Tiny Ireland and the major powers of the European Union were still engaged in their strange dance last night The EU and the European Central Bank want the Irish to ask for a bailout. Ireland, crippled by the guarantee it gave its banks and all but bust, says it doesn't need bailing out, thank you very much. Oh yes you do, says everyone else. Oh no we don't, say the Irish, but while you're on the line: what would the terms be?
One has to admire the Irish for their pluck, and for their striving to protect a rather weak negotiating position. If Irish ministers resist they know it would mean the spread of more investor panic to other countries. In theory, this could in time blow up the euro zone, trigger a depression and derail the European project.
Reuters Christine Lagarde of France and Germany's Wolfgang Schäuble Tuesday.Herman Van Rompuy, the EU's president, acknowledged this yesterday: "We all have to work together in order to survive with the euro zone, because if we don't survive with the euro zone we will not survive with the European Union."
But he said he was confident the Irish end of the crisis could be handled. And in one sense he's right. Barring an earthquake, the euro zone is not going to blow up.
Any country leaving would find that its new currency dropped like a stone (which would increase the relative size of its debts, still denominated in euros). It might default but it could not raise a penny on the markets to fund itself. Unless there is gold at the end of the rainbow, or 870 million barrels of oil off the west coast of Ireland, as was claimed yesterday, Ireland's only option appears to be the euro. It long ago passed the point of no return.
As I have argued several times in this space before, and Ireland is discovering, the events surrounding the sovereign debt crisis are driving much closer integration in the euro zone. In exchange for German guarantees, and EU-sponsored bailouts, the other countries in the single currency must learn to live by German rules.
But then what? Accelerated by the crisis, a new model of government without direct accountability to voters is being constructed. And the democratic consequences have been given very little thought other than by a hardened band of opponents.
To listen to European leaders speak in public, one would imagine there really are no implications. It is as it ever was, only a little bit more so. Ireland's Finance Minister Brian Lenihan was interviewed recently and suggested it was the same old story: "Ireland has always been linked to a fixed currency arrangement. We are currently linked to the euro, we were linked with sterling for more than 150 years. Small countries don't have the luxury of having a separate currency, they link themselves to another currency, there's nothing unusual about that."
In reality, the political end of the European project is now being completed, having been parked because it was too difficult a subject when the single currency was founded. So Ireland is not just "linked" to another currency—its independence is no more than notional. In return for its bailout it will lose control over its corporate tax rates, if not this time then a little further down the line. There will be extraordinary oversight not just of budgets but all manner of other aspects of euro-zone countries' economies. That goes well beyond a pooling of sovereignty. If it walks like a government, and it talks like a government, then it probably is a government.
But what happens when enough voters, in what might be called a nation state, inside the euro zone, one day soon decide that they want to change their government? I don't mean reshuffle their political elite, drilled by the bond markets and common currency orthodoxy, but vote to really head off in a new direction right or left, a direction that requires an independent economic policy. Perhaps such voters in countries including Ireland will always be relaxed when they discover the option has been permanently removed by the ECB and EU. But what happens if they are not so relaxed?
Skepticism about the European project leads to nationalism and extremism, said Mr. Van Rompuy last week. It is equally possible that designing a new form of government that does not have democracy at its heart will anger voters and provide an opening for extremists.
Meanwhile, on the other side of the Irish border, the U.K. government is already considering how Northern Ireland might gain a competitive advantage as the celtic tiger licks its wounds.
Intriguingly, in a speech last night in London the Northern Ireland Secretary Owen Paterson raised the possibility of allowing Ulster to have lower corporate tax rates than the rest of the U.K. About 70% of economic activity in the north is in the public sector, and the government hopes to gradually wean Ulster off state dependency.
Mr. Paterson said: "Despite its current economic problems in the first six months of this year the Republic of Ireland attracted over 50 foreign direct investments, including a number of big global hitters. There's an obvious reason for this and it does put us at a real competitive disadvantage. That's why, by the end of the year and working with the [Northern Ireland] executive, the Government will produce a paper on rebalancing the Northern Ireland economy. This will look at possible ways of turning Northern Ireland into an enterprise zone and potential mechanisms for giving it a separate rate of corporation tax to attract significant new investment."
Never waste a serious crisis, as someone once put it.
Write to Iain Martin at iain.martin@wsj.com
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