There’s a real chance we too will end up on a perilous Greek odyssey

THE state of our public finances has taken on a severe international dimension in the past week. Two events have brought into sharp focus the perilous path Ireland treads.

Firstly, the EU Commission has ruled the Government bailout of Anglo Irish Bank as routine annual expenditure – same as public sector pay or welfare. This has a devastating impact on the presentation of exchequer accounts. It pole vaults us to having the biggest current budget deficit in the eurozone for 2009, at 14.3%, with an even more bleak outlook for this year.

Secondly, for the first time in the 12-year history of the euro a member state has been unable to raise funds from the market and has to rely on an EU/IMF bailout. Greece has set a precedent for vulnerable members of the currency.

If we compare and contrast Ireland with the other PIIGS (Portugal, Ireland, Italy, Greece and Spain), there is real cause for alarm. Our current budget deficit includes minimal interest repayments, as our recent national debt was set at a low base. As our deficits multiply, we add further debt and will therefore encounter the cost of extra debt servicing in future years. Put simply, from a favourable debt position, we are accelerating faster than anyone else over a fiscal cliff.

The Government is in denial about the consequences of nationalising Anglo. The impact of the €4bn paid last year pales into insignificance with a further €18bn that will have to be stumped up. This comprises €8.3bn this year, albeit through deferred promissory notes.

Ireland already received a concession from the EU accounting body, Eurostat, and the EU Commission, in the accounting treatment of NAMA. We were allowed off balance sheet financing for this €48bn series of toxic bank loan transfers. The expenditure on Anglo plus Nationwide (€2.7bn) is actually putting good money after bad.

The Eurocrats weren’t prepared to look the other way. The days of denial are over. Saving Anglo and Nationwide could sink us all. The Minister for Finance’s eloquent spin can’t refute the crippling impact this will have on the 2010 exchequer outturn.

When the euro was established in 1998 it was conceived as a political union with an economic integration. The house rules were clear for participating states: government debt could not exceed 60% of GDP and annual budget deficits could not exceed 3% of GDP. German taxpayers and voters are waking up to the reality of the cultural clash between them and weaker colleague countries. Their succinct economic viewpoint for the last 50 years: inflation is the root of all economic evil and must be eradicated; favouring low interest rates and tight public finances. While this hard currency provides no quick fix for competitiveness, it ultimately makes savings more valuable.

Economic history informs us of a contrary strategy. Britain, Ireland, Italy, Argentina and others have periodically resorted to currency devaluations in order to adjust and restore competitiveness. The hard Deutschmark has merged into softer currencies, thereby creating an unprecedented identity crisis for the euro.

This “one size fits all” strategy is imploding in the eyes of the currency markets. A few short weeks ago, your euro bought 92 pence sterling, whereas today it’s worth 86 pence. Analysts are predicting a steep descent of the euro, resulting in probable parity with the US dollar.

These contrasting macro economic stratagems can only result in a dichotomy within the 16 euro member states. It suits Ireland for the euro to nosedive. American tourists will find it cheaper to holiday here. Eurozone exports will be priced more competitively, with the prospect of increasing volumes and market share.

Meanwhile, elderly Germans are being told to work into old age because the real value of their pension funds has depreciated internationally. The rules of the club provide for no bailout or any expulsion from the currency. The inevitable internal political conflict within the European Central Bank will be exposed when it becomes obvious that certain member states have no remote foreseeable prospect of adhering to the stability pact – Ireland included.

The chickens are starting to come home to roost in relation to the enormity of the Government’s decision to nationalise Anglo and Nationwide. The most articulate exponent of “what problem? – no problem”, Brian Lenihan, is going to find it impossible to square the circle of his own rhetoric. If the Croke Park pay deal is accepted and tax revenues maintain paralysis from lack of growth he will be unable to adhere to the budgetary projections he has promised our European partners.

Even the most elaborate smoke and mirrors of post-dated cheques (promissory notes) for Anglo and Nationwide can’t conceal the irreconcilable arithmetic. The Greek odyssey has haunting similarities for Ireland. They ignored the stark unsustainability of their public finances. In order to conceal their failures, they cooked the books. A general election resulted in a change of government. The new administration had the political flexibility to make a fresh start. Prime minister George Papandreou eventually revealed the accurate picture of the state of their finances.

Credit agencies responded with downgrading the risk rating on Greek government bonds. The cost of obtaining sufficient credit to keep the country going soared. A debt cost crisis became a liquidity nightmare. Ultimately they lunged into the lenders of last resort – the ECB and IMF. The €45bn loan package may be insufficient.

EITHER way, Greece has ceded sovereign control of its national public finances. Ordinary Greek citizens face the non-negotiable actuality that a three to five-year austerity regime will be implemented. The pay terms and conditions of public sector personnel and levels of public health and welfare services will decline. Tax hikes will impose significant hardship.

Some argue there is a credibility gulf between Greece and the other PIIGS because of the perception that the Greeks would default and were irresponsible. Who knows when market sentiment will turn against any country?

When these fundamental facts are expounded, Minister Lenihan has resorted to the charge that critics and pundits are being anti-national. If only we could believe in ourselves the way our international colleagues do.

Having been one of his strongest defenders, maybe I appreciate his unique talent for persuasive obfuscation – spoof and spin. It all has echoes of three years ago. Then, economic commentators were derided as talking down the economy. We were reassured our “fundamentals” were fine. This façade imploded. Our economy declined by more than any other in the developed western world since the 1930s. We are paying the price with business closures, unemployment and emigration. We were similarly persuaded, worst case scenario, we would have a “soft landing”.

Rhetorical rubbish, however soothing, needs to be confronted. When the EU Commission cops the extent of Anglo and Nationwide costs, it will be time for us all to realise that the international consequences of Government folly will have no hiding place. Let’s keep a close eye on Athens; we’re in the same frame.