June 11, 2012
Do you remember the expression: ‘Boston or Berlin?’ The question concerned whether Ireland was closer to America or Germany. To anyone who cared to examine the choice properly, the evidence – culturally, linguistically, economically, genetically, historically and investment-wise – has always been Boston.
However, politically we are in Berlin’s orbit, so when it comes to playing politics, Germany is enormously important – but in every other aspect of Irish life, it is of less consequence.
Germany matters politically and therefore Germany’s next move matters hugely. Germany will choose to break up the euro to protect itself and other like-minded countries. As a result, the likely next big choice for Ireland in the next few years will not be Boston or Berlin, but Rome or London.
Historically, Rome rule versus London rule has a nice ring to it. In this decade of centenaries, there is a certain symmetry here.
One possible endgame for the euro is that it will split into a hard euro and a soft euro at Germany’s behest. The hard one will be the countries around Germany in the core. The soft countries will be those of us in bailout land, which will be Ireland, Portugal, Spain and Italy, with Greece grafted on because no one knows what to do with their problems, not least the Greeks themselves.
This weekend, all eyes are fixed on Spain’s deal. But this is a mere skirmish. The bigger picture is one where the European economy is split between the German zone and the rest.
Bailouts merely use public money to replace the private money that is fleeing the periphery to make sure the countries on the periphery don’t run out of cash. Bailouts have no hope of working in the medium term, because the only way that Europe will rebalance itself is by a big currency devaluation on the periphery. We all know this; it’s so obvious.
However, groupthink is taking over again. Before we plough on with what next for the euro and Ireland, a few thoughts on groupthink. In the boom, a shocking case of groupthink emerged with regard to the housing market and the credit-fuelled boom in Ireland. Lots of so-called ‘sensible’ people believed and espoused utter drivel – and they rounded on those who warned that the economy would crash, with calamitous consequences.
The groupthink ensured that most people in positions of power, whose opinions backed each other up, couldn’t see what was coming down the tracks. They simply couldn’t countenance the alternative.
Today there is a similar groupthink with the euro. The so-called serious people in Ireland can’t countenance the end. They can’t see that the euro is – and has been for about five years – a “dead currency walking”. They are in their own new bubble. It is not a housing bubble, it’s an intellectual bubble, and it will be pricked by reality. As the great economist JK Galbraith said: “The enemy of conventional wisdom isn’t other great ideas, but events.”
The ‘events’ in Europe are moving so quickly that mass default is likely, unless a proper solution is sorted quickly. The eurozone has the potential to bankrupt Germany. Germany knows it has to save the system, but knows that monetary imperialism has its costs.
Germany also knows that bailouts aren’t working. Anything patched together for Spain this weekend will only buy a bit of time. Like our bailout and the others, these infusions of cash, combined with austerity are not permanent solutions.
A notable development is that each bailout, intervention or default buys less and less time with more and more money.
Spain’s ultimate capitulation will also signal the unravelling of Italy. Already, Mario Monti, the imposed technocrat, is deeply unpopular and profoundly ineffective. The domestic economy in Italy – which is a proper economy that makes things – is grinding to a halt. New car sales in Italy fell by more than 20 per cent last month.
The most likely solution will involve a two-speed Europe with two euros, one centred on Berlin and Paris and the other centred on Rome and Madrid. There is no way the Germans will allow us near their new hard euro. We will be firmly in the soft currency, whether we like it our not.
The Germans and French – as they were in 1992 – will be ambivalent as to whether the Irish go back to their natural financial home with Britain – with our stated mutual love of no tax on financial transactions and low corporation tax – or whether Ireland hangs out with the Catholic axis of Madrid/Rome and Lisbon.
Indeed, by 2016, Unionists looking on the Rising commemorations may well feel vindicated – because Home Rule may well mean not quite Rome Rule but, at the very least, a Rome axis may be possibility.
Down here, some Europhiles will actually support Rome over London.
But unless the Irish government’s Europhilia has reached ludicrous delusional proportions, a new Irish punt suspended somewhere between London and both the euros is the only viable option.
Germany will be happy because it doesn’t care what we do. It would be one less hassle. Brussels will concede a cheap victory to London and we will do what we have always done, take what we are given and get on with it, keeping our corporation tax low and admitting to ourselves that we are what we have always known we are, an Atlantic entity, with good relations with the continent.
That will be our choice – London or Rome.For the EU, a new softer euro would be a great move for the integrationists. It allows them to snatch victory out of the jaws of defeat. It would allow the weaker countries to devalue against the stronger ones, thus going some way to rectifying the competitive imbalances at the core of Europe. It would allow countries like Poland, the Baltics and Croatia – as well as further east in the Balkans – to join the weaker euro and give them time to adjust to the rigours of Italy, not Germany.
So ‘project Europe’ goes on. The defeat allows a more democratic solution for the rest of non-eurozone Europe and it gives a united Europe more impetus just at a time when the project was stalling.
For Ireland, the ludicrous choice would be to put Rome ahead of London. But stranger things have happened.
The key is to look beyond the immediate crisis and see it as being the result of bad planning, rather than the cause of something new. The result of this bad planning is that we go back to proper foundations based on economic and financial ties. We will be given the choice of Rome or London, I know where I would prefer to be.
David McWilliams will be speaking at www.dalkeybookfestival.org next weekend