Ireland's position in Europe: between a rock and a hard place

The deal done last week between the countries of Europe to save the euro means that Ireland, by accident, finds itself in a difficult position.  We're between a rock and a hard place.

Or between the devil and the deep blue sea, the devil being the U.K. and the deep blue sea being Europe.
It's a critical juncture for us, one fraught with danger.  Uniquely among all the EU countries, the deal raises a fundamental question for Ireland because of our close ties with the U.K., the only one of the 27-nation European Union countries to veto the new agreement.

The British refusal to agree to the deal and its growing isolation from the rest of Europe as a result poses a real dilemma for us. No other country in the EU is as dependent on Britain as Ireland.
We share a border and a language, over a million of our people live in Britain and have free movement back and forth.

Britain is our biggest trading partner in Europe. We have broadly similar positions on economics, finance, regulation and many other issues that are high on the European agenda these days and, of course, for years our old currency, the punt, was the poor relation of sterling.

The only major difference between us in recent years was our decision to join the euro and Britain's decision to keep the pound and stay outside the eurozone.
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But even with that, we have held common positions on many of the questions facing Europe, and we could always rely on each other for support.  Even when we didn't agree we would consult each other.  Britain may have been the devil in the past, the old enemy, but these days there is a special relationship between us.

Like us, Britain is an open, trading economy which opposes too much regulation because it strangles business.
In contrast, the two big European beasts, France and Germany, are more closed economies, with lots of regulation.  They are also strongly in favor of tax harmonization across Europe, which both Britain and Ireland oppose.

In our case, one reason is our 12.5% corporation tax rate which is a critical attraction for foreign companies setting up here and which French President Nicolas Sarkozy wants to end.

In Britain's case, they strongly oppose tax harmonization and similar goals because they see them as steps towards fiscal convergence and eventual fiscal union which they believe would undermine Britain's success as an economy.  In particular they oppose the FTT (Financial Transactions Tax) which is part of the deal and is to apply across Europe and which Britain believes would damage London's position as a global financial center.

That was the immediate reason why British Prime Minister David Cameron used his veto in Brussels last week, although there were many other reasons. The differences were really more about the vision of a future Europe rather than a single issue.

The effect, however, is that Britain is now more estranged than ever from the European Union, where it has always been seen as a luke warm member.  

So Britain's semi-detachment from Europe as a consequence of their veto last week is not good news for us.   Britain has been a leading member of the 27-nation EU, even though it had stayed outside the 17-nation eurozone, and its further isolation from Europe poses a big question for us.

Do we remain as a fully involved and committed member of the EU and the eurozone?  Or do we detach ourselves to some extent and stay close to Britain?

The answer, virtually unanimous among the experts here, is that we must stick with Europe.  But the same experts are also pointing out how the semi-detachment of Britain is going to make life much more awkward for us in various ways in the future.

For example, when the pressure comes on us to raise our low corporation tax rate as part of tax harmonization across Europe, Britain won't be the same strong voice standing on our side.

France and Germany have their own ideas about the future of Europe and about the pace of further financial and economic integration.  The only big player who took the same view as us, a more individual, free market view, was the U.K.  Now we'll be on our own, with maybe some support from a few small countries.

The main points of the "fiscal compact" deal agreed last week are not an immediate problem for us because, as we pointed out here recently, we are already nailed to the cross by the terms of our EU/IMF bailout.

The headline points in the deal, like the maximum 3% of GDP annual deficit and the maximum 60% debt to GDP ratio, are already part of the EU's agreed targets for states.

The target of cutting our budget deficit to 3% by 2015 is part of the terms of our bailout and is why we had such heavy cutbacks in spending this month in the budget for 2012.  And it's why even more severe cutbacks will follow here each year over the next three years at least.

The deal also gives much greater power to the center to impose automatic sanctions on countries that break the rules.  This can include Europe effectively taking overall control of the finances of individual states to force through savings.

That sounds horrendous, but it's exactly what the IMF-EU team do here every three months when they come to Dublin to check Ireland's books.

For states who fail to observe the deficit and debt rules in future there will be detailed scrutiny of budgets before they are spent, including proposed spending in individual departments.  The center (in other words France and Germany) will take control if unreliable peripheral states like Ireland or Greece get out of line.  

These are some of the points in the deal on compliance with the budget rules and some of the sanctions for those countries which don't meet them.

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In our case, failure to meet these targets would mean our bailout money would dry up, so the new compliance rules are not a big deal for us, although they will be there permanently.

But there are more worrying changes to the voting system which would mean in practice that unless we had a big country on our side, in future we would not be able to stop the implementation of new fiscal rules and targets which we might not like.

That, for us, is the general problem with this deal. Without the counterweight of the U.K., it means that France and Germany together will have far too much say in what happens in the future of Europe.

The immediate problem is that the deal concentrates almost exclusively on the fiscal problems of Europe, the budget deficits being run by the weaker countries and the debts they are piling up as a result.  But that is not the only problem, and fixing it won't be enough to save the euro.

Sovereign debt is only half the problem.  The other half is the banks and the huge cash reserves that are required to backstop the euro.

Experts have suggested that at least a trillion euro is needed for this, but the deal last week does not come near providing that.  The introduction of the ESM (European Stability Mechanism) -- the EU's permanent bailout fund which will replace the present temporary set-up -- is to be in place by next July with around half a trillion available, the deal promises.  But who is to stump up the cash seems vague, so we will have to wait and see what happens.

A major complication in the deal reached last week is the legal situation.  Because of the British veto, the new deal cannot be implemented through EU structures.  It will have to be implemented outside the existing EU legal set-up built on treaties between the member countries.

Because Britain has to be bypassed, the deal will become a reality through agreements between the other countries, legal agreements outside the EU framework.

Initially we were told that the European Court of Justice would have a role in deciding whether countries were sticking to the targets in the deal; how that can be possible if this is all outside the EU structures is hard to understand.

In other words, in spite of all the exhausted back slapping after the marathon meeting in Brussels, what we have is far from clear.  What was announced after the meeting was just the headlines.

We are told that it will be March at least before the text that goes below the headlines will be ready for countries to sign off and implement.  Given the seriousness of the euro crisis, that seems very far away.

In the meantime, the markets may get jumpy, particularly when countries begin to pick at problems in the deal they see for themselves.

For example, one that has already cropped here is the future of the Irish Financial Services Center (IFSC) in Dublin.  If we have to pay the new FTT (Financial Transactions Tax) but the City of London does not, how many of the 30,000 jobs in the IFSC will migrate?  How much of the annual one billion euro in corporation tax we now get from this sector will be lost?

The legal quagmire that is opening up under this deal, in the wake of the British veto, may in the end be more serious than anything else.  Some legal experts are already suggesting that the deal will sink and vanish from view.  

It's a pity that cool heads and compromise instead of confrontation did not work out an agreed way forward that could have included Britain.  Where Sarkozy and Cameron are concerned, there's a pair of them in it, as we say here. Both have one eye on their own electoral futures.

All little Ireland can do in this mess is watch from the sidelines as the big boys make up the new rules. Dangerous times indeed.