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.

1 comment:

  1. Stimulating piece. When I think of how the 'unthinkable' happened to the Soviet Union and how the 'unthinkable' occurred with the democratisation of Eastern Europe policy makers should be better prepared to acknowledge the lessons of history.