ORIGINAL PAPER

At the receiving end—Irish perspectives and responseto the banking and sovereign debt crises

Paul Gillespie

Published online: 2 February 2012# Springer-Verlag 2012

Abstract Having enjoyed nearly two decades of economic recovery and rapiddevelopment as one of the most successful member-states of the European Union,Ireland was shocked and chastened by the global financial crisis of 2007–2008 and itstraumatic impact on the country. A threefold crisis assailed its economic and politicalelites and citizens when the property bubble built up since 2002 exploded 6 yearslater. Its banking system collapsed through over-exposure to loans built up from thecheap credit made available after the euro was introduced. There was an immediateimpact on state revenues when property-related windfall taxes collapsed under thispressure, exposing a yawning gap between current expenditure and revenues. And thecountry’s economic competitiveness suffered from a runaway cost base. The paperputs these events in the context of Ireland’s overall experience of European integra-tion and its economic development. It goes on to explain how Ireland got into troublein 2008 and tracks the major events over the next 3 years and how they were handled.Three major axes of argument about the EU/IMF rescue packages are discussed,highlighting the views of political leaders and public opinion dealing with theintensified euro zone crisis in autumn 2011. The paper goes on to assess theirattitudes to EU decision-making, the role of the European Central Bank, the prospectsof treaty change and Ireland’s emerging position in a reconfigured Europe coming toterms with a more multi-polar world.

Introduction

Having enjoyed nearly two decades of economic recovery and rapid development asone of the most successful member-states of the European Union (EU), Ireland wasshocked and chastened by the global financial crisis of 2007–2008 and its traumaticimpact on the country. A threefold crisis assailed its economic and political elites and

Asia Eur J (2012) 9:125–139DOI 10.1007/s10308-012-0307-5

P. Gillespie (*)School of Politics and International Relations, University College Dublin, Dublin, Irelande-mail: pegillespie@gmail.com

citizens when the property bubble built up since 2002 exploded 6 years later. Itsbanking system collapsed through over-exposure to loans built up from the cheapcredit made available after the euro was introduced. There was an immediate impacton state revenues when property-related windfall taxes collapsed under this pressure,exposing a yawning gap between current expenditure and revenues. And the coun-try’s economic competitiveness suffered from a runaway cost base.

All roads led to Brussels out of these three great troubles. Being locked intothe European credit and banking system meant Ireland’s capacity to act unilat-erally was tightly constrained in any action which might endanger the widereuro system. This became clear in the critical reactions to the government’sdecision on 28 September 2008 to extend a blanket guarantee to all the €440billion deposits and debts in its banking system. Thereafter the banks and thestate had to rely more and more on the European Central Bank to plug the gapsof revenue and liquidity which rapidly became problems of solvency. Thisculminated in the November 2010 EU/IMF (International Monetary Fund)agreement which imposed a 5-year correction and consolidation programme,making the state dramatically more dependent on external economic and politicaldirection.

This paper puts these events in the context of Ireland’s overall approach towards,and experience of, European integration and its economic development. It goes on toexplain how Ireland got into trouble in 2008 and tracks the major events over the next3 years and how they were handled. Three major axes of argument about the EU/IMFrescue packages are discussed, highlighting the views of political leaders and publicopinion dealing with the intensified euro zone crisis in autumn 2011. The paper goeson to assess their attitudes to EU decision-making, the role of the European CentralBank, the prospects of treaty change and Ireland’s emerging position in a reconfig-ured Europe coming to terms with a more multi-polar world.

Major elements of Ireland’s approach to the EU

Politically and economically Ireland’s policy towards European integration has beendriven since the 1960s by a prolonged effort to escape from continuing over-dependence and over-reliance on Britain (Gillespie 2006). Accession to the EuropeanEconomic Community in the 1970s was experienced as a liberation from post-colonial constraints by policy-makers and a broadening horizon by the mass public,underlying the generally positive attitudes which find Irish people among the mostconvinced they are beneficiaries of EC/EU membership and that membership a goodthing (Laffan and O’Mahony 2008 chap. 5). This appeared to affirm the nationalproject of independence and was harnessed by political elites as fully compatible withIrish nationalism, which always had a European vocation (Hayward 2009). Econom-ically too, there was a diversification away from British markets, especially as the1990s boom developed. The multinational sector of the Irish economy had a world-wide market, even if the domestic sector continued to rely much more on trade withits nearest neighbour. This release of energy happened unevenly and variouslydepending on circumstances, notably during the prolonged downturn of the 1980s;but it was strongly reinforced by the 1990s takeoff.

