Ireland Is Going To Show Us Just How Much Pain a Country Can Endure
Financial markets are hitting Ireland again today on news that the burden of rescuing its banks is rising again. The political system's stability should be on our radar screens.
The trigger this time is Anglo Irish Bank, a real disaster of a firm that has seen so many loans go bad that that the government split it into a good/bad bank to cordon off the bad assets and recapitalize what's left. Now, bondholders in the bank may also take a hit, a welcome bit of financial justice.
But what really hurts is the fiscal consolidation that Ireland has undertaken despite being mired in an awful contraction -- GDP has shrunk about 10 percent since the crisis began. Data released yesterday confirmed that Ireland's recession is still in full swing. The government has managed to keep financial markets at bay with a searing austerity program that it will now, in all likelihood, need to take even further if it is going to maintain its ability to borrow, central Bank governor Brian Honohan said a few days ago.
What could that entail, in a country that has already done so much? The economists at Danske Bank of Copenhagen (don't worry, one of their people is an Irishman) have some thoughts about what more Ireland could do to rein in its budget deficit. Cut its infrastructure spending more. Broaden the tax base to hit more lower- and middle-income families. Cut social benefits. Take another whack at public sector employees. Or, put another way, Ireland can chip away at what makes its economy more productive, bleed those who can least afford it, bleed those who really can least afford it, and slice into demand by firing people. Ugh.
Throw into the mix a prime minister, Brian Cowen, who apologized for "below par" performance in a radio interview in which he also sounded tired and disconnected, and an opposition that is circling around him and you get a recipe for some ugly political economics coming up. Nobody wants to say the word "default" in today's Europe. But the risk that Ireland follows Greece into the arms of Europe's rescue fund is more than tiny.
Related:
- European Stress Tests Stress Investors Who Wanted More Information
- European Bank Stress Tests Turning into Dangerous Farce
- Not Making This Up: New European Debt Crisis Is About Hungary
- Europe's Crisis Will Make Markets Unstable for Some Time to Come
- European Rescue Plan, Part Two: What's Missing
- Give It a Rest, Already -- the U.S. is Not Like Greece