To stroll around the old walled city of Dubrovnik on the Croatian coast is to savour one of Europe’s gems. From its marbled streets to the immense baroque cathedral, the heavily fortified harbour and the oldest pharmacy in the world, ancient Dubrovnik exudes affluence. In fact, many of the cities of Dalmatia’s coastline — where I am writing from — attest to huge past wealth.

With the world’s oldest orphanage (founded in the 14th century) and one of Europe’s oldest synagogues, it’s clear the people of Dubrovnik were both enlightened and tolerant. So where did the cash come from?

The Dubrovnik Republic was one of a number of very powerful city-states that emerged in the Middle Ages of which Venice was the most powerful and influential. The city-states were constantly playing the role of middleman between the big powers, sensing the big powers’ weaknesses and anticipating their next move.

As long as a city-state juggled its allegiances and avoided any military showdowns with the big boys, it could trade and export its way to prosperity.

The elders of Dubrovnik realised that the city was in a delicate position, occupying a crucial strategic point in the Adriatic, half way between the expanding Ottoman Empire to the south-east and the rapidly developing Renaissance markets of Italy, France and Flanders in the north-west.

Trading with Renaissance Europe in lead and silver from Turkish-occupied Serbia and Bosnia (the silver mines still exist in Kosovo today) and silks and spices from the Levant, generated Dubrovnik’s immense wealth. Indeed, the Republic’s most famous son, Marco Polo (allegedly born on the nearby island of Korcula), epitomised the swashbuckling, capitalist adventurers of the time.

In the first example of a national branding campaign, by the early 17th century, Dubrovnik had opened trade consulates in 80 cities from Alexandria to Marseille. As a result, Dubrovnik was always watching the big powers and seeing where their interests were heading.

Today, small countries like Ireland could take a leaf out of the book of the old city-states. Instead of committing ourselves totally to one sphere of orbit, we could play a trading game, seeing where the big powers’ interests have shifted and altering our own policy accordingly.

Events of recent days have shown how dangerous it is to be dependent on one large trading bloc. It is clear our Government was slapped down on burden sharing at the last minute. In a world of free moving capital, this humiliation has to be acted on.

Maybe Barack Obama’s visit next month, along with that of Queen Elizabeth, will open our eyes to the fact that there is more to the world than Germany and France.

In fact, the changing relationship between Germany and France may explain why our Government was left isolated in Europe last week.

Think about Germany. It is clear to anyone who has watched German diplomacy in recent years that Germany is falling out of love with Europe — or at least a certain type of Europe. German tolerance has ebbed and its willingness to turn the screw on us might be more a reflection of the fact that its concerns are elsewhere and it is not as obsessed with Europe as it used to be.

One of the explanations for this might be the chart in the accompanying cartoon. It shows that the influence of China and Russia on German trade and shows how together with Poland these new trading partners are eclipsing France as Germany’s main market. The Germans are turning east at a rate not seen since they turned west in 1945 and this trend is going to continue.

The Germans know that three-fifths of Germany’s population will be aged 60 or over by mid-century, and it seems unlikely that the country’s fertility rate of around 1.3 births per woman will change even if Mrs Merkel were to return to the old cash-for-babies policy.

So in crude terms the Germans have to “bank” their competitive advantage now in order to pay for the old Germany of the future. They won’t do this if they have to keep bailing out the likes of us, so they have doubled their bets on the east and clamped down on what they see as ongoing transfers to the EU’s periphery.

But frankly, that’s their problem and once you figure out the weakness of the people on the other side of the table, you begin the process of strengthening your hand.

I come back to the so-called bailout because we can’t pay for the banks’ debts and, interestingly, there are not so much “our” banks as “their” banks because the main creditor now is the ECB and as we all know from Leaving Cert economics, the creditor owns the company.

One other weakness the Germans also realise is that there are no real sanctions against a default in a monetary union. This is why they threatened our Government last week. The threat was that if we pursued “burden sharing”, the ECB would cut off funding to Ireland and flood the rest of the periphery with liquidity. This would show exactly what happens to a country that breaks ranks and imposes on German banks the losses that they should have taken anyway.

Well this proves that they don’t want to understand how a monetary union works. They could have cut off European liquidity to Ireland as much as the old Irish central bank could have cut off Irish liquidity to Mayo.

The money would simply find its way here as excess liquidity spilled over into all the nooks and crannies of the monetary union. Irish banks would have got liquidity as other banks lent on to the new Irish banks with the cleaned up — post default — balance sheets.

Their lack of comprehension about how a monetary union works on the way up when money cascaded into Ireland is only matched by their lack of understanding about how a monetary unions works on the way down. Yes, we would be downgraded, but there would still be ample euro financing around and, more importantly, as our balance sheet improved, together with a credible budget adjustment programme, money would flood into Ireland to recapitalise us.

We have to understand that this ECB Emperor has no clothes. There is no sanction against an Irish bank default within the euro bar threats and these threats are idle because the system is set up to make sure that liquidity seeps around the union. The threat is as hollow as Gerald Ford’s threat to New York City when in 1975 he said he wouldn’t bail out NYC and told the bankrupt city to “drop dead”. Of course he did a deal. The ECB and Europe’s politicians would do the same.

Yes their priorities have changed. Germany needs China more now then ever and this dependence will increase, but that’s our opportunity. Like Dubrovnik of old we should be watching the big powers. China is now the world’s banker and increasingly Germany’s future. But all this does is generate more surpluses in China because China is using German heavy machinery to add value and export even more. So where will all this money end up? Back in Europe of course and we need to look elsewhere for bridge financing if only to show the ECB that its money isn’t the only cash on the table.

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