COLUMN-Can Ireland rely on Germany? Margaret Doyle, Paul Taylor

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-- Margaret Doyle and Paul Taylor are Reuters columnists. The opinions expressed are their own --

By Margaret Doyle and Paul Taylor

LONDON, Feb 25 (Reuters) - Less than a decade ago, Ireland's deputy prime minister told an American audience that the Irish felt much closer to Boston than Berlin. A humbled Dublin now believes its future depends on decisions taken in Berlin more than anywhere else.

An economic slump, a banking crisis and a public deficit in double figures as a percentage of GDP leave Ireland feeling vulnerable. The spreads on its debt have ballooned to up to 180 basis points above the benchmark German Bund, raising borrowing costs, as investors shun the country. And some bank depositors have fled to what they perceive as the greater safety of Britain.

While the gung-ho Celtic Tiger wooed American corporates with low tax rates, infuriating France and Germany, the Irish government is now aligning itself as closely as it can to Berlin. In a Reuters interview Finance Minister Brian Lenihan said his German counterpart Peer Steinbrueck was "very impressed" with the 7 percent average pension levy that Dublin has slapped on its public sector workers.

Lenihan said Ireland is in the frontline of the eurozone, implying that any breach of the Irish defences might bring the whole currency union crashing down. For Germany's export-driven economy, that would be a nightmare scenario. Lenihan disparaged Britain, always semi-detached from Europe, saying its bank guarantee (however implicit) was draining deposits out of Ireland, while the depreciation of sterling was distorting the EU single market.

A panic-stricken Irish public is likely to reverse last year's referendum result and vote in favour of the Lisbon treaty later this year, fulfilling a key German interest.

Like the banking system that Lenihan is trying to save, this strategy is a fragile edifice. It relies on Dublin being able to impose harsh spending cuts and swingeing tax increases. The public is in no mood to take its medicine from a party it blames for the mess.

If Dublin manages to engineer a turnaround in its public finances but the markets remain unconvinced, the question is how exactly the Germans might help. In the early 1990s, the Germans chose strong money over supporting Britain when it came under pressure in the EU's Exchange Rate Mechanism. It is far from clear that they would be any keener on rescuing the Irish.

Axel Weber, head of the Bundesbank, said in an interview published on Wednesday that a bailout would be against EU rules. Help would be only given in extremis and then on punitive terms: Weber said the conditions would mirror those of the International Monetary Fund.

Berlin will be no softer than Washington.

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