Irish cash famine threatens euro, world markets

There's another interesting kerfuffle going on in the eurozone. Ireland looks like it's about to receive a bailout like Greece did earlier this year, but unlike the Greeks, the Irish might have the bailout forced on them against their will. So far pundits and politicians have said the existence of the euro, if not the European Union, is at stake, and that the "contagion" could spread to other economies such as Portugal, Spain and Italy.

http://finance.yahoo.com/news/Why-the-Irish-Crisis-is-Going-usnews-4028366968.html
http://www.guardian.co.uk/business/2010/nov/17/ireland-bailout-debt-crisis
http://www.guardian.co.uk/business/2010/nov/16/ireland-bailout-debt-crisis

Adding to the tension is Finland, which is apparently against adding another bailout recipient to the rolls, and Austria, which yesterday threatened to withhold its monthly contribution to the Greek bailout because it wasn't satisfied with Greek reforms (a position from which it has since climbed down).

http://ftalphaville.ft.com/blog/2010/11/16/406251/greek-profligacy-vs-austrian-obstinacy/

Maybe it's just me, but this whole situation is fascinating. It pits a government's sovereignty and economic policy against its responsibility to its peers in the region and the world economy as a whole. Ireland says it's fully funded through June 2011 and doesn't need a bailout, but can it have a bailout forced on it if the markets say that's not good enough?

 

The euro is doomed. It won't happen any time real soon, but it's an experiment that has essentially failed. There's just no way the Germans, for one, are going to keep underwriting the fiscal lunacy of Spain, Italy, Ireland Greece and Portugal. They've had enough already, and they're realizing that these countries aren't going to play by the rules, because Germany will always come along like a good older brother and take the hit.

And Ireland may well be fully funded through June 2011. But that doesn't mean it can get funding for July 2011, and June 30 isn't the time to rectify that.

 

I don't know if it's fair to paint Ireland with the same brush as Greece, Portugal and Spain. Its downfall came from banks and the property market -- private entities -- more than irresponsible fiscal policy. You could argue Ireland didn't have to bail out the banks, but then it would've assumed a risk a government the size of the US felt it could not bear.

As to your larger point, which is more unworkable -- holding together the eurozone or separating those countries all over again (keeping in mind all the pre-euro headaches that existed)? Can the European Union exist without a common currency? What are those countries supposed to tell the Eastern European nations who have gone to such pains to gain EU entry?

 

Those banks were able to do what they did in large part because of lax government oversight, with no small boost from the insanely low corporate tax rate in Ireland, which is why other European businesses keep moving there. (And why that ultralow tax rate is likely to come under intense scrutiny as part of a bailout.) Ireland's government certainly didn't have any qualms about reaping the benefits of what turned out to be an enormous bubble.

The eastern European nations don't participate in the euro, so they could still benefit from EU membership in much the same way as they do now. I don't think the eurozone will actually dissolve itself. I think at least one of its major members will find a way to withdraw, triggering a domino effect. If I had to bet, I'd say that country will be Germany, but it could probably be France as well.

All I know is there's not really anyone left in the U.K. who regrets not joining up.

 

Is there still an EU without the euro? I thought the whole creation of the eurozone was to ease trade between European nations, something which would not be helped going back to individual currencies and exchange rates.

You're right about the corporate tax rate. That would seem to be the thing for which the Irish government will fight the hardest -- otherwise, what else will it have to sell to draw investment and get out from under its bailout payments?

 

Famine? Really? Can we choose a better word?

 

Well, obviously the EU existed long before the euro, in various forms. And I think maybe it's a sign that they swung too far on the pendulum of cooperation and that maybe a move back in the other direction is the right thing to do. I doubt that the exchange rates between, say, the French franc and the deutschmark would ever move so dramatically as to undermine trade. They might not be in lockstep, but what affects one is likely in many cases to affect the other.

If Ireland still had its own currency, it could easily devalue, take the short-term hit and end up a lot better in the long run. Now it's lost that flexibility.

And I actually thought the famine usage was quite good. What, too soon?

 

It might be 163 years, but yes, too soon.

Ireland was forever changed by the Famine. You think it's odd that New Orleans hasn't recovered in five years?

This chart is of Ireland's population:

 

God damn it must be fun to be a headline writer for European newspapers.

 

Europe is no longer about East and West, but North and South. The North, increasingly, is bailing out the South, although I understand Ireland is an exception. There are also significant cultural and societal differences between North and South that increasingly are more relevant than the old East/West cold war dichotomy.

The EU exists because of two world wars and, to an extent, the cold war, but is both powerful enough to help profligates but not powerful enough to truly rein in their behavior.

 

The British version of The Onion has a typically subtle take on the situation.

"IRELAND TO DANCE ITS WAY OUT OF DEBT"

http://www.thedailymash.co.uk/news/international/ireland-to-dance-its-way-out-of-debt-201011153254/

 

Iceland would be, too, even though it was not an EU bailout.

The Irish government has doubled down repeatedly in bailing out the banks. Brian Cowen and Brian Lenihan's policies have been disastrous to the economy. The main governing party will be lucky if it sniffs a majority in the next 25 years as a result of this.

Here's an interesting article on the Irish housing bubble: http://news.bbc.co.uk/2/hi/europe/8653949.stm