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Ireland’s decisions to join the European Monetary System in 1979 without Britain,to support the opening of negotiations on the single European market in 1984 despiteBritish opposition and above all to join the euro by accepting the Maastricht treaty oneconomic and monetary union in 1992 notwithstanding the British opt-out from theeuro confirmed this long-term political strategy. Some of the genuine difficulties weredisguised by the large structural and cohesion funding successfully negotiated from1987 to 1992 in compensation. Irish policy-makers were willing to accept the newdisciplines involved, notably the loss of sovereignty over currency devaluation, theneed for ‘internal devaluation’ instead and in principle conditions of the Stability andGrowth Pact negotiated during Ireland’s EU presidency in 1996 which imposed the60% debt and 3% budgetary limits. It was a different question when they wereimplemented several years later. Chided by the Commission for breaching thebudgetary limits and for pro-cyclical policies in 2001–2003, the government pointedout the pact rules had been ignored too by Germany and France. It was not a goodsetting in which to develop the new disciplines, as a wall of cheap credit flowed fromcore European economies to countries like Ireland, Greece, Portugal and Spain wheregrowth and demand were more buoyant. Much of this reciprocal activity was seenmore clearly in critical retrospect after the property bubble burst, when argumentsopened up about who was most responsible and should bear the cost.

Having established this position as a small state within an expanding union in the1970s and 1980s, Irish policy was geared to take advantage of its additional role as adeveloping state anxious to benefit from the structural funds it helped create. Therelative success in doing so in the 1990s accomplished a transition away fromperipheral ‘Mediterranean’ status, marked in 1997 by passing out average UKincomes. Because of its economic success in that decade Ireland became a modelfor development and modernisation, based on the neoliberal verities of the time,which it enthusiastically adopted. Ireland was a friend of the community method andthe Commission, wary of any large state directoire and anxious to impose restrictiverules on trends towards two-tier or multi-speed variability and flexibility (Gillespie2011b). More policy and political energy was devoted to institutional and inter-governmental channels than through the European Parliament, reflecting Ireland’sstrong centralised executive government structure. There was a conscious effort toavoid being obstructive. A series of successful EU presidencies, notably in 1990,1996 and 2004, established its political credentials within the European governancesystem. Certain primary interests were foregrounded, including low corporate taxa-tion, maintaining the Common Agricultural Policy and benefiting from the structuralfunds, as well as sustaining the open response to globalisation responsible for Ire-land’s economic success.

Ireland’s experience as a referendum state added another distinctive dimension toits EU profile. There have been ten referendums on EC/EU treaties beginning withaccession in 1972 and then on each successive treaty since the Irish Supreme Courtdecided in 1997 that the Single European Act required a referendum because itsforeign policy provisions were inconsistent with the Irish constitution. Since thengovernments have decided politically it is more prudent to hold referendums than relyon parliamentary ratification. This means they are more alert to the domestic politicalconsequences of integration than most other governments; and since the defeats in thefirst referendums on the Nice and Lisbon treaties (2001 and 2008), more cautious

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about accepting treaty change. The experience has taught the political elite it isnecessary to campaign vigorously and persistently over the long term if referendumsare to be passed. Political communication is put at a premium and they must be ableand willing to argue their case. But political parties are not well geared to fightreferendum campaigns in Ireland. If in government they have been frustrated by courtrestrictions on state involvement and requiring balanced broadcasting; if in opposi-tion they resent the expenditure required and are ill-equipped to fight such a cam-paign on the doorsteps. Thus it is doubtful whether one can conclude these lessonsfrom the first Nice and Lisbon campaigns have been properly learned. In both casesdismally lacklustre and unconvincing campaigns were run, with a failure to mobilisecivil society organisations in favour of the changes.

Irish knowledge of how the EU works has been a critical factor in successivereferendums on treaty change. Positive perceptions of Irish EU membership havebeen combined with relatively low levels of objective and subjective knowledge of itsworking. Lower levels of knowledge are closely associated with being working class,a woman, aged over 65, a farmer and with lower levels of education; this remains true(Sinnott 1995: 19, Sinnott and Elkink 2010). Despite improved levels of knowledgebetween the two Nice referendums in 2001 and 2002, a Eurobarometer survey foundin 2005 that the vast majority of Irish people were uninformed (Laffan and O’Mahony2008: 129–30). The Eurobarometer 74.2 of autumn 2010 saw some improvement,reflecting the impact of the financial and euro zone crises, as well as the intensity ofthe two Lisbon referendums in 2008 and 2009 in which turnout increased.

How Ireland got into trouble

Following the collapse of the Celtic Tiger in 2008, the International Monetary Fund(IMF) said the Irish crisis “matches episodes of the most severe economic distress inpost-Second World War history”. In March 2011, the governor of the Central Bank ofIreland, Patrick Honohan, described it as “one of the costliest banking crises inhistory”. When the full extent of sorting out the banking system became clear, thecountry’s deficit as a percentage of its GDP rose to 32% in 2010, more than ten timesthat permitted by the European Union and a record for any country outside wartime(Kirby and Murphy 2011: 20).

