Pressure building on Ireland to seek EU help
15.11.10 @ 18:15
BRUSSELS - The European Central Bank told Ireland on Monday (15 November) that EU emergency funds can indeed be used to bail-out its debt-ensnarled banks, adding to the pressure on the country to finally access a European rescue mechanism.
Ireland continued to insist on Monday that it has no need of funding for government spending, but ECB vice-president Vitor Constancio said that a pool of monies set up by eurozone government for bailing out countries can be used for banks instead.
The EU facility was not set up to lend directly to financial insitutions, but the Irish government if it access the fund, can then decide to "use the money for that purpose," Mr Constancio said from Vienna.
Frustration in other European capitals at Ireland's reluctance to seek financial help from the EU and IMF also spilt out into the open on Monday as Portugal, trapped in its own debt whirlpool, all but demanded that Ireland reach out to Brussels.
Portuguese finance minister Fernando Teixeira dos Santos said in Dow Jones Newswires that: "I would not want to lecture the Irish government" but added "I want to believe they will decide to do what is most appropriate together for Ireland and the euro. I want to believe they have the vision to take the right decision."
For his part, Spain's member of the European Central Bank council, Miguel Angel Fernandez Ordonez openly attacked Dublin for its reticence.
"The situation in the markets in recent weeks has been very negative due in some way to the lack of a final decision by Ireland," he told reporters in Madrid on the same day.
Echoing the words of the Portuguese finance minister, he added: "It's not me who should take a decision about Ireland, it's Ireland that should take the right decision at the right moment."
Portugal and Spain are petrified that Ireland's stubbornness could lead to a contagion of lack of market confidence, as Spanish and Portuguese bond yields increase.
"From a strategic point of view, Madrid and Lisbon are worried that the uncertainty will spread to them, with ramifications for the euro as a whole," Tom McDonnall, an economic policy analyst with Tasc, an Irish economic think-tank, told EUobserver. "The ECB believes that if Ireland was in the fund, the uncertainty could be removed and thus lower bond yields."
"But for Ireland to go into the fund, this is effectively handing over sovereignty over fiscal levers. This is why you are seeing ministers making these comments about Ireland's struggle for sovereignty and so on," he explained.
On Sunday, enterprise minister Batt O'Keeffe said: "It has been a very hard-won sovereignty for this country and the government is not going to give over that sovereignty to anyone."
For Ireland, a country that fought a long, bitter struggle to free itself of British rule, to surrender economic sovereignty to the troika of the European Commission, the European Central Bank and the International Monetary Fund, as occurred when Greece tapped the EU fund, is an ignominious dishonour for any Irish government.
But for a one headed by Fianna Fail, whose full name in Irish translates as "Soldiers of Destiny - The Republican Party," such a move would be a historic humiliation for the party of the first president of the republic.
The government does have enough money to fund public expenditure through till July next year, but the yawning debts of Irish banks is steadily undermining confidence that the government will not be forced to default.
On Friday, fresh data showed that outstanding loans to Irish banks, mostly coming from German, British and French banks, climbed to €130 billion at the end of October, up from €119 billion in September.
That Ireland would be giving up its economic sovereignty to in effect transfer funds to, amongst others, British bankers, can only add to the indignity.
Brussels however denied that EU officials were adding to the pressure on Dublin.
"As the Irish authorities have reiterated themselves over the last few days, they have not made any request for financial assistance. Further, Irish sovereign debt is fully financed till the summer of 2011, so there is no imminent need on that area," commission economy spokesman Amadeu Tardio told reporters in the European capital.
"The commission is in close contact with the Irish authorities at the moment as you can imagine, but there is no news from that in itself."
If Dublin were to apply for help, the troika would likely demand very significant reductions in public sector pay and social transfers, albeit likely in line with those under consideration by the government.
More controversially, there will be pressure for Ireland to raise substantially its ultra-low rate of corporation tax as part of the overall policy mix.
However, the troika will have difficulty pushing through such a move, as Ireland won a series of legal guarantees, including notably on tax sovereignty, attached to the EU's Lisbon Treaty in return for a second referendum on the text, which was ultimately approved.
However, as some might argue, the Irish guarantees have yet to be approved.