Irish and Greek Defaults Will Reshape Europe
German and British taxpayers are beginning to realize the downside of our economic interdependence in the global economy. When British banks have too much exposure to Irish banks, all of a sudden Dublin’s property crash becomes the UK’s problem. Similarly, when German taxpayers have to bail out bankrupt governments in Athens and Dublin, Greece and Ireland’s problems become Germany’s. How long will that model of international economic interdependence last?
Probably not too much longer, particularly if Portugal and Spain have to join the bailout queue, too.
What’s increasingly obvious, as I noted in my May 26th blog post, is that the European monetary union is no longer feasible. A monetary union between similar economies, like those of Germany, France and the Benelux countries, is. But clumping fiscally wayward economies with much lower per-capita incomes, like Portugal, Spain, Ireland and Greece, into a common currency union with Northern Europe is no more sustainable than is a monetary union between Mexico and its North American free-trade partners, the US and Canada.
It might have taken an oil-induced financial shock to unravel it, but the euro was an accident waiting to happen. By not allowing their loosely regulated banks to fail, countries themselves are failing as a result. So while Irish banks keep their doors open, schools and hospitals will soon close as the country tries to cope with a public-sector deficit one third the size of its economy. (Curiously, these are the very same banks that only recently passed financial stress tests.)
German taxpayers, who must shoulder the lion’s share of the financing burden for the 85 billion euro bailout package for Ireland, are understandably increasingly irate that they have to dish out billions so that Ireland can maintain a 12.5 per cent corporate tax rate that steals jobs and production from their own economy. And they weren’t any happier when even more of their hard-earned tax dollars were being sent over as welfare checks to Greece, a country where tax evasion is a national pastime.
Taxpayers in creditor countries are starting to ask themselves the same question that bond holders have been troubling themselves over. The burden of reducing a deficit as large as one third of GDP means that the Irish economy, like the Greek one, will be shrinking for the foreseeable future. And shrinking economies, riddled by growing social unrest, are not economies that are able to service gargantuan debt loads. That’s why the bond market was already charging Ireland as much as three times Germany’s borrowing rate.
Chances are that Ireland and Greece (and likely Portugal and Spain) are going to default, unraveling the monetary union. What will follow: a born-again drachma, Irish pound and perhaps escudo and peseta. And as those currencies plunge in value against what’s left of the euro (likely still to be traded in Germany, France and the Benelux nations), even the free trade zone may be up for grabs.
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