The increasingly likely prospect of an Irish bailout is looming and that is also likely to have an impact on the UK.
While the UK was not involved in the Greek bailout, British taxpayers are liable for one of the two bailout funds agreed in its aftermath: the €60bn European Financial Stabilisation Mechanism (EFSM), founded on a very dubious reading of the EU treaties, is a lending facility guaranteed by all EU member states, including the UK, using the EU budget as collateral. The other bailout fund, the €440bn European Financial Stability Facility (EFSF), was agreed outside the EU treaties, and can also issue loans guaranteed by eurozone governments.
According to Downing Street officials, the UK's share of the €60bn fund is 12%, so British taxpayers are potentially liable for between £6bn and £7bn at current exchange rates.
If Ireland asks for help it is up to the European Commission to propose the use of the EFSM with EU finance ministers making the final decision. However, the vote is taken by qualified majority, meaning that the UK has no veto and effectively no choice in whether to contribute to a bailout using the €60bn fund.
A UK Treasury official has already been quoted in the Times saying that the UK will its play its part to help Ireland. “This is not like Greece — they are close trading partners,” the official said. The Mail also quotes an official saying, "There are several ways it can be done, but it looks like EFSM will be used - that's the one we participate in".
It seems likely that the EFSF would be used as well, with additional funding coming from the IMF, to which the UK also contributes.
David Cameron has said today that stability in the Irish economy is "very much in Britain's interests". Shares in RBS reportedly fell 5% this morning over investors' fears of the banks' exposure in the country and Bank of International Settlements' estimates from June highlighted that the UK's exposure to Ireland was greater than Germany's.
But while it's in the UK's interest to see Ireland through, a bailout must come at a price. The eurozone's one-size-fits-all exchange rates contributed significantly to Ireland's fate, with a huge property bubble fuelled by low interest rates. This private debt problem is now becoming a public debt problem as the government struggles to cope with the ailing banking sector.
The question is what will change in the future to ensure that this doesn't happen again? Serious questions need to be asked about whether Ireland's membership of the eurozone is really sustainable.
The unholy alliance of politicians and banks believed the fairytale that Ireland could simply hand sovereignty over monetary policy to the ECB in exchange for growth and German-style stability. It was their poor decisions which also contributed to the economy overheating and a bailout should not be allowed to paper over their role in the crisis.
As Cameron said today,
"I don't want to make life difficult for the Irish at a time when they are trying to take difficult decisions about their own economy but they did have a consumer boom, property boom, badly-regulated banks...
"They added to that the issue of euro membership - I always think the great lesson from the Exchange Rate Mechanism is that the Euro is the Exchange Rate Mechanism without an exit, and that is the problem."
The eurozone's monetary policy was and is going to be unsuitable for Ireland for the foreseeable future and the fate of many Irish citizens' economic futures now lies largely in the hands of others. Maybe it's time to consider the exit?