Eurozone crisis: Irish demand better rescue deal
Irish voters have rejected a deal to prop up failed banks and slash spending. The £73bn tussle could spook international financial markets.
As political wipeouts go, this week's general election in Ireland was dramatic. The party seen as responsible for a catastrophic financial crisis and an unpopular bail-out deal suffered its worst ever result – Fianna Fail has dominated Irish politics since independence from the UK in 1921, but it now faces a period in the political wilderness.
The winner, Enda Kenny of Fine Gael, now the largest party, warned yesterday that he wants to renegotiate the £73bn (€85bn) deal with which the European Union and the International Monetary Fund have propped up the Irish economy.
It's a powerful demonstration of democracy in action: the Irish people have got rid of a set of ministers with whom they were disgusted. Instead, they chose a party that seeks to reverse promises to the EU and IMF to keep the banks alive with €45bn of taxpayers money while cutting back savagely on public spending. Cuts are inflicting severe pain – unemployment is rising and living standards are falling.
But there's an enormous technical hitch – these days the government, any government, is only partly in charge.
The financial markets are watching closely in case Ireland's incoming government signals it might default on its debts rather than stick to the terms of the rescue deal.
If there is any sign of the agreement unravelling, investors across the world could start to pull their money out of Ireland - and the rest of the Eurozone.
Ireland, along with Greece, has one of the two largest budget deficits of the 16 countries that use the European single currency (Euro).
When the global financial crash of 2008 hit, it burst the bubble on an economy that had previously been nicknamed the Celtic Tiger because of its soaring growth rates. But much of the supposed economic miracle was built on sand because debt levels were so high.
Under new management
As he heard the news of his election win, Mr Kenny said: 'We are up to our necks here, and I do think people, genuinely, have to have explained to them the scale of the mess.'
The Celtic Tiger has been brought low, and the ensuing political rout has seen Fianna Fail, traditionally seen as Ireland's 'natural party of government' booted out.
But who runs a modern nation anyway, if bankers in the international markets choose the direction of public policy?
- From boom to bust, bankers and politicians in Ireland have gone from being heroes to villains. Is this fair?
- Germany is angry about having to prop up Ireland and Greece in order to save the European Single Currency. Should they be left to default on their debts and go under?
- The two main Irish political parties, Fianna Fail and Fine Gael were formed when the leaders of the independence movement fell out. Using the links, write a poem, song or short scene about the drama of a country's two political leaders coming to blows.
- 'Moral hazard' is the risk that by bailing out a failing bank, you make the others think they can also fall back on the taxpayer or other rescuers. But if banks go bust, customers suffer. What are the pros and cons of bank bail outs?
Some People Say...
“These days, bankers have more power than politicians.”
What do you think?
Q & A
- So is the new man in charge going to junk the deal?
- It's not quite that simple. First he has to form a coalition and agree a policy. Then he has to spend the next month re-negotiating with EU countries.
- And they won't be happy?
- No. An argument is already raging over how much the richer nations like Germany should stump up to help the more vulnerable members of the Eurozone. It could even tear the single currency apart.
- So this Irish crisis affects the whole EU?
- Yes. Even the UK, which is not in the single currency, could be vulnerable if the international financial markets start to think Europe as a whole is a bad investment.
- And the bank debt?
- Ireland's pledge to support its failed banks is eye-watering – one bank alone, Anglo Irish, owed €34bn. This liability dwarfs that borne by the UK taxpayer, for example.