I wrote a day or two back that the Irish bail out was bound to fail. I’ve also drawn attention to the obvious parallell with post WW1 reparations for Germany – and the resulting massive social harm.
I’m glad to note I am not alone. Take this from Barry Eichengreen in an article entitled “Ireland’s Reparations Burden”:
The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse.
It pains me to say this. I’m probably the most pro-euro economist on my side of the Atlantic. But given this abject failure of European and German leadership, I am going to have to rethink my position.
The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. After a couple of years, not just interest but also principal is supposed to begin to be repaid. Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.
This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?
But European officials are scared to death not just by their banks but by their publics, who don’t want to hear that public money is required for bank recapitalization. It’s safer, in their view, to kick the can down the road in the hope that something good will turn up – to rely on “the luck of the Irish.”
As John Maynard Keynes – who knew about matters like reparations – once said, leadership involves “ruthless truth telling.”In Europe today, recent events make clear, leadership is in short supply.
Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley.
I think I am right.
I think he is right.
The ECB are right to be doing QE.
But the real issue has not been tackled.
As i argued here it’s systemic – and until we recognise that the problem won’t be going away.