Europe's Neverending Crisis Can the Euro Still Be Saved?
Part 2: Multi-Billion Bailout for Ireland Announced
A delegation of representatives of the EU, the IMF and the ECB arrived in Dublin on Thursday of last week to investigate how big the Irish problem really is. At that time, the draft version of a bailout plan had already been written.
It included two options. Under the "minor solution," the euro-zone stabilization fund would only cover the acute new shortfalls of the Irish banks. Under this scenario, the rescue fund would have to provide about 45 billion-50 billion, according to estimates made before the experts arrived in Dublin. London market insiders even feared that the sum could be as high as 60 billion-80 billion.
Many experts in the EU and a few finance ministries recommended a "bigger solution," which would involve taking Ireland "completely off the market," at least for some time. Otherwise, the proponents of this solution argued, the problems could begin all over again in the spring, when the government of Prime Minister Cowen will have to obtain new money to extend expiring loans. That plan would however cost "about 100 billion," said one official, "maybe even a bit more."
The British also indicated they wanted to contribute to the rescue package for Ireland. They may not be part of the euro club, but they are "good neighbors," said a British government spokesman.
Then, on Sunday, the Irish government announced it had officially asked the EU and IMF for help. Europe's finance ministers quickly agreed to the aid in a hastily convened telephone conference on Sunday evening. It is not yet clear exactly how big the bailout will be, but Prime Minister Cowen said it would be less that 100 billion.
On Monday, the British Chancellor George Osborne confirmed that Britain had also offered a bilateral loan to Ireland totaling around 7 billion pounds (8.2 billion or $11 billion). "Ireland is our very closest economic neighbor so I judged it to be in our national interest to be part of the international efforts to help the Irish," he told BBC radio.
The German government has taken a reserved approach to providing financial help for the euro-zone's troubled members. Chancellor Merkel is under particularly intense pressure. In addition to public opinion in Germany, she has to take the views of the judges on the constitutional court and the coalition parties' parliamentary groups into account. The Karlsruhe-based constitutional court is currently reviewing several constitutional complaints against the billions in aid for Greece and the establishment of the European stabilization fund, and the number of such complaints could soon rise.
"In the event that Ireland also applies for assistance from the EU stabilization fund, we will immediately file a motion for a temporary injunction with the constitutional court to prevent the funds from being disbursed," said Berlin legal scholar and economics professor Markus Kerber ahead of Sunday's announcement.
He is one of the appellants filing a suit against the EU stabilization fund in Karlsruhe. If billions are made available for highly indebted countries with financial difficulties, the monetary union will turn into a transfer union, Kerber argues. In addition, he says, the government's approval of the fund violates the property guarantee under Germany's constitution, which is known as the Basic Law. "Article 14 of the constitution guarantees a secure, stable currency," says Kerber.
Peter Gauweiler, a member of parliament for the conservative Christian Social Union (CSU), also has constitutional concerns about aid for Ireland, and he believes that the prospects of his suit against the EU rescue fund are improving. "If Ireland asks for help from the EU now, this will confirm the basic assumption of my constitutional complaint, namely that the basis for a secure euro in the Treaty of Maastricht has become obsolete," he said recently.
Criticism of Low Corporate Tax Rate
Politicians from the conservative Christian Democrats (CDU/CSU) and their coalition partner, the pro-business Free Democratic Party (FDP), are also closely watching each step the German government takes in Brussels. Markus Ferber, the chairman of the CSU group in the European Parliament, wants to tie aid for Ireland to strict conditions. "We also managed to obtain tax increases in the case of Greece. The same thing has to happen in Ireland," says Ferber. "It is unacceptable if a country relies on the solidarity of the community while continuing to secure competitive advantages over its benefactors through the use of tax dumping."
He is referring to Ireland's low tax policy. Corporations in Ireland pay a low corporate tax of 12.5 percent. "If they had our system, they would be swimming in money," says economist Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research.
The tax question had been the sticking point in the bailout negotiations. The tax question is non-negotiable, said the Irish government. Without concessions there will be no money, responded officials in Brussels.
Nevertheless, it was clear that there would be a compromise in the end, and that Ireland would get help. It is hoped that the bailout will bring calm to the financial markets, at least for the time being. But what happens after that? Won't the markets' attention turn to Portugal next? Not even Portuguese Finance Minister Fernando Teixeira dos Santos is willing to rule out that his country could find itself in a situation in which it would need the protection of the rescue fund. His counterpart at the Foreign Ministry can even imagine Portugal being ejected from the euro zone.
The rescue fund was approved to calm the financial markets. Its mere existence was expected to reduce tensions to the point that no country would actually have to make use of it. Instead, the situation has become more and more tense for many countries in the interim.
The European Union and the IMF envisioned a fund comprising 750 billion to protect their weaker members. This money would be sufficient for Ireland and Portugal. But things would become more difficult if Spain needed help. This is a situation Europe's governments did not anticipate, who reasoned that what should not be allowed to happen could not happen.
Apparently they assumed that the problems would be largely resolved by the time the rescue fund expires in 2013. It was expected that by then the PIIGS countries would have cleaned up their finances and be able to borrow money at reasonable rates again. Now the European governments must face a different reality, coupled with the question of what happens in 2013.
- Part 1: Can the Euro Still Be Saved?
- Part 2: Multi-Billion Bailout for Ireland Announced
- Part 3: Internal Government Document Outlines Planned Crisis Mechanism