Category: Bailout

One of the features of political commentary everywhere is that it tends to be dominated by a smallish cadre of insiders who view themselves as “sensible people” and usually figure they know what needs to be done. For example, Washington DC-based political commentary tends to be dominated by folks (Paul Krugman’s Very Serious People) who think politics should be about bi-partisanship and dealing with a crisis in Social Security. In reality, wide political differences make passing bi-partisan legislation impossible and the crisis in Social Security isn’t such a big deal.

In Ireland today, the sensible people have decided that the election should be about two themes. First, that any talk of renegotiating the EU-IMF deal is simply misleading the electorate, with some columnists resorting to much stronger rhetoric. Second, that the electorate should be focusing on the fact that Fine Gael and Labour have different policies. (I’m not singling out any columnists in particular but a few random selections from the Irish Times opinion page should confirm these points).

On the EU-IMF programme, the sensible people seem to have missed that the deal was going to be up for some type of renegotiation even before the ink had run dry. I’ll offer the following observations:

1. The EU-IMF negotiators knew there was going to be an election when the deal was put together and met the main opposition parties during their time here to prepare for the inevitable change in government.

2. When asked in December about what might happen after an election, the IMF’s Ajai Chopra was very relaxed about the idea of the plan being changed saying “as long as the overall objectives of the program are agreed to by all, and that does seem to be the case, the specific policies as to how to achieve that can be discussed.” At a press conference on Thursday, IMF Caroline Atkinson, Director, External Relations Department, stressed the same message. Atkinson refused the opportunity to say that the deficit targets in the programme must be kept unchanged

3. When Mr. Chopra was asked about whether there was a possibility of the overall interest on the package being renegotiated, his answer was “For the IMF, no. This is the rate that is applied to all member countries.” This answer clearly leaves the door open to the idea that the EU rates could be renegotiated. Also, because Ireland’s IMF quota is just about to increase and is likely to increase substantially further in a year or so, the underlying interest rate at which the IMF will be able to lend to Ireland will be about 100 basis points lower than announced last November. This will make the IMF loan rates at least 100 basis points lower than the EU equivalents, even when controlling for the fact they are variable rather than fixed rates.

4. The argument that Ireland cannot unilaterally renegotiate the interest rate on the EU loans is, of course, correct but the implication that the interest rate shouldn’t be discussed in the campaign is a little silly. We are borrowing from the EFSF and EFSM at the rates that these organisations have set for their lending operations and so these organisations would have to change the rates that they set for all countries, not just Ireland. However, right now, they are only lending to Ireland and, at a time of great change in European institutions, the next Irish government would be remiss if they did not raise the issue of lowering the interest rate.

5. Much was made about Jean-Claude Trichet’s comments at his press conference this week that Ireland needs to “apply the plan”. Some seem to interpret this as somehow meaning that the man in charge of the EU-IMF programme had just said that nothing could be changed in the plan but this is simply not correct. M. Trichet is, of course, very keen to see key aspects of the plan implemented, particularly the banking sector measures, and so one wouldn’t expect him to say anything else. However, the ECB does not set the interest rates on the EFSF or EFSM loans and, frankly, I doubt if M. Trichet cares very much about this or about whether there are small adjustments to the fiscal plan.

On the other point being pushed by the sensible people, that Fine Gael and Labour have (gasp!) … different policies, it might be worth pointing out that the last time an Irish election produced an overall majority government was 1977. Coalitions, featuring programmes for government thrashed out between parties with different policies, are now the norm in Ireland. Since Fianna Fail have no chance of forming an overall majority government, perhaps it might be worth also emphasising that they too have different policies than any of their potential coalition partners.