NO ONE wants to pay for Ireland to be bailed out. But Britain must face, along with its European partners, the danger that an Irish default presents.
Britain is liable for 13.6 per cent of the €60bn (£50bn) European Financial Stabilisation Mechanism. An Irish bailout from the fund could therefore cost Britain as much as £7bn, and perhaps another £3bn through its IMF commitments. That may seem arbitrary and unfair, especially for a country sensible or fortunate enough not to have become enmeshed in the euro’s internal tensions.
Yet Britain is hardly isolated from the Irish or the wider European economy. Recall how Iceland’s crisis imposed real costs on the UK, where British councils alone had £1bn invested in Icelandic banks. Today, Britain’s banks are heavily exposed to Ireland. At the end of last year, Bank of England figures show that British banks held £107bn of Irish debt. RBS revealed a £4.28bn exposure as recently as July. That is not even to consider the impact on trade with one of our nearest neighbours – Ireland is Britain’s fifth-biggest trading partner, receiving 7 per cent of our exports. Ireland’s problems are ours too.
But the real problem here is the lack of a mechanism for failure. Angela Merkel’s comment yesterday that “if the euro fails, then Europe fails,” might not always sound so catastrophic to British ears, but the fallout from a European collapse could scarcely fail to injure us too. Ireland is a reminder that we lack a suitable way to manage sovereign failure. We need to find an alternative to the kind of system we have now, rife with moral hazard, where no one is prepared to accept losses are possible – without risking crippling economic contagion from the debts that moral hazard has already allowed to accumulate. A solution is proving intractable.
Euro-area finance ministers are meeting in Brussels today, but yesterday, even as Portugal’s finance minister Teixera dos Santos urged them to “do what is most appropriate together for Ireland and the euro”, the Irish government called rumours of an EU bailout “fiction”.
Whatever happens next, it is a tale without a happy ending, and without heroes. Ireland’s political class has landed the country in a calamitous economic situation, to which Europe and the euro also made a substantial contribution. In the short term, Angela Merkel’s comments helped to precipitate the Irish bond anxieties that brought this crisis to a head. And in the long term, it was Ireland’s membership of the euro that forced it to accept the low interest rates that inflated the bubble that has now exploded. We are all left to face the consequences. There are no easy answers here, and no cheap fixes either.