Ireland may be forced to leave Euro Zone

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Just when you thought it was safe to think things were back to normal with European banks, the recent announcement regarding new banking stress tests from the mandarins in Brussels indicate that the sovereign debt crisis is far from over.

The solutions to date have not comprehensively solved the core weakness of the Euro. New bank stress test will not solve the problem. An idea floated late in December to issue multi-state backed Eurobonds would have been an ideal solution.

Germany balked due to the possibility that this maneuver could have jeopardized its debt rating thus raising its cost of borrowing. This failure in German leadership indicates that Berlin is not committed to a fully federal Europe and I believe that this lack of solidarity will eventually lead to a two tier Europe and a possible breakup of the Euro.

The current policy allows peripheral states fall directly under IMF/EU control without concomitant democratic checks and balances and amounts to a dictatorial solution to what ultimately is a democratic problem.

Instead of moving forward comprehensively to develop a “Euro Bond," which would be guaranteed by all member states, Brussels came up with a half-baked theoretical synthesis conceived during the Greek crisis.

Following the meltdown in Athens, the European commission set up the European Financial Stability Facility. Each member state contributes to the facility. Currently it stands at 440 billion Euro. This war chest is sufficient to rescue Greece, Ireland and Portugal. However the elephant in the room is Spain. This could be the financial story of 2011.

Spanish regional banks are very very shaky.  It is reckoned that Madrid has so far only allowed 50% of potential mortgage losses to be recognized. In the event of default, the funds needed by Spain would dwarf those soaked up by Ireland and Greece.

If the new bank stress tests really do their job the amount of losses required to be written off could push Spanish banks, reeling from property losses, over the brink, particularly if interest rates start to rise.

Inflation rates are trending out of control in England and this does not augur well for the European continent.

The mixture of crippling austerity measures, potential sovereign debt default, ballooning structural unemployment and rising interest rates indicates that 2011 will be a challenging year for the hapless Euro officials.

Here in Dublin the economy has more or less “frozen” due to economic uncertainty caused by a draconian budget introduced in December at the behest of IMF/EU officials.

The resignation of Brian Cowen as head of Fianna Fail has led to further uncertainty. The IMF/EU funding is contingent on this financial package moving successfully through the Irish Parliament.

Failure to conclude this legislative agenda would have reintroduced chaos into Euroland given its predisposition for contagion. The Irish parliament hangs on a wafer thin majority and it will be at least four weeks before this whole IMF/EU budgetary process is finally nailed down and an election is set for March 11 . Until then more surprises could be in store from Dublin.

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