These assessments of the disaster indicate how serious were the problems faced byIreland’s governments. Their scale was matched by the extent of the economic boompreceding the collapse. That came in two phases, roughly divided between the 1990sand the 2000s. From 1993 to 2001, the Irish economy with rising productivity andstrong exports grew at an average rate of 8–10% per annum, expanding employmentopportunities and reversing emigration. In 1986, Ireland’s GDP per capita was 65.9%of the EU average, which rose to 122% by 2002; unemployment fell from 17% to lessthan 4%; the numbers at work increased by 50% and the debt/GDP ratio fell from150% in 1987 to 26% in 2006 (Laffan and O’Mahony 2008: 225). This buoyancy wasbased on longer-term competitive advantages laid down in earlier decades, includinginvestments in education, the low corporation tax regime and the use of the IndustrialDevelopment Authority, a strategic state agency charged with targeting potentialgrowth sectors from the 1960s. Following the consolidation of state finances from

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1987 to 1993 after the recessionary 1980s, and with the help of substantial transfersfrom European structural funds, Ireland was in a very good position to benefit fromthe flow of internationally mobile capital seeking investment opportunities within thenew Single European Market regime inaugurated in 1987. US capital in particularwas concerned to establish a base there and did so on a large scale. The Irishauthorities concentrated on sectors such as pharmaceuticals, information and com-munications technology, computing and financial services. The so-called Celtic Tiger,a term coined by Kevin Gardiner of Morgan Stanley in 1994, was therefore “not veryCeltic at all” despite the domestic spinoff growth (Hardiman 2010: 74).

Ireland’s low corporation tax helped in that as did the wider policy commitment tothe market-based Anglo-American variety of capitalism. Ireland’s distinctive mix ofeconomic geographies included both the political-economic core European one andthe open market one that was given worldwide reach by the globalisation thatneoliberal policies strongly encouraged from the 1980s. The European commitmentdid not exclude but harnessed the market approach. This gave Ireland a continuinginterest in making alliances with those who had a similar market commitment, such asthe Netherlands—and the UK, which contributed to the perception of Ireland inFrance and Germany as effectively an ally of the UK’s on market issues, even thoughin reality the picture is more complicated. Ireland has steered a course between theAnglo-American and the continental approaches. That is reflected in the Bostonversus Berlin debate initiated by the deputy prime minister Mary Harney in 2001,arguing that Ireland is closer to Boston (note that it was not presented as a Londonversus Berlin one, so that Irish Euroscepticism is also distinctively Americanised).

In the 1990s, Ireland pulled itself away dramatically from the southern Europeanperiphery with which it had previously been bracketed as an EU cohesion country.One measure of catch-up growth over a longer period and on a world scale put Irelandfourth after Singapore, Hong Kong and Japan in a ranking from 1960 to1998; if weremove the two city states, only Japan outperformed Ireland. But in Ireland there wasnot the same concentration on educational investment and social equality (Dellepianeand Hardiman 2011: 5). Critics influenced by dependency theory argue that the threemajor features of the Irish model—radical free trade, radical free enterprise andforeign industrial domination—weakened indigenous industry and created a two-tier economy with inadequate links to create strong indigenous industries, unlike EastAsian and southeast Asian states which managed to avoid over-dependence onJapanese subcontracting. Singapore was more like Ireland although its state wasmore interventionist on labour policies and savings. The four Asian tigers alsoinvested far more heavily in industry than Ireland, which had one of the lowest suchrates in Europe (Kirby and Murphy 2011: chap.1, O’Hearn 1998).

Ireland’s boom qualitatively changed after the dot.com bubble turndown in 2001–2002. It shifted from export-based growth as the main driver of economic activitytowards a construction and domestic consumption model fuelled by the availability ofcheap credit accompanying the creation of the euro. The elements of a classic assetprice bubble emerged based on this financial explosion. The share of the financialsector in total value added reached 10.6% in 2007, compared to a 5% average in theeuro zone. Net lending by Irish credit institutions grew incredibly from 10% of GDPat the end of 2003 to 41% by the end of 2005. Light touch regulation and sharpcompetition among banks drove up the lending and borrowing frenzy. So did

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government support for tax breaks in support of construction. Strong revenues fromtaxes on property transactions and other indirect taxes allowed direct income taxationto fall in line with the prevailing ideology. Weaknesses of policy making and atendency to run pro-cyclical fiscal policies reinforced this picture. So long as thebubble continued state finances were insulated, but they were increasingly vulnerableto a downturn (Hardiman 2010: 75–9). This was a financial boom masked by a fiscalnormality, since Ireland remained well within the Maastricht criteria of 60% debt toGDP ratios and budgetary balances below 3% per annum. As a result internal andexternal criticisms of its weaknesses were muted and when expressed, resented.

The crisis breaks: from bank guarantees to EU/IMF bailout and the election

The international financial crisis that developed from 2007 and broke in 2008 hitIreland hard. The country’s previously admired combination of growth and near-fullemployment suddenly came to an end. It was a triple crisis—“a financial crisis due tothe collapse of the banking system; a fiscal crisis because of the rapidly widening gapbetween current expenditure and revenues; and a competitiveness crisis resultingfrom the runaway domestic cost structures that had developed during the boom years”(Dellepiane and Hardiman 2011: 11). But far from being over-determined by theinternational crisis, the Irish one was very much homegrown.

