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The Corner

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Re: Merkel, Raving



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Chancellor Merkel isn’t just wrong about market “excesses” having caused the crisis. She could be wrong in various ways, depending on what she means by “crisis.” 

A big reason for Ireland’s current sub-crisis is that in the fall of 2008, the nation guaranteed all of its bank liabilities. This fateful choice was not a market decision, but a government one.

One could make the case that had Ireland let its bank bondholders go, as Iceland did, Ireland would be better off today. Unlike Greece, Ireland has competitive tax rates, an English-speaking population, and a workforce that desires work.

But Ireland instead hitched the brick of bank liabilities to its sovereign balloon. The balloon hasn’t brought the bricks up; the bricks have brought the balloon down. Europe — if the Continent (and Britain) were to require Ireland to raise its tax rates as a bailout condition — could pop it.

That price may be too high for Ireland. But now, Ireland can’t undo what it did two years ago, at least not easily. Because of Ireland’s guarantees, investors would view dropping the banks now as a selective sovereign default.

Further, as Britain now prepares to help its neighbor, it should learn Ireland’s lesson. Will British “help” strengthen Ireland — or weaken Britain?

Merkel still deserves credit for fumbling belatedly to create a way sovereign European bondholders can take losses in the future, though, a subject that the U.S. government ignores with respect to its own states.

— Nicole Gelinas is contributing editor to the Manhattan Institute’s City Journal.



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