Ireland’s collapse is a direct and immediate consequence of the euro. As early as 2001, Irish economists were warning that the boom was getting out of control, and that interest rates needed to go up. But, of course, there were no Irish interest rates any more: There was only the European Central Bank. Its policy of cheap money was arguably excessive even for the core European economies; for Ireland, it amounted to catastrophically pro-cyclical monetary policy. A credit bubble was inflated; the bust, when it came, was commensurately painful.
I know no one likes to hear this, but we told you so, we Euro-skeptics: We predicted right from the start that the euro would lead to an unsustainable boom in the peripheral members, followed by a terrible crash (see here).
The credit crunch was just the beginning of Ireland’s euro-related troubles. Unable to devalue, the country suffered as the United Kingdom, its largest export market, gave itself a 25 percent competitive advantage.
Ireland’s position has now become calamitous: debt and unemployment are rising, prices and incomes are falling. GDP is down by an almost unbelievable 20 percent from peak. And here’s the really bad news: These problems will carry on for as long as Ireland is in the euro. Bailout or no bailout, Eire’s economy diverges cyclically and structurally from Continental Europe: Save by occasional and fleeting coincidence, its interest rates and exchange rates will always be wrong.
The obvious solution, of course, would be for Ireland to withdraw from the euro, recognising that its trade patterns and economic cycle link it to the Anglosphere. (Since the British devaluation, the U.S. has overtaken the U.K. as Ireland’s largest market.) Once again, it would be able to suit its monetary policy to its own needs. Immediately, it could start to export its way back to growth.
Ireland’s political elites remain wedded to the EU, which has become a handy way for Irish officials and politicians to make a good living. Then again — I’m afraid there is no way of putting this gently — these are the same liars who promised that voting for the European Constitution Lisbon Treaty would lead to an immediate recovery. It’s surely time to try something different.
– Daniel Hannan blogs every day at www.hannan.co.uk and is the author of The New Road to Serfdom: A Letter of Warning to America.
The EU was not set up to emulate America by establishing a "United States of Europe." That conceit was sold though to build support in Yankeeland. Because it was intended to break down local identities the EU avoided the mechanics of Federalism that the US had pioneered, even where they arguably might have worked and the trappings were at hand.
For example the US has 12 regional Federal Reserve banks that adjust the money supply based on the needs of their localities. If the EU had viewed their monetary system from that functional approach, rather than as part of a grand ideological project, then it might have worked.
Unfortunately the US has itself gotten away from its federalist roots in a drive to become more European. For example the immediate engines of the melt-down in 2008 were Fannie and Freddie. They served as a joint tool for the centralized control of the economy. Reforms should include breaking them up into 12 Federal Regional Mortgage Associations.
Reply to this commentLinkReport AbuseIt wasn't the Euro or low interest rates that busted Ireland. A stable currency and a lower cost of lending are good things. When the Euro inflates to bailout banks and other market speculators (exactly the same thing is happening with the dollar) that causes a problem. Yes there was a housing bubble. It's not clear that the same MBSes and limitless leveraging were made available as in the USA with Fannie Mae & Freddie Mac.
The Euro was highly inflated, mainly to suit the nationalist (trans-nationalist?) pride of Europeans in competition with the dollar and US economy.
The European economies were doing well, with strong manufacturing (automobiles), pharmaceuticals (though principally in Switzerland), technology & electronics (Nokia, Dell, etc), minerals (North Sea oil), finance (though principally in England), and tourism (primarily in the so called PIIGS), and even agriculture. An increase in low cost, labor (from newly liberated eastern Europe, as well as the Middle East) also helped.
The end of the cold war, free trade and yes, the Euro helped spread peace and prosperity, though the level of government spending managed to outstrip growth. Combined with a new dynamic system -- despite the EU collaboration, there were still unique economies and different regulatory regimes in place.
The "good times" of the 1990s and 2000s weren't a false boom, but speculation (private and governmental) & lack of regulation (espcially enforcement of regulation) led to the bubble and inflation, and now bust and deflation.
The USA was also doing well. Our bubble was primarily speculative and principally privately held in nature, and ours has resulting in government bailout of private speculators, while Europe's had more (direct) government involvement at an earlier stage (due primarily to the nature of their more socialized economies.)
In fact, the European countries that are suffering the least harm (Scandanavia, Germany, the UK) are doing so primarily because of decreased government involvement. Certainly 15 years ago we would have said Norway and Sweden were more socialist (in the sense of government involvement in the economy) than Greece or Spain.
Reinflating the bubble isn't the answer in Europe any more than it is here. In fact, the problem is that the bubble has burst, pumping more money into it (created out of thin air -- or in the form of debt) isn't the answer, because it was an unnaturally inflated level already, but also because that busst represents a rupture that liquidity will continue to pour out of (likely faster than it can be reinflated) that also can't be patched while they're still pumping.
Stable money is what's needed, and government (or corporate) bailouts not only delay but exacerbate the problem.
Withdrawing from the Euro would be easier for Germany because if it's size and relative strength, but when it comes down to it, it's military strength, not economic (though the one leads to the other) that would enable it. It's a pure play of force that keeps Ireland from withdrawing from and accepting the EU mandates.
Reply to this commentLinkReport AbuseAnd yet Mr. Hannan found it possible to support Obama for president?
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