From spring 2008 shares in Irish banks plunged, particularly in Anglo Irish Bank(a property specialist without a retail deposit base). Irish banks were shut out of thebond market and relied more on ECB funding. By September 2008, Anglo started torun out of ECB-eligible collateral and was close to failure. On September 30th, theGovernment introduced a blanket guarantee of liabilities of six main Irish banksfollowing intensive lobbying by bank executives who argued this was a liquidityrather than a solvency matter. This amounted to a massive socialisation of their lossesby taxpayers, just as the previous gains had been privatised. Over the next 6 monthsthere was a to and fro exchange between the government and the banks over theextent of the assumed liquidity problems, as the sums got bigger and bigger. InJanuary 2009, Anglo Irish was nationalised. In April 2009, the Government proposedthe National Asset Management Agency (NAMA) to take property loans off thebanks at “fair value” in exchange for government bonds. Irish banks remained heavilyreliant on the European Central Bank for funding. As the country came close to notbeing able to borrow the money to keep running, the government’s priority over allelse was that Ireland would not default. Non-resident deposit flight began. Otherbanks ran out of ECB-eligible collateral and sovereign backed emergency lendingstarted to escalate rapidly. When the original blanket guarantee expired large amountsof bondholder debt were paid off. By November 2010, the ECB decided it had hadenough. It threatened to stop funding unless Ireland entered an EU–IMF programme.In a further round of stress tests and recapitalisation in 2011, all banks apart fromBank of Ireland were fully nationalised. The final costs ran to at least 40% of GDP ByAugust 2011 loans to the six state guaranteed banks from the ECB and the IrishCentral Bank amounted to €150 billion at a low interest rate of 1.25% (Whelan 2011).

Details of the EU/IMF programme were negotiated with a ‘troika’ of officials fromthe European Commission, the European Central Bank and the International

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Monetary Fund in November 2010, following a humiliating series of denials byministers that the process was actually underway. This accentuated the political andpopular shock of losing economic sovereignty in a sulphuric atmosphere of chargeand counter-charge between government and opposition parties. The agreementprovided that funding of Ireland’s huge budgetary deficits would be provided witha €85 billion loan at 5.83% interest, consisting of €22.5 billion each from theEuropean Financial Stability Mechanism, the European Financial Stability Facilityand the International Monetary Fund, together with €17.5 billion from the sovereignIrish National Pension Reserve Fund and bilateral loans from the United Kingdom,Denmark and Sweden. In return the government would bring the annual deficit below3% by 2015 in a programme of spending cuts, taxation increases and privatisations.Banks were recapitalised by €10 billion, bringing them to a core 1 capital ratio of12%, with a contingency fund of €25 billion (The Irish Times 30.11.2010). InDecember 2010, the budget announced a €6 billion reduction in the first of fourannual cuts implementing the agreement. In November 2011, the new Fine Gael-Labour coalition announced an amended programme built on the one they inheritedfrom the previous government with anticipated cuts of €3.8 billion in 2011 and 2012,€3.5 billion in 2013, €3.1 billion and €2 billion in 2015. Economic growth of 2.2%was assumed over the 4 years, without which these figures would be even moresevere. By December 2011, it was already recognised they were too optimistic, aftereconomic growth declined by 1.9% in the third quarter.

The financial crisis precipitated a political one. Public satisfaction with the gov-ernment had been falling fast since early 2008 following its confident re-election in2007. By early 2009, satisfaction had collapsed from 49% to 10% and it hardlyrecovered at all in the following 2 years. The governing party Fianna Fail fell fromover 40% to the higher teens. The EU/IMF deal proved the last straw for the smallGreen Party, which announced it would pull out of the coalition after the budget waspassed and demanded a general election. This was conceded by the Taoiseach BrianCowen before he was himself replaced as Fianna Fail leader by Michael Martin, whowas to lead the party to an unprecedented low vote of 17.4% and electoral defeat inwhat proved to be the third most volatile election in Europe’s post-war history on25th February 2011 (Murphy 2011: 20–26, Mair 2011: 288). It was replaced by acoalition between the centre-right Fine Gael and the social democratic Labour Partyon 9th March which had 113 seats in the 166 seat Dail or lower house of parliament.

Policy debates and public attitudes

One bright spot for the government during the dismal years of the financial crisis wassuccessful carriage of the Lisbon Treaty in October 2009 after a second referendum.The first one in June 2008 was lost on a relatively high turnout of 53.4%. By the timeit came to voting again in 2009 after the government had negotiated improved termswith Brussels the gravity of the economic crisis was much more apparent. Alongsidea stronger Yes campaign and better communication of its contents there was apronounced 20% swing of voters to give an overwhelming 67% for the treaty, with41 of the country’s 43 constituencies voting Yes. As one commentator put it: “Theoverriding rationale of the electorate seemed clearly to be that it was safer to be an

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integral part of the European Union in troubled economic times” (Murphy 2011: 23).That conviction persisted through the following 2 years, notwithstanding the bailoutshock and sharply reduced living standards. Three Ipsos/mrbi opinion polls, in Julyand October 2011, found a persistent 68/65/67% saying it is better to be part of theEuropean Union against 22/25/23% not, with 10% don’t know each time (The IrishTimes July 22/October 8/October 26 2011). The feeling was held even by classes andparty supporters normally most hostile to treaty change. Asked how they would votein a referendum to amend the Lisbon treaty to deal with the financial crisis, 47% saidthey would vote No, 28% Yes and 25% were undecided (The Irish Times, 26 October2011).

