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Should We Sting Our Saviours?

Posted on: November 28th, 2010

SO who is in the driving seat? A small island nation, representing just 1 per cent of the European economy, has caused 90 per cent of the turmoil in Europe over recent weeks. It has extracted €85bn in aid — 11 per cent of Europe’s fighting fund — for itself.

Quite a disproportionate trail of destruction has been left by the Irish recklessness in its wake. We have made an indelible mark, never to be forgotten or forgiven by our European partners, blasting a crater in the €750bn fund.

The fund is too small. The euro is badly wounded. Ireland is being blamed.

Good. Let us look at the upside.

Last Wednesday night, many of the foreign broadcasting vans visiting Ireland began to fold up their tents. The travelling media circus, which started to follow the European bankruptcy trail in Athens back in March, had been camped in Dublin’s Merrion Street for the past two weeks. On Thursday, once the four-year plan was published, they were heading for Lisbon and Madrid.

The Irish game was thought to be finished. We were rolling over. Far bigger fish are being fried.

The markets gave an early thumbs down to the first leg of our recovery project: the contagion had not been halted by our four-year plan. Portuguese and Spanish bonds fell in value. On Thursday, the Financial Times led with the ominous headline: “Irish Fail to Dispel Eurozone Debt Fears.” The fight on Irish soil, chosen as the second line of defence to save the euro, had failed.

The media corps’ tickets to Lisbon were booked. More prescient reporters reserved onward flights to Madrid.

Do not dismiss the possibility of their return to Merrion Street on December 7, in case we give the international media another euro feast on Budget day.

The four-year plan, billed by the same media as a watershed, proved a damp squib.

So they upped sticks .

They could be wrong. The outside world has already dismissed the bigger picture, the imminent battle of the banks, as a runaway victory for our external tormentors.

No wonder there was an air of unreality as the plan was published. Where was the reference to the culprits that had sunk Ireland? The plan simply addressed the crippled invalid — the public finances; this patient was awkward, but curable.

The plan may have savaged the recipients of social welfare, played ball with the Croke Park Agreement, increased income tax and cut the minimum wage, but it read more like a draconian Budget than a panacea for all our economic ills. The elephants in the room were the villains of the catastrophe. The banks and the bankers were invisible, left for another day.

Brian Lenihan was right when he said that the banks had grown too big for the economy. So big, that they were being treated separately and with more tender gloves.

So big, that the four-year plan was a sideshow.

Suddenly the little matter of the economy was a doddle by comparison. The four-year plan used all the conventional weapons to adjust the figures. Under the eye of Europe’s Olli Rehn and the IMF’s Ajai Chopra, the mandarins had hammered out a set of highly questionable cold numbers: the projected rate of growth –at around 2.85 per cent over four years — raised eyebrows as wildly optimistic, but it still managed to lift the Government over the first hurdle last Wednesday. Progress will be reviewed quarterly. The IMF and Europe are entitled to turn the tap on and off, depending on how we measure up to meeting the optimistic growth targets of the plan. The IMF’s Irish puppets were on a string.

Perhaps. Yet the four-year plan was merely a foretaste of the battle of the banks.

The Irish banks still have the capacity to sink the euro. If they go down, the contagion will spread throughout European financial markets. The interdependence of AIB, Bank of Ireland, Anglo and Irish Life & Permanent on European rivals is still unclear, but a collapse of Ireland’s banks spells a knock-on danger for the single currency. If the Portuguese and Spanish banks catch the Irish disease, then Italy could be next. If Italy …

Which could all be pretty good news. We are punching above our weight.

Look on the bright side. Fianna Fail and the Greens could do the State some service in the dying days of this home-grown catastrophe. This weekend their minions are busy negotiating a deal with the IMF to save the banks. No one believes that the process is anything but a surrender — on the IMF’s terms. Chopra and his colleagues will dictate the size of the loan and the shareout between the public finances and the banks. Above all, they will decide the interest rate we pay on the €85bn loan.

Nowhere did this vast figure feature in the four-year plan. If the interest rate is 7 per cent, the cost could be as high as €6bn a year. It is more likely to be around 5 per cent, still an unacceptably high level. Down that road lies national penury.

The Government spin is simple: we may not need to draw down the full €85bn facility. This is not a loan, it is an overdraft. We will be charged interest only on what we need. Yes, but even for an overdraft there is a chunky facility fee.

Ireland’s negotiators are already believed to be plotting the spin on the capitulation due this weekend. They will be trumpeting a triumph in holding the corporate tax rate at 12.5 per cent in the face of a fierce assault from Angela Merkel and Nicolas Sarkozy.

Never in the history of negotiation has such a gigantic red herring been introduced to the talks. The 12.5 per cent rate was never in danger. Angela and Nicolas may well have favoured an increase — but not the IMF, which does not want to crucify us. If it does, it will never get its money back. Ireland would default.

Which is still a possibility. A debate has already opened on the merits of a default or a devaluation. After all, our credibility is already shot, our credit rating was downgraded again last week, we are reduced to begging to the lender of last resort. What have we got to lose?

We are de facto defaulters, a basket case; but a basket case with a sting in store for our saviours.

That sting is lethal. The arrival of the UK, Sweden, Denmark and Norway as individual volunteers to join the rescue team last week should have revealed that we still had one weapon left. We could press the nuclear button. Angela, Nicolas, David Cameron and three Scandinavian nations were prepared to dig deep to ensure we did not blow the entire European project and some of their special interests to smithereens.

Europe and the IMF should be told that we will not be discarded to the rubbish heap of history; that if their terms condemn us to a decade of poverty, we will walk. We must not underestimate the fear in Europe of the damage that an Irish default could cause. If they impose terms on us that would take us down the road to inevitable bankruptcy, we might as well default now as default later.

Desperation may be the only ace left in our hands. But it is a card we should be prepared to play.

Walking is an option.