Leading article: Ireland must free itself from economic bondage

Once again, all is changed, changed utterly. Fianna Fail, the party that has dominated Irish politics since independence, has collapsed. Its share of first preference votes fell in last Friday's general election to just 15 per cent.

But this election promises to be more than simply a political revolution. Enda Kenny, the leader of Fine Gael and the next prime minister, vowed yesterday to set Ireland on a fresh financial course; one radically different from that charted by his Fianna Fail predecessors.

Mr Kenny has pledged to renegotiate the terms of Ireland's 85m euro (£72bn) bailout deal from the International Monetary Fund and the European Union secured last November. He says this effort will begin next month at a meeting of the European Council in Brussels. Under normal circumstances new governments should be very wary of re-opening agreements made by their predecessors. But these are not normal circumstances. And Mr Kenny has every right to revisit this bailout package. The conditions of the borrowing are too onerous. The 5.8 per cent interest rate charged on the loan is unreasonably high.

Mr Kenny is also right to re-examine the blanket state guarantee of all the liabilities of Ireland's bust banks. Perhaps the biggest mistake of the Fianna Fail government (out of a woefully crowded field) was its decision to underwrite all the debts of the Irish banking system at the height of the crisis of September 2008. The full horror of this decision is still unfolding. A new banking stress test scheduled for next month could show that the banks need yet more capital from the Irish taxpayer.

The suggestion of forcing bank bond holders to accept write downs would unsettle the European financial markets. It might even restart the European bond market crisis. European governments are likely to resist such a move by Ireland for these reasons. But to lumber the entire Irish population with responsibility for picking up the bill for the speculation of a small number of Irish bankers and property developers was always an offence to democracy.

It is also an unacceptable injustice to expect the Irish population to suffer for the sake of repaying in full bankers from across Europe who lent money to pump up the country's economy in the boom years. Those continental lenders are being protected from the consequences of their own stupidity. And the plain fact is that Ireland cannot afford this bill. In large part due to the cost of the bank bailout, the ratio of government debt to GDP has risen from 25 per cent in 2007 to 95 per cent today. The IMF projects it to reach 125 per cent by 2014. Ireland has a great asset in the education and enterprise of its people. But even a dynamic and open economy like Ireland cannot cope with this level of debt.

The deep spending cuts implemented by the previous government were intended to slash the deficit. But public borrowing has not fallen. The cuts have merely succeeded in inflicting still more damage on the Irish economy. With unemployment at 13.3 per cent (up from 4.6 per cent four years ago) Ireland really needs stimulus not austerity from the state.

The Irish people seem resigned to a long period of economic austerity. But they are not, rightly, resigned to endless bondage. The present bailout deal is not in the interests of the Irish people. Nor is it in the interest of Europe to impose such onerous demands on Ireland. Mr Kenny has his democratic mandate to force a fairer deal for the broad mass of the Irish people than his predecessors delivered. He should not be afraid to use it.

Comments