The first-order economic challenge facing Ireland is to regain creditworthiness. Both the State and the banks lost their creditworthiness over the second half of last year. Without international assistance – the EU/IMF funding for the State and the ECB as lender of last resort for the banks – the loss of creditworthiness would have been catastrophic. The primary (i.e. non-interest) budget deficit would have been forced to zero immediately and the banking system would have collapsed as people attempted to withdraw remaining deposits. Those who think that the burden would fall only on the public sector would be in for a rude shock. The real loss of sovereignty is not the bailout deal, but the general dependence on foreign funding.
A dangerous complacency seems to be creeping into the election debate about how to deal with our official funders. It is true that the present design of the support mechanisms, including though certainly not limited to the interest rate, will make it extremely hard for Ireland to regain creditworthiness. There is common interest in finding a combination of measures that work, possibly with some additional “concessions” in areas that are in our plans anyway, such as the redesign of fiscal institutions. (The new paper by Daniel Gros and Thomas Mayer provides a good analysis of the creditworthiness challenge as well as some ambitious proposals for redesigning the support mechanisms.)
The bottom line is we need to get on a path to restored creditworthiness, but in a way that also protects our “aid-worthiness”. This does not mean that we lie prostrate before official funders, but we have to protect our reputation for being willing to meet the conditions of support. Misplaced tough talk about renegotiation is likely to do more harm than good. We might hope that soft notions like goodwill do not matter; the reality is that they do. As bad as things are at present, they would be much worse if support is significantly curtailed. Politicians should be careful not to heighten the risks we face as they seek narrow political advantage for the election.