This configuration of public attitudes forms an essential backdrop to the publicdebates on the crisis and Ireland’s response to it arising from the EU/IMF bailout duringand after the election campaign. The election-related discussion was the first of threemajor axes of policy debate on the crisis. It flowed over into the second axis, on whethermultilateral or unilateral strategies to resolve it should be pursued. The third axis ofdebate concerned whether and when Ireland could expect to return to the markets for itsstate funding requirements and not continue to depend on emergency EU/IMF aid.

The first major axis of debate broke the normal pattern whereby internationalquestions rarely become domestic political issues. In contrast to social turmoil andconflict elsewhere about the crisis, in Ireland public anger was expressed electorally(Mair 2011; Kirby and Murphy 2011). Civil society in Ireland has been morequiescent for historical, sociological and political–structural reasons but this maychange with circumstances (Murphy 2012). Greater awareness and more directpersonal exposure to the issues involved closes the information gap betweenpolicy-makers, political elites and the voting public which normally applies in foreignand European policy, narrowing the elites’ ability to control them. Political parties inIreland as elsewhere normally police the domestic/foreign boundary and prefer tokeep their post-election coalition bargaining options open by insulating them ratherthan make them into competitive issues (Gillespie 2012). On this occasion economicissues which normally top the national domestic agenda had an inescapably interna-tional dimension—albeit a special one in the sense that Europeanisation is bestdefined as making European matters part of domestic politics (Risse 2010). In Irelandeven national issues are usually kept at arm’s length from local electioneering but inthis election 41% voters said in an exit poll that choosing between the policies set outby the parties was important compared to 24% in 2007 (Mair 2011: 291). Fine Gaeland Labour made the European issue national by pledging in their manifestos torenegotiate the interest rates paid to the bailout fund and to reopen the extent to whichbank bondholders would be paid (Suiter and Farrell 2011: 36–7), which Fianna Failhad to defend as the best deal available. Renegotiation received support from a pollshowing 80% of voters preferred it to austerity (Mair 2011: 293). As Mair points outthis raises in acute form one of the central dilemmas of contemporary democraticpolitics, the tension between the voter preferences to which political parties areexpected to respond and which they must also seek to represent, and the variousinternational and supranational actors who expect and demand that certain policiesare pursued by domestic authorities. Where (admittedly unusually) the two sets ofactors are completely at odds, and where the external actor holds the upper hand, weend up with a “democracy without choices” (Mair 2011: 295–6).

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This dilemma opens up the second axis of the Irish debate: whether to persist withmultilateral efforts to improve on the EU/IMF deal in the expectation that the crisiswould open up opportunities for Ireland as it penetrated the core European economiesand could no longer be contained in the peripheral ones; or take unilateral action tobreak out of the deal. The new government accepted the major parameters of theagreement negotiated by the outgoing coalition on the grounds that this was asovereign decision which must be adhered to. But it sought to reduce the high,indeed punitive, interest rates paid on the loans and tried to convince the ECB thatcertain bondholders, notably in Anglo Irish Bank, should not be paid in full. Morebroadly, it participated in the debates on financing generalised bank recapitalisationand whether and how to create a deeper fiscal union, including using the ECB as abank of last resort and creating a Eurobond system.

The debates on the Greek rescue plan in October and November 2011 crystallisedthese issues, as often happens in periods of high tension. Asked why he waspermitting unsecured but senior bondholders of Anglo Irish Bank to be repaid €700million the Minister for Finance Michael Noonan said in the Dail: “It is the choicebetween two evils, as far as I am concerned, and the decision we are taking is thelesser of two evils…It is more in the interests of the Irish people to grit our teeth andallow Anglo Irish Bank to pay the bond than to default, because default takesus over the edge of the cliff.” He supported a much stronger role for theEuropean Central Bank, saying it needs to generate a “wall of money” toprevent contagion spreading to Spain and Italy. The government wanted toensure it had “no association with the Greek problem whatsoever”. Irelandshould be seen as a separate economy with different values, closer to thenorthern European states not the southern Mediterranean ones in the post-crisis period (The Irish Times November 3rd 2011). It does things more like theUK, the Netherlands or Germany than the peripheral Mediterranean southern stateswith which it has been re-bracketed in 2010 by the PIIGS designation. Estab-lishing that positional perception in Europe and internationally is a large part ofrestoring its damaged reputation. Ireland would grow its way out of its problems and payits debts. He foresaw a third phase in its “rolling renegotiation” of the package comingaround 2013, reducing the debt by €15–20 billion through engagement with the ECBon interest payments, by taking advantage of collective developments in the euro zonerather than acting unilaterally (Noonan 2011).

