Germans are calling the shots, so pray we’re still in their good books

WE’RE finding out just what Germany thinks of Greece and lest you think that such foreign stuff is of little interest to us, it is hugely relevant in so many very important ways, most especially to our standard of living.

Germany’s actions in relation to Greece may save or break the euro – the currency in which we trade and in which we hold hundreds of billions of debt. The likelihood is that, despite German reluctance and anger about the cost of bailing out the indigent Greeks, some deal will be agreed to stop Greece being ejected from the euro. We should hope so because the consequences of that are potentially calamitous to Ireland – and a successful outcome is not guaranteed.

What’s happening to countries like Greece on sovereign borrowing markets at present is the equivalent of what happened to banks like Lehman Brothers in September 2008. The consequences of a possible euro collapse are even worse.

If Greece was to be evicted from the euro, then the pressure to do the same to the other members of the so-called PIIGS (Portugal, Italy, Ireland and Spain) would become enormous, irrespective of the size of the Spanish and Italian economies.

While we’re hearing from many people that Ireland is least at risk in this group – because of the perception, fostered by the likes of the influential Lex column in the Financial Times yesterday, that our government is fighting to curtail the budget deficit – the worries must remain.

What’s called the “spread” on our Government’s bonds – loans our Government has raised on international money markets – has gone up to a price that is two basis points (or percent) higher than Germany’s. As that’s higher than at any time since the immediate aftermath of the introduction of the bank guarantee, it highlights our vulnerability to becoming ill from the financial virus attacking one part of the euro.

Joining the euro might not have been the right thing for us but notwithstanding that, leaving it could create even more damage.

Even if it doesn’t get to that, the other possibility arising from the Greek situation is that the EU would take full fiscal as well as monetary control of our finances.

This would mean the EU would, IMF- style and with the encouragement of Germany, impose all sorts of spending restrictions on us, including the dismissal of tens of thousands of public sector workers while reducing the pay of others.

It could also force us to bring our corporation tax rates into line with those of the rest of Europe, removing one of the main attractions to the US of investing here. We would lose all economic sovereignty, although there are probably many who would argue we no longer deserve to have it on the basis of our clear inability to manage it.

Last month German chancellor Angela Merkel raised the possibility of errant nations being ejected from the euro because of their failures to rein in their budget deficits. Germany was no longer prepared to carry passengers within the eurozone. Countries that could not pay their own way would be made to do so or removed from the Economic and Monetary Union.

Such talk has become more strident in the last week. So what do the Germans think of us? We have had strong hints previously, even before our effective bank collapse of September 2008. In September 2007 it emerged that the German Ambassador to Ireland, Christian Pauls, had cut loose at a meeting of visiting German industrialists and pulled no punches in criticizing the excess he felt was endemic in the country, particularly our way of spending our newfound money.

Pauls focused on how Irish junior ministers were paid more than the German chancellor and how hospital consultants had refused a new salary offer of €200,000 per annum as “Mickey Mouse money”, even though the health system was “chaotic”. He made unfavourable reference to property prices and the rush to buy new cars, contrasting this with Germans who drove their cars until they were eight or nine years old before changing them.

He said “very many Germans, including politicians and high-ranking civil servants, believe it was EU money, including a large portion contributed by the German taxpayer, which was responsible for the Irish success story.” He continued that this was “rubbish” and that “95% of the success was owed to the work of the Irish people” but some interpreted this as mere politeness and the truth of the situation was contained in the first part of that statement.

Instead of taking the criticism on the chin and doing something about addressing the issues he raised, the Government complained to Germany about the ambassador’s breach of protocol, publicly reprimanding him for the comments which, it said, were “inaccurate, misinformed and inappropriate”. In retrospect nobody would dare argue with him, but his views are very similar to the criticisms that are being made of the Greeks by the Germans now.

On the plus side, however, the German foreign minister, Guido Westerwelle, had nice things to say about this country when he met his counterpart, Micheál Martin, in Berlin on Wednesday. He said Germany would never forget the help that Ireland provided, as president of the EU in 1990, in facilitating the unification of Germany without conditions or treaty changes. Hopefully, such goodwill will extend to our future financial relations too.

The reality is that much of the power over political decision-making in Ireland – at least in how it relates to economics and finance – has shifted to the international money markets, the European Commission and the European Central Bank.

LAST month the European Commission warned that we are not doing nearly well enough in trying to address the issue of our public finances, which explains why Taoiseach Brian Cowen swiftly highlighted the need for a further €3bn in spending cuts in the next budget. With the euro under pressure, such demands upon us may intensify.

The shifting and more difficult economic position may also explain the rumours that the European Commission is looking askance at the Government’s plan to inject tens of billions of euro into the rescue of Anglo Irish Bank. Approval must be given to the business plan by the end of May, but it is becoming clear the investment will have to be treated as part of the Government’s debts, not as some sort of parked, off-balance sheet item. Added to the commission’s distaste for subsidies to state-owned enterprises it is easier to understand why Brian Lenihan has subtly shifted his position on Anglo’s continued existence, now that he is now no longer ruling out its closure.

My expectation is that the Government will announce within the next month that it has found a way to save money by winding down Anglo, as if it was its idea and not one forced upon it.

Other than fight to get the budget deficit – and the associated borrowing – under more control there is not much more that our Government can do than watch and hope that we remain in favour with the Germans.

The Last Word with Matt Cooper is broadcast on 100-102 Today FM. German support for Ireland is detailed in the updated and revised edition of Who Really Runs Ireland? which is released by Penguin next week.