Michael Berendt's blog

The eurozone will never be the same again – and nor will Europe as a whole. The scale of the crisis which has hit the single currency area in recent weeks is transforming the European Union.

It looks as if the first victim is the European social model, as governments slash and burn, reducing public services, cutting benefits, tackling the spiralling cost of pensions and even – in Ireland’s case – reducing the minimum wage. The classic trade-off between “Social Europe” and the European single market has taken quite a bashing.

The question is whether the political system can take the strain. There is a theory that revolutions are triggered, not by the long-term downtrodden or those who have always been poor, but by those whose lives have turned for the worse.

Life is going to get tougher for many people, but I must say that although there have been angry protests – rioting in Greece, a general strike in Portugal, pensions protests in France and student demonstrations in England to name a few – there has so far been general acceptance that the tough medicine must be taken.

There are fascinating aspects to the crisis. One is the role of the International Monetary Fund. The IMF was already active in eastern Europe before the euro hit real trouble, but it was hardly expected to become senior fireman at the rescue of the euro. Yet that’s how it has turned out, probably because the Fund can provide the independence and muscle which the European institutions lack.

Another feature is the way in which EU countries outside the euro area have responded to the crisis. The UK, for instance, has committed direct support to Ireland of €7bn, and Sweden has also announced its willingness to help. Of course the British and Irish economies are deeply interlinked, British banks are heavily exposed to Ireland and Ireland is one of the UK’s main export markets. The stability of the euro is essential for all European economies, whether they be in or out of the eurozone.

Finalising the bail-out facility for Ireland has been an object lesson in how economic governance might or might not work in the future. Take Ireland’s 12½ per cent corporation tax. For nearly 40 years other member states have demanded that the rate be raised closer to the European average. It is a highly sensitive issue well beyond the eurozone. Rhodri Morgan, first minister for Wales from 2000 until 2009, argues in today’s FT that Ireland’s tax regime sucked inward investment away from poorer regions of the UK like Wales and attracted big corporations to register in Dublin. He demands at least an undertaking that Ireland does not present itself as a tax haven.

There’s little doubt that Germany and France thought a bail-out of Ireland would give them the leverage they needed to force up the corporate tax rate. It has been a consistent theme in French and German press reports for weeks. No wonder that the Irish resisted any bail-out for as long as they could! They have fought tooth and claw to protect the low rate and perhaps made this a condition of accepting the eurozone support which was deemed essential to prevent a wider euro crisis.

The Irish were not on their own in resisting the pressure. They had allies among other EU countries for whom fiscal policy must remain the prerogative of national governments and is no business of European institutions. Eurozone economic governance is not for them.

The position of Germany is now key. It’s ironical that Chancellor Merkel should claim the pre-eminence of politics over markets just when she is arguing that bondholders should share the pain of sovereign default. The markets have bitten back with a vengeance. Their fear – that this approach will be a feature of any Irish, Portuguese or Spanish bail-out – sets the backdrop for tumultuous weeks ahead.

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