Taoiseach Enda Kenny said repudiating the EU/IMF deal and reneging on Ire-land’s debts “would be disastrous for our recovery”. It would cut the state off fromfurther international loans, force it to close the 2011 €16 billion government deficitimmediately and, strongly underlining his government’s reputational case for ortho-doxy, given Ireland’s vastly better economic circumstances compared with Greece,default would mark us out as a country that ‘won’t’ rather than ‘can’t’ pay our debts,killing off foreign direct investment and resulting in even higher borrowing costs forthe State and Irish businesses that would strangle recovery and lower living standardsfor a generation (Kenny 2011).

He went on to specify the benefits flowing from his government’s approach inchanging the terms of the deal they inherited, including interest rate cuts of €10billion on the bailout loan, private sector participation in bank recapitalisation andrefocusing budgetary policy towards jobs and growth.

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In due course this would ease the way back to the markets, the third major axis ofdebate on the crisis, and the basis for the strategy outlined by Noonan and Kenny. Itsteered a middle way on timing between the “tax and spend” alternatives supportedby the two coalition partners in the February 2011 election. This represented a similarcompromise between the approach advocated by the (government-appointed) Inde-pendent Fiscal Advisory Council which wanted a faster adjustment and the IrishCongress of Trade Unions which sought an extra 2 years so as to encourage therecovery of growth and employment (O’Brien 2011). These debates on timing echoedthose wider policy ones between advocates of expenditure-based adjustments andKeynesian critics of austerity politics.

The government’s parliamentary and political critics rejected these arguments,saying Greece’s willingness to bargain robustly with the EU/IMF was the betterway, showing greater courage and leadership. Repaying loans in full is unfair andunethical because they were originally lent as a risk and had since been profited on insecondary trading. Ireland, after all, had saved the euro by rescuing its banks withoutfailure. Opposition critics did not agree it would be as perilous as Kenny and Noonanwere convinced it was to defy the ECB. Nor did they credit a multilateral approachwith producing longer-term relaxation of the debt burden. This axis of argumentdrives towards a logic of unilateral action and ultimately withdrawal from the EU/IMFdeal. But that would also jeopardise Ireland’s membership of the euro. Some critics wereprepared to contemplate that scenario, invoking Iceland and Argentina as exemplars andsaying Ireland needs to retrieve the right to devalue its currency if it is to recover. Others,such as Ireland’s largest selling newspaper, the Sunday Independent, were not quite soexplicit but floated a lurid perspective of German neo-imperialism dominating theECB and the euro zone in a frame of British-inspired Euroscepticism implying thatIreland should return to the UK sterling area.

Analyses of the Europeanisation of Irish political parties note an evolution towards“critical engagement” in the previously more sovereigntist Sinn Fein and Greenparties, tracking official policy and public attitudes despite their serial opposition totreaty change (Maillot 2010). During the euro zone crisis Sinn Fein, while sharplycritical of the Fine Gael-Labour coalition, advocated a greater role for the ECB as abank of last resort, inverting Eurosceptical positions. In Ireland as elsewhere in theEU there is a definite pattern showing greater enthusiasm for the EU among partyleaders than among members and supporters (Hayward and Murphy 2010: 8, Holmes2009). “Engagement with the EU is overwhelmingly elite-led, knowledge of the EUis often mediated by political parties and support for the EU is based on trust inpolitical leaders” (Hayward and Murphy 2010: 10). In addition identification with theEU is relatively low among Irish citizens. In a 2008, Eurobarometer poll 46% saidthey had little or no sense of attachment to the EU and 59% “rejected the proffereddegrees of European identity and opted for an exclusive Irish identity, second infrequency in this respect only to Britain (63%)” (Eurobarometer 2008: 21, quoted inO’Mahony 2009).

Given that a deeper more redistributive EU would probably require a strongersense of community than the multiple secondary identities which sufficed to legiti-mate the level of regulatory integration so far achieved (Risse 2010: 8, 60) it isinteresting to ask whether Irish public opinion would support such a qualitative shift.There is a lack the data to bolster that case; but the financial and euro zone crisis has

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intensified the politicisation and convergence of public spheres in which Risse arguesare essential in constituting such a closer polity. The recent and continuing events area veritable social science laboratory for research on these questions (Gillespie 2011a,b, c). Much will depend on how effective political outcomes are in alleviating andimproving ordinary peoples’ lives rather than on their pre-existing sense of commu-nity as Europeans, as the tempo of the financial crisis (system integration) outruns thelevel of social integration so far achieved (Streeck 2011). Political leadership, visionand will are required to close this gap and are in regrettably short supply (Marquand2011).

