German elections - Merkel move crucial for Irish finance

SELDOM was a general election in another European state watched more closely by the Irish people than Angela Merkel’s performance yesterday, which put her in an unassailable position to become Chancellor of Germany for a historic third term in succession.

Ultimately, her party’s victory is assured, according to an estimated 42% exit poll. It will have repercussions throughout Europe, but nowhere more so than in the bailed-out economies of Ireland, Portugal, and Greece, where people are being ground down by austerity measures.

From Ireland’s viewpoint, the result effectively sets the agenda for the post-bail-out era and will have a major influence on this country’s economic and financialdirection in the coming years. Of crucial importance will be the shape of the coalition that emerges when Ms Merkel gets down to the business of political horse-trading today.

With the Free Democrat Party failing to win the 5% of votes required to enter parliament, guaranteeing the outgoing administration’s return to power, Ms Merkel could now be forced into a grand but troublesome coalition with her leftist rivals the Social Democrats, with their 25% vote. They could bring down the axe on European Central Bank finance for Ireland and other troubled countries. That would scuttle Taoiseach Enda Kenny’s prediction that sticking with the economic challenges of austerity and exiting the bailout programme later this year would ‘bring back the sunshine” to the bleak lives of Irish people.

Illustrating how Europe can impact on Ireland’s economic future, the vice president of the ECB last week called on the Government to introduce a package of €3.1bn in cuts and taxes rather than a less harsh regime of €2.5bn in next month’s budget.

He also poured cold water on the likelihood of the troubled Irish banks being retroactively capitalised.

Politically speaking, relations between the Taoiseach and the returning chancellor have been friendly and Mr Kenny will be keen to strengthen their personal connection. With the election behind her, he will seek greater support from a cautious Ms Merkel in resolving Ireland’s fiscal problems, including the controversial issue of bank bail-outs and the notorious promissory notes to cover losses at Anglo, whose leaked telephone conversations he regarded with contempt.

While the latest CSO figures show Ireland’s economy has grown slightly (0.4%), the spectre of a second bail-out continues to haunt the Coalition.

Another foreign problem is the preponderance of IDA eggs in the investment basket. There is urgent need to create more jobs by fostering home-grown small and medium enterprises. In the long term, that’s where the future lies. On a broader economic canvas, the German federal election result suggests Ireland’s immediate future will be dictated more by Berlin than Dublin and influenced more by Angela Merkel than Enda Kenny.