Duncan’s Economic Blog

Ireland & the Eurozone: First Thoughts

Posted in Uncategorized by duncanseconomicblog on November 29, 2010

So, we have a provisional deal in Ireland. And the deal is only provisional; the new government new year will almost certainly re-open the talks.

What does this actually mean? In the (very) short term, some of the pressure is now off Ireland. Although in the medium term this solves nothing – no haircut on bank or government debt makes this unaffordable. The underlying problem is being ignored. By 2014 interest payments will be 20% of Irish tax revenues – there is no way to balance the budget with that kind of headwind. The cuts mean that the medium term prospects for growth look horrible.

The next obvious flash point (financially speaking) is the Budget, followed by the election. I’d be voting Labour myself, although expect Sinn Fein to do surprisingly well.

For the Eurozone as a whole the crisis is far from over. There is some immediate relief in the markets today (to be expected) but I still believe Portugal will be under pressure soon. The market reaction is hardly euphoric. We were told in May that the bailout of Greece was the end point. It bought Ireland six months. I expect Portugal’s period of “calm” to be a lot shorter.

One brighter development is reported in today’s FT – the ECB is looking at extending liquidity support for periphery banks (a necessary but not sufficient step for recovery).

Baseline scenario runs through 4 scenarios for the future of the Eurozone that are well worth a read.

In the end game, we are going to see either restructuring of debts or outright default. The banks needed to be prepared to take this hit. Following the Greek disaster 6 months ago, the EU conducted “stress tests” and decided that “everything was fine” with Eurozone banks. We need to use this breathing space to conduct real stress tests (assuming large losses on periphery exposures) and re-capitalise banks ASAP. We might not get another chance.


3 Responses

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  1. Neil Wilson said, on November 29, 2010 at 10:35 am

    The problem is that without effective transfer payments from the rich areas to the poor areas – as occurs in the Federal United States of America then this currency union is nothing more than a complex currency peg.

    The gold standard failed.

    Bretton Woods failed.

    Only those with Big Hug rose tinted spectacles can believe the EMU will survive in its current form. The stability pact practically gurantees its downfall.

    And in the meantime millions of people are denied work and income – all for some grand scheme. It’s criminal.

    • duncanseconomicblog said, on November 29, 2010 at 10:37 am


      I think the Euro area can be made to work – but I agree it requires those sort of transfer payments in the long term.

      Not sure how politically feasable that it is.

      • gastro george said, on November 29, 2010 at 3:08 pm

        Isn’t there an argument that payments to the poor areas will end up back in Germany anyway due to the balance of trade? So any German payments are almost a Keynsian stimulus at an arms length – and less of an arms length than QE.

        Of course selling that to the German public is something else.

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