Only way forward for EU may be to go back to the beginning

WE have been through another week of absurd politics in the European Union, and who knows what the leaders summit on Thursday and Friday will bring.

For a country whose economy and banks are in meltdown it was strange to see the antics in the Dáil when it emerged that the Fianna Fáil parliamentary party had decided there should be a vote on the contract with the EU-IMF for the bailout.

The Government blithely informed the IMF of the vote on Wednesday and pointed out that it would not be legally binding. But the IMF — apparently the only body taking this vote seriously — put off its approval of its €22.5 billion share of the loan until after this vote.

So far, and not surprising given the opaque way the Government operates, we do not know whose idea it was to hold the vote. Did the Attorney General warn it was necessary, did the IMF say it was needed?

Or, as some in the European Commission suggested, is it that Fianna Fáil is now in election mode and is using the vote to score over the opposition — even if they are playing games with the country’s citizens and future?

In the meantime, Government leaders across the eurozone offer workaround solutions. Jean-Claude Juncker, chair of the ministers group that attempts to manage government influence on the currency, has suggested eurobonds as a way out of the immediate crisis.

It has horrified many Germans who see it as making them responsible for others’ debt and reducing their country’s credit rating. However the crisis, and a wider growing movement away from government lending by the markets, is pushing up the price of German debt.

At the same time debt restructuring is out for eurozone members, which means that those in trouble can fall back only on the EU-IMF fund. This has sufficient funds to bailout Portugal — something that could happen in the next few weeks. But if Portugal goes, markets are likely to target Spain next. And that is when funding could become an issue.

They, like Ireland will not be allowed to force private holders of debt to take a hit and so the entire burden will fall on taxpayers. In Ireland’s case this decision was made by our politicians and tied down by the EU-IMF loan terms, which suits the big holders of Irish debt, including Germany, France and Britain.

The private sector taking losses will only happen under a new permanent bailout fund after 2013.

In the meantime the French and German leaders agree they must keep the markets calm, offer no new solutions and convince them that austerity measures will change the game.

Talk of a two-tier euro continue and are fuelled by the latest figures that show German growth this year at 4% — way ahead of the periphery countries in particular.

A two-tier euro would damage Germany and make the job of the ECB impossible while Chancellor Angela Merkel reiterates that there can be no break up of the eurozone. It would endanger the entire EU project, she says — and especially Germany.

Rejecting alternative proposals to work around the problems, she increasingly uses the phrase “for now”, suggesting decisions are temporary.

It could be that the only way is back to the beginning and that this time there would be a full-blown fiscal as well as monetary union. It wouldn’t be much of a problem for Ireland given that all our spending and fundraising decisions are made with the EU now — but it will require Germany to adjust.