Ireland's troubles are just beginning


kennyIreland goes to the polls today, although the headline result is already a foregone conclusion. The ever-so-slightly-centre-right Fine Gael – think Edward Heath on a wet day – will win a plurality of seats, or possibly a majority, and its leader Enda Kenny will become Taoiseach. What’s interesting is that for the first time in Irish history, Fine Gael might be able to form a government alone, without having to go into coalition with the Labour party. It’s not likely, but this could have implications for the Irish debt and the future of the eurozone.

If Fine Gael do make a government alone, it’ll probably be with the help of four or five independent MPs – economists and businessmen who’ve run opposing the bailout and debt repayments, and tend to be quite economically liberal overall. This would be the ideal outcome for Ireland, but these independents are strongly against the current bailout settlement and may push for a partial default (which would be a good ‘nuclear option’ when the new government tries to renegotiate the bailout terms). Enda Kenny refused to rule out a partial default at this week’s debate, although he and his party haven’t shown the backbone that would require so far.

That would create exactly the situation that many warned about last November, when the Chancellor lent Ireland £7bn of British money, or, to be precise, borrowed an extra £7bn on Ireland’s behalf, acting as guarantor to the money. Ireland’s debt is over £100bn and the economist Constantin Gurgdiev, who’s been remarkably prescient about the crisis so far, thinks that a default is unavoidable. 

That would probably mean Ireland being expelled from the eurozone, and might destroy the currency altogether. I don’t know what the global implications of that would be, but it’s probably safe to say it wouldn’t be good. But it would be irrational for the new government to do anything else: default seems a lot better for Ireland than carrying around that debt with its 6% interest rate and the interest payments on the bailout alone are about 10% of total government expenditure. It's a pity that it'll mean catastrophe for the rest of us.