Bailouts in Europe: A punitive Versailles or a benevolent Marshall Plan?
WASHINGTON -- Fintan O’Toole, Ireland’s most articulate left-leaning commentator, wrote in the Irish Times that “[t]here are two international options for dealing with broken and delinquent states: the Versailles option and the Marshall Plan option. … [The] bailout of broken and delinquent Ireland is much more Versailles than Marshall.” His words deliberately tread on two of Europe’s most sensitive historical images: the punitive settlement that humiliated Germany after the First World War, and the grand gesture of transatlantic solidarity that rebuilt Europe after the Second World War.
Although the emergency measures passed on Sunday are intended to save the euro, they carry the grave political risk that the dose of discipline they contain could create serious, long-term public hostility to the European project. Few people, not even among the crowds demonstrating in Dublin last Saturday, would deny that the Irish crisis is home-grown. Lehman Brothers notwithstanding, Ireland exposed itself to unacceptable risk by allowing its banks to feed a monstrous property bubble while using once-off property transactions to finance unsustainable tax cuts and public-sector wage increases that eroded its international economic competitiveness; the state then turned a banking crisis into a sovereign-debt crisis by taking on the debts of the banks in order to save the banking system. Austerity is necessary to undo some of this damage and bring public spending closer into line with tax revenues, as it is in Greece, Portugal, and many other EU member states.
Providing assurance to bondholders that their investments will be safe seems to be essential to preventing a destructive run on the common currency throughout the eurozone. In the abstract, large parts of the public in Europe’s distressed periphery can accept the need to do whatever it takes to prevent contagion across the continent. However, it may be only a matter of time until they begin to lose faith in the official explanations for the specific measures that are being imposed from without. Take the case of Ireland, where there is widespread resentment to the terms of the bailout package, and punishing public sector cuts. National crises in Ireland can bring political unity around a common solution (as evidenced by the all-party agreements on deal that brought peace to Northern Ireland), but in the past week, thousands protested in Dublin — a rarity in Ireland — and outraged opposition politicians condemned the package.
Those opposed to the bailout do not accept that the cuts in public services are fair, they abhor the higher interest rate (5.8 percent over seven years) applied to Ireland compared to the terms Greece got (an average of 5.2 percent) last May, and they do not see why the bankers who, at the height of the boom, put up capital they did not own are now being guaranteed the repayment of the entirety of their risky loans by the Irish government. Worse, the direct consequence of these austerity measures will be reduced economic growth, making it ever more difficult for Ireland to pay back its loans. Many Irish people seemed to welcome the intervention of the International Monetary Fund (IMF) and the EU as a relief from the incumbent politicians who are so closely associated with the crisis. But this window of goodwill is rapidly closing. The main parties in the Irish parliament are likely to lose many seats in the elections in early 2011 to independent MPs.
There is no threshold for party representation in the Irish parliament, so the number of single-issue, free-radical members not belonging to any party is likely to increase. Many of whom will undoubtedly run on an anti-foreigner, anti-EU, anti-IMF platform. Anti-IMF graffiti is already appearing on Dublin streets, and it is doubtful that any revision to the EU treaties could pass a referendum in Ireland at the moment, even if such a revision were specifically intended to repair the flaws that caused the crisis. The danger is that the current economic crisis will both obscure and exacerbate a broader political crisis, which is the erosion of the political legitimacy of the same European project that the emergency measures are attempting to defend. To avoid this outcome, the EU must quash the perception that it would be worth crippling Ireland to provide a lesson to other prodigal states about the unattractiveness of choosing the bailout option.
It may be too early, given the state of the bond markets, for the European Central Bank to speak openly about debt restructuring, but this must be reserved as a medium-term option. In the meantime, the EU needs to generate goodwill in Ireland and the other peripheral states. It must demonstrate that the emergency measures are intended not to send a warning signal to other vulnerable member states, nor to postpone the collapse of a failing system, but as a precursor to far-reaching financial reform after which the general public will never again be forced to pay for a run of bad bets by out-of-control banks and financial institutions. Starting with Ireland, the EU should articulate anew how the European project is one of solidarity, not punishment.
Thomas Legge, an Irish citizen, is a Program Officer in the Climate & Energy Program at the German Marshall Fund.
The views expressed in GMF publications and commentary are the views of the author alone.