Ireland's crisis puts Germany in the eurozone driving seat

„Seen from Berlin, the situation is relatively simple. Europe should be able to cope with its own internal problems, but if the stronger eurozone countries are too lenient with bailout conditions for Ireland, there will be less pressure on Portugal, Spain and Greece to stick to their deficit-reduction plans. That will mean tough curbs on lending by Ireland's banks, which will deepen the depression. But the alternative would be to risk a domino effect through the weaker economies of monetary union.

For Germany and its ally France, this is a risk not worth taking – not least because German and French banks would stand to lose a packet on their unwise investments should the crisis deepen. But Berlin also grasps that the problems exemplified by Ireland provide an opportunity to complete the construction of the single currency on German terms. The design flaw of monetary union was that the one-size-fits-all approach to interest rates was not accompanied by a joint approach to running their budgets. There was no effective mechanism for forcing those countries where interest rates were too low to raise taxes or cut spending. Similarly, Europe lacked a way of delivering financial help to a country in trouble. This was always a recipe for instability, leaving the eurozone with only three options: to keep muddling along, to accept that political union is the inevitable next step to monetary union, or to accept a breakup of the single currency. Germany would prefer the second option, provided the rules are suitably stringent. A breakup is still the least likely option, although the threat is growing.

For Britain, the crisis shows what life might have been like in the single currency. As in Ireland, interest rates would have been far too low, the housing bubble more colossal, the bust more horrific. UK membership of monetary union is a dead issue, leaving the more interesting question of whether the British government will exploit attempts to neutralise Ireland's corporate tax regime. There is nothing George Osborne would like more than to market the UK as an English-speaking economy that is open to business. Ireland's plight might provide just the opening he wants.”