Political views of EU governance: structures and institutions assessed1

Ireland’s position as a small, pragmatic and communautaire member-state is chal-lenged by this crisis. It poses especially difficult issues in three areas: choosingbetween inter-governmental and community methods of decision-making in the eurozone; charting an optimal role for the European Central Bank; and contemplatingtreaty change. Again the Greek and Italian events in October–November 2011,followed by the European Council on the euro zone crisis in December, clarifiedpolitical and public attitudes, within a framework of more intense political discussionand engagement. Noonan was optimistic about the euro’s future and argued it hasbeen a great success, reducing inflation, encouraging trade and holding its value(Noonan 2011).

The euro needs to adapt and institutionalise further, as it has done over the last yearby creating the European Financial Stability Facility (EFSF), introducing the Euro-pean semester economic surveillance system and the prospective European StabilityMechanism (ESM). He supports automatic stabilisers, transfer payments and a bankof last resort role for the ECB like the US Federal Reserve, in which the bank shouldput up a “wall of money” to protect Italian and Spanish bonds from sceptical markets.Kenny took the same position at his meetings with Angela Merkel and WolfgangSchauble at which significant differences arose on treaty change, with Kenny sayingexisting provisions should be used to the full, disagreeing that a new treaty wasnecessarily required and hinting that Ireland would expect recognition of the extent ofits debt burden in any political bargaining (The Irish Times 17th November 2011).The difficulty, according to Noonan, was that leadership and solutions fell short of therapidly emerging problems and hence markets caught up fast with the genuine gaps inthe currency’s armoury. He and Kenny supported the financial transaction tax pro-posed by the Commission, but only if it includes the UK.

This is very much a vision of deeper integration, raising all the obvious questionsabout political consent and acceptability. Noonan was also acutely aware of theECB’s central role in providing support for the Irish banking system, to which ithas extended cheap credit of some €110 billion when market funding dried up. Hecontinually reminded political opponents calling for renegotiation of the bailout termsthat the ECB had vetoed any Irish default for fear of contagion, demands whichintensified after the Greek write down of 50% was agreed. Ireland had to accept this

1 This section draws substantially on Gillespie 2011a.

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existing reality, even if it sought to change policy and structures over the longer term.He and Kenny underlined how they had resisted explicit pressure from the French andGerman leaders to increase Ireland’s 12.5% corporation tax in return for budgetaryaid. These demands were dropped at the July 2011 European Council which conced-ed lower interest rates for Ireland and at which Sarkozy praised Ireland for followingthe EU/IMF programme, setting a trend which culminated in Merkel’s similarencomium when Kenny visited Berlin (The Irish Times 23 July, 17 November2011); but they are likely to resurface in any future negotiations about closer fiscalunion, posing awkward choices for Ireland. Noonan further said resources must befound to encourage domestic and international economic growth rather than concen-trating on austerity policies. Ireland depends on exports to guarantee growth andwould suffer badly from any international contraction. This theme intensified asbudgetary cuts contracted the Irish economy too.

Echoing other ministers, the position of previous governments and a substantialbody of public commentary, Noonan is worried about the weakening position of theCommission within the new euro zone arrangements and the tendency of France andGermany to act as a directoire, as if they own the currency. That, he said, is “bad forIreland”. The Commission should be strengthened with the help of a greater smallstate collegiality in designing the new system. He was also concerned about thedanger of a two-tier system divided between the 17 euro zone states and the 27 EUmember-states, strongly preferring the larger entity as the dominant one. The eurozone is currently more inter-governmental than the EU as a whole. That is why hewants to see the 27 EU member-states running the deepening system rather than the17 euro zone ones dominated by the largest states. Ireland should work with othersmaller states against that (Noonan 2011).

If the euro system survives and deepens how realistic is it to think it could begoverned from the 27 not the 17? Noonan’s desire to avoid a two-tier system withseparate agendas owes much to his awareness of the economic values Ireland shareswith the UK, including on trade, the single market, financial services and transatlanticrelations. The UK desperately needs the euro zone to succeed yet will not join it. Butthose outside will not be allowed dictate terms. That probably makes a deepeninginner core more likely than a unified EU. The UK Prime Minister David Cameron’sdecision to veto an EU treaty on deepening the euro zone at the December 9–10European Council made this more likely. Ireland was not consulted on the decision. Itcomplicates any Irish effort to leverage passing the international treaty decided oninstead, since this will apply only to those adopting it after twelve states do so,according to the draft under discussion.

It is clearly a crucial moment for Britain in Europe, and hence for Ireland too,opening up once again which of several possible scenarios previously outlined arerelevant now (Gillespie ed. 1996, 2000). Negotiating another EU treaty changecoincides with the UK becoming embroiled in its own deep debate about relationswith the EU, alongside an internal one about Scottish independence. Ireland’s choicescould be profoundly influenced by that as (in Northern Ireland too) it decided whereto position itself in a reconfigured Europe. So the strategic impulse that originallyattracted Ireland towards EC/EU membership in the 1960s and 1970s as a means ofreducing dependence on the UK resurfaces now that the euro is facing an existentialcrisis requiring that the EU be deepened politically if the currency is to survive. While

136 P. Gillespie

it would be in Ireland’s interest that the UK would be a leader in the EU, or onoccasion a gambler willing to join new initiatives the better to adapt them to its owninterests, the best that can be hoped is that it will be a late joiner, refusing to joinEuropean projects from the beginning and then being forced to do so later. Thecurrent resurrection of the European question in British politics by Euroscepticsalarmed at the Cameron government’s readiness to help euro zone economies outand advocating that they deepen the system to save it in fact makes two otherscenarios of the UK’s policy direction more likely: the opportunist or pick and chooseapproach; or that of the rank outsider in which Britain is left outside a deepening eurozone—as has been accentuated by Cameron’s veto.

