Analysis and Commentary on Irish Banking and Eurozone Stability - An Economist's View.
Wednesday, 6 April 2011
Greece – Ireland – and now Portugal: Bailouts and Defaults and the Implosion of the Eurozone
Portugal’s decision to seek a ‘Bail out’ was inevitable. It almost certainly, signals a terminable fracturing of the Eurozone. The contagion will now spread to Spain – and it will not stop there. Sovereign debt defaults are now well nigh inevitable. The Irish poet W.B. Yeat’s put it best ‘things fall apart, the centre cannot hold’. The weakness of the peripheral economies reflects the very different structure of their economies compared with that of Germany. It also has to be said that each of the peripheral economies, including Ireland, is suffering from its own distinctive self-created wounds. Even so, the continued insistence by German and French Federalists on imposing the Stability and Growth Pact targets, has proved wholly counter-productive. It has not assisted the peripheral countries in recovering. In their attempts to impose a wholly misconceived discipline on the Eurozone countries. Euro Federalists have pushed Ireland and now Portugal into a vicious deflationary cycle with chronically weak banks undermining the status of their governments in the sovereign debt market. It was always the case that recovery, followed by closer convergence across the Eurozone’s disparate membership, would take not years, but more like decades. Germany and the ECB were not prepared to compromise on the Stability and Growth Pact. Is there really anyone who still believes that Portugal or Ireland can achieve the convergence criteria of a 3% current deficit and a 60% debt GDP ratio by 2014/2015? Particularly under the crushing burden of increased debt servicing costs and with ECB rates set to rise. For the peripheral economies, the initial issue is less about Bailouts than about planning for orderly sovereign defaults. It is about the leadership necessary to reconstruct their economies, based not on a malign EU orthodoxy, but rather on their own latent strengths and on the willingness of their people and institutions to engage in transformation change and trust-building. Ireland must now contemplate an enforced exit from the Eurozone with all of the enormous disruption that this would entail. Ireland has never been less than fully committed to the building of a values-based Europe, characterised by solidarity and subsidiarity, as well as mutual respect. This vision – and the singular achievements of recent decades – has been eclipsed by the ad hoc, reactive and prescriptive approach to mitigating the strains of the global financial crisis across the Eurozone. For all Ireland, and Portugal’s mistakes, it is the Eurozone’s leadership that lost the plot and which the primary cause of the escalating collapse of Europe’s peripheral economies. If the still-unfolding crisis has taught us anything, it is the need to plan proactively, for the ‘unthinkable’. This now means the break-up of the Eurozone under the twin pressures of punitive bail-out arrangements and the inevitable sovereign defaults. It is also worth recalling the oldest monetary union in Europe – which latest some 200 years – was the pre-ERM link between Ireland and the UK.