Merkel Hysteria

If a case study was needed on how NOT to conduct EU negotiations, the October EU summit provides it. It has long been the bane of EU politics that the carefully crafted, finely balanced and nuanced written conclusions of an EU summit can be blown out of the water by a President or Prime Minister speaking at their subsequent ‘national’ press conference. Here they are defending themselves, making the best of a bad lot and/or talking up their achievements in front of what they often see as a domestic media audience.
On October 19 Angela Merkel was in precisely that setting when, in response to a question on recapitalising Spanish banks she insisted that no recapitalisation could occur until new regulatory structures were up and running and that these structures could only deal with bank recapitalisation needs from that point onwards i.e. no dealing with ‘legacy debts’. This provoked a firestorm of commentary in Ireland, starting with press reports that Merkel had dealt Ireland a blow to dealing with its own debt problem.
I have no doubt but that Merkel and the German government are not mad keen to pick up the tab for what is presented in the German press as the mad excesses of profligate and weak Euro zone partners. The fact that these mad excesses were funded, in part, by mad German bankers is, for the purposes of this discussion, moot. Thus, to that extent Merkel will be delighted that her remarks will be seen domestically as holding a firm Teutonic line.
What’s striking about the media storm that ensued in Dublin, however, is the almost wilful ignorance of where Ireland’s negotiating position starts. First, Ireland has already secured unique status in dealing with its debt crisis. The June summit conclusions clearly specify that Ireland’s case will be looked at first and that others may then make a case for comparable treatment. Yes, specifics are absent and the time scale unspecified, but Ireland is first in the queue. Second, the question posed to Merkel related to the recapitalisation of Spanish banks to deal with their legacy debt. This is NOT Ireland’s problem – as has been repeatedly made clear by people who know what they are talking about, such as Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics. Irish banks do not – as of this writing (!) require ANY recapitalisation. Irish banks have been recapitalised, at great expense, by Irish taxpayers. The ‘legacy debt’ germane in the Irish case is thus the debt hanging, noose-like, around the government’s neck. How that is resolved is the focus of ongoing technical negotiations – in parallel with those to establish the new EU banking union.
If the Government is smart it will ignore Merkel’s comments on Spanish bank recapitalisation, it will not satisfy opposition demands for political grandstanding, and it will take the domestic political lumps for that – even at the expense of taunts that the government is ‘weak’ in face of German provocation. The government must continue to play the longer, tougher, strategic game. The focus has to be to ensure that our EU partners make good on their existing political assurances. Remember too, that Merkel and the EU needs an Irish success story. If the Union’s and the Troika’s star pupil is left flounder, then the logic underpinning their entire response to the euro crisis falls apart – leaving open untold political and economic consequences.

Ireland has a hand to play. Game on.