Weimar Ireland?

By Paul Goodman

I reported almost a forthnight ago that Sinn Fein was "apparently putting it about that it may not win the forthcoming Donegal by-election which it's been pushing to have held".  The Republican Party was either misreading developments or downplaying expectations: it won the poll yesterday.  I also wrote that Gerry Adams may not win the coming by-election in Louth - "some see it as the last throw of the dice by an ageing politician" - but wouldn't want to bet on that outcome this morning.

The good people of Donegal weren't supporting Sinn Fein's view on Irish unity, or backing the IRA terror campaign of which Sinn Fein was the mouthpiece, or expressing a view on Northern Ireland at all.  They weren't, so to speak, voting positively.  They were voting negatively - in general, against the country's political establishment, and in particular against the Fianna Fail-led administration that has bankrupted Ireland: the result was a knee in the groin for the two civil parties that have dominated Ireland since independence.

What swung it was humiliation of the last two weeks: the confirmation in the form of the bail-out that the country is bust, no longer self-governing in any meaningful sense and now dependent, as Morgan Kelly put it in his alarming piece for the Irish Times, on "the kindness of strangers".  In desperate times, people will seek desperate remedies.  And Sinn Fein's remedies are indeed desperate, but desperation's occasionally the mother of necessity, and it's worth asking whether it's so in this case.

Ireland is, to borrow a phrase from part of the island's history, "at the crossroads", and facing a choice about its future, which is basically as follows -

• It can cross its fingers and hope that the bail-out works.  In short, it can cling to the Euro (the cause of part though not all of its economic collapse), borrow money, raise taxes, cut spending - in effect, go on a severe diet, and hope to return to health in this way.  Such diets sometimes work: if the patient's body is reasonably healthy, this treatment may help him to run, say, a hundred yards in the required time, presuming that he's not tethered to an iron ball and chain, or loaded with burdens too heavy to bear.  This is our own situation in Britain: the diet (deficit reduction driven by spending scalebacks), some training (measures to boost competitiveness, although these are rather lacking) and the absence of a ball and chain (the Euro) should help recovery to happen.

Ireland's case is different.  Although its body is fairly healthy (note Kevin Myers's figures on the robustness of its private sector), it's heaped with burdens: namely, its debts.  John Redwood made the point yesterday that Ireland is borrowing partly to pay off borrowing, which raises the question of whether it can afford to, given its shrunken tax revenue and continuing spending commitments.  Naturally, this is question that the markets are asking, and may well answer with a no.

The Financial Times reports this morning market rumours that Ireland's bail-out package could involve an element of defaulting, and refers to the "intensifying battle between markets and politicians in the eurozone", as speculators turn their attention to Portugal and Spain, in a combat eerily reminscent of the exchange rate mechanism struggle of the early 1990s (which the politicians, of course, lost).  In short, the burdens that Ireland bears on its back, and the weight of the Euro tethered to its feet, threaten to collapse the patient.

• It can quit the Euro and default on its debts.  This, in effect, is Sinn Fein's prescription: Ireland should cast off its burdens and ball and chain, and once again run free.  The suggestion has the obvious upside: Ireland would have the chance, which some defaulting countries have taken before, to export its way back to prosperity: Douglas Carswell cites the case of Argentina.  It also has a considerable downside in national terms and a larger one in international terms.  The national consequence is that Ireland would find it very difficult to borrow in the short term.  It could thus find it impossible to fund its spending, although the counter-case is that tax revenues would rise.  The international one is that Ireland defaulting could spark a banking collapse, recession, depression, slump.

There are various halfway houses.  My friend Daniel Hannan, with the wonderful mixture of seriousness and playfulness that so distinguishes him, suggests that Ireland rejoin the sterling area - part of his dream of re-uniting Ireland with the crown.  It isn't shared by the Irish people.  A very senior Conservative told me yesterday that they should work like blazes to pay off the debt - and then quit the Euro in three or four years.  For some here and elsewhere, Ireland is a means to end - propping up the Euro, if they're supporters of the EU project, or collapsing it, if they're opponents.

They tend, therefore, to downplay the risks of the medicine they'd apply.  I believe that the choice isn't easy - to put it mildly - and that the Irish are between the classic rock and a hard place.  On balance, I'd incline to the default option as the lesser of two evils, providing that there's international management of the kind that the Financial Times refers to this morning (with the crucial difference that the default would happen outside the Euro rather than inside it).  I understand only too well that this prospect's remote.

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However, what matters isn't what I think (or, I'm afraid, what you think): it's what the markets think.  The lesson of the early 1990s and before is: markets are stronger than politicians.  If the markets decide that Ireland's bail-out package won't work, the costs of its borrowing will rise rather than fall.  If they want to charge Portugal or Spain a higher price for borrowing, they will.  If they conclude that the Euro's a goner in those countries or elsewhere, then a goner, sooner or later, it will be.

Those who ask why we should care what happens to Ireland aren't always capable of grasping the answer.  The country's politics and economics are inextricably linked to ours - which returns me to yesterday's result in Donegal.  If the Euro hangs on, and Ireland hangs on to it, the political contest is shaping up to be: Sinn Fein versus a discredited establishment (if Labour decides that paying money to bankers is more important than providing jobs for workers).

But why should the devil have all the best tunes - or, in this case, at least a passable one?  We have, to coin a phrase, a "selfish, strategic and economic interest" in making life easier for the Irish and harder for Sinn Fein.  The former won't turn to the latter in droves.  But, given Ireland's electoral system, they don't need to for the republicans to flourish: a tiny number of Sinn Fein TDs could create deadlock in the Dail and worm their way into government.  The prospect has echoes of Weimar Germany during the 1930s.

A party with a visceral hatred of England and a recent history of violence would thus hold power in Ireland.  The possibility can't be dismissed out of hand, even if Sinn Fein is lacking the required figurehead - that's to say, a young(ish) and exploitative figure with the required cunning and charisma.  All this has implications for what the Government should now do in private and say in public about the Euro, and I'll return to the matter later next week.