Irish economy close to a basket case says NY Times’ Paul Krugman

Nobel winner says curse of the single currency dooms Ireland

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New York Times, Paul Krugmann

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During the recent crisis Krugman argues the problems with the Euro became terminal.

Comparing Ireland and Spain he writes “revenue plunged in both Spain and Ireland, in part because tax receipts depended heavily on real estate transactions. Meanwhile, as unemployment soared, so did the cost of unemployment benefits — remember, these are European welfare states, which have much more extensive programs to shield their citizens from misfortune than we do. As a result, both Spain and Ireland went from budget surpluses on the eve of the crisis to huge budget deficits by 2009.

The greed of the banks in Ireland he says was incredible. “ Banks ran wild in the boom years (and were allowed to do so thanks to close personal and financial ties with government officials),” he writes.

“When the bubble burst, the solvency of Irish banks was immediately suspect. In an attempt to avert a massive run on the financial system, Ireland’s government guaranteed all bank debts — saddling the government itself with those debts, bringing its own solvency into question.
Krugman argues that solvency issue is at the heart of the crisis.

“Over the course of the past year or so, first Greece, then Ireland, became caught up in a vicious financial circle: as potential lenders lost confidence, the interest rates that they had to pay on the debt rose, undermining future prospects, leading to a further loss of confidence and even higher interest rates. Stronger European nations averted an immediate implosion only by providing Greece and Ireland with emergency credit lines, letting them bypass private markets for the time being. “

Krugman says the high yield on the Irish bonds means investors don’t expect them to repay in full  “ ...the message from the markets was clear: investors don’t expect Greece and Ireland to pay their debts in full. They are, in other words, expecting some kind of debt restructuring..” Krugman calls Iceland an example of what can be done to salvage things. “Unlike Ireland, which tried to salvage its banks by guaranteeing their debts, the Icelandic government forced its banks’ foreign creditors to take losses, thereby limiting its debt burden. And by letting its banks default, the country took a lot of foreign debt off its national books.”

A critical difference says Krugman is that Iceland retained its own currency and was able to devalue -- an idea that may become a reality for Ireland at some point he says “ the earlier Ireland-Nevada comparison shows, the United States works as a currency union in large part precisely because it is also a transfer union, in which states that haven’t gone bust support those that have. And it’s hard to see how the euro can work unless Europe finds a way to accomplish something similar” he notes.

The only way back says Krugman is for a currency union where every country in the euro is responsible for other countries debts as well However he says Germany has given no indication it would accept such a system based on Eurobonds.

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