Germany’s Gift – Part II

I blogged some time ago about the German talent for strategic retreat.

The particular retreat that I have in mind is the one where the Germans decide that the long term interests of the health of the Euro, the EU and the German economy can no longer carry all the burden of the assorted hangers-on, malfeasants and meddlers that make up the PIIGS and decide that a sacrificial victim to explore the mechanisms of working out a sovereign default without a devaluation is called for.

Napoleon occasionally executed a general “pour encouragez les autres”. Done sparingly it is a useful disciplinary exercise. The Irish (people, Government and banks) make a perfect candidate for just such an exercise for the Germans. We are peripheral in every possible context to the European project and have no friends in Europe after our rejection of the Lisbon Treaty and the precipitate issuance of the ‘Guarantee’. More so now that the bulk of our borrowings have been heaped upon the State rather than the more diffusely held and legally less secure obligations of the Irish banks.

I have been bending the ears of friends, colleagues and dogs in the street about the precariousness of our fiscal/monetary position and how it is an unlikely combination of being both up a creek without a paddle and out on a rotten limb. There are no more policy alternatives for the State. All our borrowing options are exhausted. In poker terms, the Government has gone all in hoping that there will be a global economic recovery that will restore growth and that this will restore some of the previously obtaining property price levels.

In the meantime, as the original Guarantee expired a lot of bonds and notes issued under its protection could no longer be rolled over in the markets and the Government and its client/pariah banks have been forced to go back to borrowing directly from the ECB. The resulting explosion in ECB borrowing puts us right back at early 2009 levels.

In this article, the redoubtable Karl Whelan points out that the Germans (the only part of the ECB authority with authority) has been carefully laying the groundwork for that retreat.

Neither he nor I would suggest that an EU change of mind (a ‘volte-face’ as the French would say) is inevitable or even probable.

But it speaks volumes that the ground is being prepared for just such a retreat.