When politicians (Merkel and Sarkozy) attempt to regain control of the markets by threatening private lenders to the Irish State with contributing to the restructuring of the Irish debt, the lenders get scared and try to get rid of their suddenly questionable Irish debts by dumping them on the market. This in turn makes risk premiums (interest rates) shoot up, making the situation in that country even worse. As to be expected, it is feared that all the private lenders who hold loans of other indebted countries in the eurozone will adopt the same behaviour, thus risking depreciating the bond assets of the banks most at risk and bankrupting the whole of Europe.
To stop this « systemic » epidemic, as they say, it has meant that Nicolas Sarkozy and Angela Merkel had to do the honourable thing and publicly retract their declaration. Jean-Claude Trichet had warned them of the risks, only to be repaid with a public reprimand from the French President which was as scathing as it was short-sighted. Today, things should be clearer in the minds of Angela Merkel and Nicolas Sarkozy : when one follows the market, one is a slave to the market. The lesson also applies to those of Right and Left who are addicted to government deficits ; the Irish example shows that it is the surest way to alienate political independence from speculators.
But perhaps the hardest thing for our citizens to understand is that the Irish crisis is completely different from the Greek crisis : Ireland resisted the European Union’s help while Germany, who did not want to intervene in Greece, begged Ireland to accept (while Ireland appealed a legal objection from its Constitutional Court) ! Make of that what you will.
Ireland, whose pro-European sentiment is not the strongest, did not want Europeans putting their noses in their public expenditures, while Germany realised that with the single currency, a bad Irish cold threatened to infect its banks and destroy its small depositors. Meanwhile, in the absence of an Irish fiscal consolidation plan (32% of GDP deficit !), it is only Jean-Claude Trichet’s European Central Bank who has somehow bailed out Ireland by acquiring debts the private sector are selling cheaply in abundance through a massive production of Euros, devaluing it for the best (the competitive Monetary Union) but especially for the worst (the devaluation of savings, the weakening of banks and the rising price of energy).
In reality, Europe suffered the unending torment of a unified currency area which is not master of its fiscal policy, but rather is fragmented into 27 quibbling national sovereignties...
The prediction of this Kafkaesque situation, however, was clearly spelled out by economists in the 90s when the Euro was first conceived.
This pernicious situation, caused by a failure to sign up for an advance commitment of European fiscal federalism, was paradoxically rejected by France and Germany during talks with the European Parliament about the 2011 EU budget. The solution is laid out to us with diplomatic firmness by Wolfgang Schaübble, the excellent German Finance Minister. It consists of establishing on the European Union a Franco-German Directive, more German than French, on the basis that the two largest economies in Europe have a special responsibility not to be destabilized by the fiscal profligacy of the other. This German message, addressed to Ireland, is also subliminally addressing France. The future of Europe is in play, as Herman van Rompuy warned us from the height of his European impotence.
In fact, under pressure of events, Germany has turned itself into a form of Economic Government for the EU, which consists of nothing more than putting under guardianship failing states in return for the aid the EU gives them in order to save itself. This empirical evolution of the Germans, towards which notably the French Left has been urging them for several years, has the irony of placing them in the position of guardian of Europe. One now understands better why Nicolas Sarkozy presented basing the budget and French taxation on German thoroughness as a political choice to the French public ; it is hardly a sovereign French political choice the European constraints which, incidentally, the French Left will have to cope with, so as not to make Europe implode.
An alternative solution, which is more European, less German and more economically sustainable, was to evolve a truly European « federal » budget, capable of developing a single European fiscal policy against the single currency. However, Germany is fiercely opposed, as is France.
What cannot be denied is that Merkel and Sarkozy are no Mitterrand and Kohl. The Franco-German engine has become a brake, risking that candidates entering into the eurozone will think twice before giving up their national "independence”.
The crisis gave birth to a European economic policy, rather than a European fiscal policy...