Ireland will find it more difficult to marry its EU and UK policies in this setting.Conceivably this policy landscape could be dramatically altered by Scottish indepen-dence (within the EU) in coming years, driven in good part by growing Scottishdisenchantment with an increasingly Eurosceptic and Conservative dominated Eng-land (Hassan 2011). That would raise the question of Irish unification more urgentlythan has been the case with the consent and stability norms under which the BelfastAgreement has bedded down since 1998. Even more speculatively one can ask howlong a geopolitically reduced England would want to remain outside a deeperEuropean Union. Alternatively, the confident British Eurosceptic predictions of theeuro’s demise, if they come true, would also throw such scenarios into rapid melt-down. All this underlines the need for a coherent Irish foreign policy towards Britain,over and above the imperative to stabilise the Belfast Agreement, which has nowbeen largely achieved.

The Fine Gael-Labour coalition blames its Fianna Fáil dominated predecessors forneglecting alliance building in an enlarged EU and for failing to participate optimallyin the Council of Ministers and in many other parts of the EU governance system.There is considerable truth in the criticisms, but they raise questions about what thenew government should do to repair the damage. If Ireland wants to position itselfwith northern and not southern states in the EU what alliances are necessary to securethat and how much effort has gone into making them? With the Dutch, the Germans,the Finns—and what about Denmark and Sweden currently outside the euro? Andwhat of the central and eastern European states which are now maturing in their EUmembership? Is it sensible to exclude the Mediterranean states—Italy, Greece, Spainand Portugal simply on reputational grounds? Does Ireland not have interests incommon with them as debtor states needing to reduce that unsustainable burden?

This question overlaps with another on the balance between large and small statesand the debate between inter-governmental and community methods of governing theemerging euro zone institutions. Ireland’s interests as a small state are better servedby the community method involving the institutions. If the community institutions areto be involved it is essential that strategic alliances are made with similar states in thecoming negotiations to preserve that balance. This will be more difficult within asmaller euro zone system. Pursuing strategic alliances and knowing when to interveneeffectively in EU debates and with whom is a large part of what makes a small statesmart within this system. Active small states can sometimes punch above their weightwhile inactive ones cannot. Case studies show Ireland can exercise considerableinfluence within the EU system (Panke 2010). Changes in the structures of centralgovernment have moved the entire EU division of the Department of Foreign Affairs

At the receiving end—Irish perspectives and response 137

to the Taoiseach’s office. This brings Ireland into line with most other member-statesand positions the governing apparatus more appropriately to influence the EuropeanCouncil, which is now the major agenda setter in the EU. But if the crucial businessof alliance building within the EU is thereby separated from foreign policy making itcould be counter-productive.

Conclusion: looking ahead

From being an exemplary model for European modernisation, catch-up developmentand conflict-resolution in the 1990s and early 2000s, Ireland’s path was shattered bythe global financial crisis which precipitated the collapse of its property bubble in2008. A traumatic 3 years since then saw its state and banks become highly depen-dent on loans from the ECB and the goodwill of its EU partners. This put great strainon its links with Europe, its commitment to neoliberal globalisation and its strategicabilities to chart a way through the crisis. The impact on its politics has also beenhuge, but expressed electorally rather than through street protest, and with significantcontinuity of policy on the basic EU/IMF package through the governmental transi-tion. Living standards are being scaled back, so far by 5–6%, unemployment hasjumped to 14%, emigration has become once again a part of Irish life after a decade inwhich the country became a more multicultural immigrant society.

This paper has tracked these changes against a background of Ireland’s overallprofile towards European integration. It has identified three major axes of argumentabout consequent policy direction and assessed political views on EU governance.Public attitudes decisively favour staying in the euro zone but differ on policies. Aselsewhere in the European Union public attitudes have become more engaged withthese debates the greater they affect everyday life and living prospects. This isEuropeanisation in practice and it helps create a new polity.

Looking ahead Ireland faces decisions on whether the Euro zone becomes moreintegrated or fragmented; whether this takes the form of a two-tier system and whereIreland ought to position itself in that case; how the country responds to a moreintense Europeanisation requiring more than secondary identifications; and the role ofEurope in the emerging multi-polar world order. As a small economy open toglobalisation Ireland favours the continuation of that process, even if it is modifiedin a post-crisis setting in which financialisation is reduced. Politically Ireland favoursmaintaining the United Nations structures in which it has participated enthusiastical-ly, enabling a greater role for regional organisations like the EU in a more multi-polarworld. That too depends on leadership and vision.

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