Fine Gael and Labour’s most urgent challenge will be to formulate a joint position on the bailout terms they will seek to have changed
TWO GRAND bargains are to be struck in March: one between Fine Gael and Labour on the terms of their programme for government; another among the 17 states that make up the euro zone on the single currency’s new institutional edifice. Both of these bargains will be central in determining whether the long haul of rebuilding credibility in Ireland can even begin.
Another key determinant will be the capacity of households and businesses to survive and thrive despite the uncertainties generated by the fragility of the financial system and despite powerful headwinds such as crushing debt burdens, demand-dampening austerity and continuing job losses.
On the capacity of households and businesses to plough on, yesterday brought some reason for hope. Despite huge new tax increases which risk tipping the economy back into recession, people spent more in the shops in January than in December, as measured by the most reliable indicator of underlying retail sales. If consumers keep spending in the months ahead it will be the continuation of a pattern observed in the final months of 2010 when, despite enormous uncertainty, businesses and households did not freeze up in fright but proved economic life can go on even in the most uncertain circumstances.
But if the economy is not out, it is down and still bumping along the bottom of the trough into which it was thrown when the property bubble burst. Worse still, the floor upon which the battered economy languishes is itself unstable and could cave in. Strengthening it depends on a credible European backstop for that part of the euro area banking system located in Ireland.
Ireland’s EU-IMF bailout in November was designed to achieve this. But it has patently failed, as shown, among other things, by signs credit rating agencies may be preparing to downgrade to “junk” status Irish Government bonds and by Central Bank figures for January, which showed further large withdrawals of bank deposits.
Failure – more than fairness or a new government’s mandate – will be the decisive factor in triggering a re-examination of the bailout. Most if not all of this re-examination will take place in the context of a euro zone grand bargain to be negotiated by the end of March.
The most urgent challenge facing Fine Gael and Labour is to formulate a joint position and priorities on the bailout terms they will seek to have changed and a position on other aspects of the euro area grand bargain - notably corporation tax.
Will the parties chose to prioritise a reduction in the interest rate on the EU tranches of the bailout? Will they aim for a target interest rate? Will they seek to build alliances on the issue with the Mediterranean countries or will they go it alone to avoid reinforcing the perception that Ireland is an unreliable Club-Med country adrift in the North Atlantic? Or will they acknowledge the weakness of their position on the issue and expend negotiating capital where it can yield a higher return?
Formulating an overarching position will almost certainly involve the abandonment of Labour’s pledge to push out the time frame for the budgetary adjustment owing to strong opposition from Fine Gael, Frankfurt, Brussels and the fiscally hawkish countries whose credibility provides the anchor for the rest of the euro zone.
One party swallowing some pride will be the easy part. The hard part will be how to handle the banking element of the bailout. The issues include: how much additional capital should be sunk into the banks; what role of the National Pension Reserve Fund will play; how fast bank assets are disposed of; and which assets should be transferred to Nama (and which assets already in Nama are to be sold off, at what speed and for how much).
The timing of all of this could not have been worse for Ireland. Not only will an inexperienced new government have to enter into the endgame maelstrom of the euro area grand bargain negotiations, but the time pressures placed on Fine Gael and Labour to cut their own coalition grand bargain could well make their bargain more fragile.
Even against an auspicious economic backdrop, merging the two parties’ manifestos to form a programme for government would be difficult. If a bargain is to be reached by the weekend, as the parties are indicating, much of the detail will have to be worked out later. A great deal will have to be taken on trust. As trust is rarely in oversupply in coalition arrangements, its limited supply may quickly be exhausted.