Ireland: The Next Iceland?

Is Ireland the next Iceland? That question might have seemed preposterous six months ago. Today it’s hard not to answer it in the affirmative.

The country’s banks are teetering on the edge of nationalization as they continue to hoard rather than lend money the government has injected into them. Unemployment is forecast to rise as high as 14% this year with the possibility of hitting 20% in 2010. Irish government bonds are trading at a spread of 2.18% to the benchmark German issues. The economy may shrink by up to 8% this year.

Into this disaster, the government now intends to introduce measures to begin bringing down the deficit to the EU mandated maximum level of 3% of national income. Currently it’s running at about four times that level. How they intend to squeeze that sort of revenue out of their economy is anybody’s guess. Why they would introduce such policies is a question that shouldn’t even have to be asked.

On display again is the inability of the EU to deal with a crisis of this magnitude. Rigidly adhering to arbitrary deficit ceilings at a time when just the opposite strategy is called for is straight out of the 1930’s policy blunder book. It is hard to imagine Irish society tolerating this sort of pain for long. If the EU does not soon see the light of day, the damage to the Euro could be deep and lasting.

More here (Guardian.co.uk)

Comments

[Bagsnatcher]

"the damage to the Euro could be deep and lasting"
I would go further and say that it is the beginning of the end for that grand "peacekeeping" project called the EMU. There is little chance that it will still stand 5 years from now. Grand as it was, it will only be a footnote in history. EUR - RIP

2009 Apr 09 04:56 AM

[morph366]

Why can't Ireland take a bridge loan from the IMF to build bridges to stimulate their economy?
Hopefully when the bridge loans come due the activities of the Fed will have reflated property prices around the world enough and then Ireland's banks can be taken private again and the Irish government can pay back the IMF. If not they can always take another bridge loan to build even more bridges.
If the euro does fall apart - which certainly Germany, France etc will do their utmost to avoid but which may well hinge on how other troubled EMU members react to their domestic crises - e.g. Portugal, Greece and Spain - the systemic consequences would be like a magnitude 8 seismic event.

2009 Apr 09 05:10 AM

[CautiousInvestor]

Ireland is in a tough spot and I think it resembles Latvia more than it does Iceland. As the author notes, they will be forced to reduce the budget deficit in accordance with EU policy over a five year period. Nevermind Keynes.

The scale of the task facing Brian Lenihan is herculean. He must outline a coherent plan for bringing the state’s finances under control over the next five years, strike the right balance between tax increases and cuts in public spending and convince international investors who lend money that his strategy is a credible one. On top of that he has to put in place stimulus measures that will put a halt to spiralling uneployment.

Lenihan has made a start by taking a scythe to the public sector and to politicians' pay and perks. But the exercise has simply shown how far out of line Ireland's political pay had become through creative benchmarking. Brian Cowen, Ireland's Taoiseach (prime minister), for example, earns more than either Germany's Angela Merkel or France's Nicolas Sarkozy.

2009 Apr 09 06:34 AM

[Chancer]

Wake me up when you can buy an ocean front Irish castle cheap.

It's a beautiful country.

2009 Apr 09 02:48 PM

[Gedankonomist]

Huh? Why don't you just ask the tooth fairy to wave her magic wand?

On Apr 09 05:10 AM morph366 wrote:

> Why can't Ireland take a bridge loan from the IMF to build bridges
> to stimulate their economy?
> Hopefully when the bridge loans come due the activities of the Fed
> will have reflated property prices around the world enough and then
> Ireland's banks can be taken private again and the Irish government
> can pay back the IMF. If not they can always take another bridge
> loan to build even more bridges.
> If the euro does fall apart - which certainly Germany, France etc
> will do their utmost to avoid but which may well hinge on how other
> troubled EMU members react to their domestic crises - e.g. Portugal,
> Greece and Spain - the systemic consequences would be like a magnitude
> 8 seismic event.

2009 Apr 09 03:51 PM