government over which they have no democratic control – should be subject to majority vote in a forum consisting of 27 different member states is mindboggling, and it takes the EU’s democratic deficit to a whole new level. But that’s what the Coalition government now is facing.

 

Adding to the likelihood of British involvement is that the EU’s second bazooka, the €440 billion European Financial Stability Facility (EU leaders aren’t known for their great imagination when it comes to naming these things), of which the UK is not a part, is subject to unanimity and therefore more difficult to get off the ground quickly.

 

And some EU countries are kicking up a fuss. The Finnish government for example – historically the poster boy for a good European – has said  that it’s not prepared to dish out any cash to Ireland unless there’s an absolute guarantee that it’ll get it all back – which is a tricky thing to ask for. Other governments who are meant to contribute are themselves one step away from bankruptcy.

 

Of course, temporary loans to Ireland or anyone else will do nothing to solve the eurozone’s inherent flaws – which are well documented by now. But let’s not kid ourselves: the UK is hugely exposed should the Irish economy sink, irrespective of how difficult we all find it to prop up a single currency which we knew all along was heading for trouble.

 

Leaving aside the need for Ireland to clean up its banking system and the accompanying too-big-to-fail discussion – admittedly two big issues to leave aside – the Treasury is therefore right to look at ways to assist Ireland bilaterally. If anything, bilateral rescue arrangements between similar economies have a far better chance to end happily than messy multilateral bail-outs which come with ideologically fuelled demands (i.e. German or European Commission demands for raising the corporate tax rate which would be economic suicide for Ireland). The joint loan given by the Nordic countries to Iceland when that country hit the wall in 2008 could be one model.

 

In its own strange way, a UK-Irish deal could also serve to strengthen the UK’s position in Europe. But alas, the terms and conditions for UK taxpayer-backed loans to Ireland no longer rest solely with the British government.

Mats Perrson is director of Open Europe