Andreas Whittam Smith: Restore trust now, or Irish people won't buy the pain

The false denials so quickly followed by exposure mean that it is an Irish Government with no credibility that sets out to pass a budget

The Irish Government has lost the trust of its people. When you are planning to borrow a massive amount from the IMF and your European partners, that loss of trust is a big problem. It puts at risk your ability to carry out the conditions of the loan.

There are two ways in which a government can lose its legitimacy and the present Irish Government has recently experienced both. The first happens when a coalition partner leaves a parliamentary alliance and exposes the remnant to defeat in a vote of confidence. This has happened to Fianna Fail, the largest party in the Irish assembly, now deserted by the Greens, who will stay only to pass the forthcoming budget. As a direct consequence there will be a general election in February or March next year.

The second method is uncommon and hard to describe in precise terms. It is when a government no longer has the respect of its electorate. You recognise such a situation when you see it and this is what has become visible in Ireland during the past few weeks. The Irish Sunday Independent described it in a leader column: "The Taoiseach (Prime Minister), Brian Cowen, and his Government are at risk of being ignominiously driven from office, such is the level of anger sweeping the country this weekend. The people have broadly welcomed the arrival of the IMF, are largely indifferent to emotive sentiment associated with a perceived loss of national sovereignty, but are roundly furious at the manner in which the Government has "lied" about the unprecedented events of last week."

When an opinion poll enquired if there was tactical advantage in the Government "lying", 79 per cent said no and 21 per cent said yes.

Now given that people in democracies instinctively assume that their politicians are not always truthful, what has to be explained is the intensity of Irish anger. A glance at the timing of the Government denials that a bailout was being sought gives the answer. Remember that on Tuesday, 16 November, the eurozone's finance ministers released a statement confirming that negotiations were under way. IMF and EU officials arrived in Dublin on Thursday, 18 November. Yet on Friday, 12 November, Mr Cowen said: "We have made no application whatever for funding". Two days later, on Sunday, 14 November, Enterprise Minister Batt O'Keeffe told RTE Radio that he was "absolutely unaware of any moves from Europe. It's been a very hard-won sovereignty for this country, and this Government is not going to give over this sovereignty to anyone else". In a more explicit denial, Minister for Justice Dermot Ahern said speculation that Ireland was about to seek financial aid from Europe was "fiction". Minister for Tourism, Culture, and Sport Mary Hanafin followed this and also denied Ireland was discussing a possible bailout. "There is no question of it," she said. The following day, Monday 15 November, Mr Ahern again insisted nothing was going on. "I'm not aware of it [pressure]".

These false denials so quickly followed by exposure mean that it is an Irish Government with no credibility that sets out to pass a budget. The measures will be the harshest set of proposals in living memory. They will be presented on 7 December, but the task will not be completed until two pieces of legislation are passed – a social welfare bill and a finance bill. These stages are likely to last until February 2011. The arithmetic of finding a majority is in any case complex, with five parties and 10 independent members in play. Moreover, members will know that their actions during the next few months will probably determine their success or failure in a spring election.

Now consider how the financial markets are likely to view this series of events. The first reaction would probably be favourable. No doubt on first reading, the budget would appear suitably draconian – or realistic, as bankers would say. This, however, would only be the start of the process. Then would come the realisation that the budget wasn't done and dusted as soon as published. So the next question in the minds of participants in the financial markets would concern timing. When is the budget likely to become law? But then, I fear, there could well follow a more damaging question: will the budget be so watered down in order to obtain a majority that it no longer accords with the conditions originally attached to the loan agreement?

The reason the debates on budgetary measures may become difficult is precisely because they will be immediately followed by a general election. The temptation for members to say and do what they believe will impress the electorate will be overwhelming. How easy will it be for them to put their signatures to very tough measures when they are likely to be campaigning for re-election a few weeks later? It is at this final stage of the budget process that Ireland is likely to pay the price for no longer having a government that can be trusted. Indeed, I cannot imagine anything worse – having to approve a severe budget just before confronting voters.

Turn again to the question of how financial markets are likely to react to this scenario. If the current opinion polls are to be believed, at some stage markets will begin to assume that the Government which passes the budget is immediately going to lose office. So then they are going to wonder – what next? Might a new Government reverse the measures so recently agreed? In those circumstances how likely are they to wish to buy Irish government debt or to make deposits with Irish banks? No chance at all, I would say.

There is, of course, a remedy, but it is going to remain strictly theoretical. That would be to have the general election straight away. In other words, achieve legitimacy first. Let Fianna Fail immediately place before voters its economic plan announced yesterday and its budget proposals shortly to be unveiled. Let the other parties state whether they would want to do things differently. Get as much "buy-in" as possible from the electorate before the pain begins. Otherwise Ireland will find that she is walking along a dangerous path, with the rest of Europe looking on with increasing anxiety.