Three Eurozone countries are being “bailed out” at present: Greece, Ireland and Portugal. In each case the country’s government has been lent money by public sector organisations (IMF, European Central Bank (ECB) and EU member states) because the private markets would lend only at very high interest rates or not at all.
Leaving aside the latest casualty, Portugal, I’ve been recently struck by the big differences between Greece, which was first to get help a year ago in May 2010, and Ireland, which was pushed into accepting a bailout in November.
On the face of it, two small economies got into fiscal trouble and had to get help. But the sources of the problem are quite different. Greeks systematically understate their taxes and get away with it. The state sector is massively inefficient and there are absurdly generous pension and other benefits. The Greek government hugely understated the country’s debts and massaged and misrepresented its financial position to get entry to the Euro, to which it should never have been admitted. There is resistance internally to the measures demanded by the IMF and EU in exchange for their loans and one has the impression of a country quite deluded about its position. Greece will obviously default at some stage and its main negotiating position is that a default will badly damage some German and French banks so the German government wants to pretend a default can be avoided.
Ironically, as explained by Michael Lewis in his excellent article for Vanity Fair last autumn, the one group that is not responsible for Greece’s insolvency is the banks, which were never allowed to join the international sub-prime party that the supposedly responsible German banks threw themselves into.
Ireland ran a strong fiscal policy up until the financial crisis, though tax receipts were unsustainably boosted by the property boom. The Irish debt problem was largely that of the banks but the government guaranteed all of the debt, not just depositors’ money, in 2008. This was perhaps a forgivable error at the time, given the desire to avoid a general bank panic but the guarantee should have been broken later, since it has led to the ruin of the government and great injustice (as argued superbly in this piece by Irish economist Morgan Kelly). Irish banks have been nationalised and their gigantic private mistakes have been socialised i.e. the Irish people must now pay for them. The banks are increasingly funded by the ECB since nobody else will lend to them. Ireland cannot possibly pay back the likely future debt load and so will also default.
But Ireland has a workable tax system, a work ethic and a sense of social cohesion that mean it can eventually recover, even if it faces years of misery to pay back the ECB. The French government is insisting that Ireland raise its corporate tax rate in exchange for a lower interest rate on the bailout loans, knowing that this would undermine one of Ireland’s few competitive advantages (and knowing too that in practice corporate tax rates in France are as low as in Ireland).
It’s fitting, at a time of a historically very symbolic tour by the British Queen to the Republic of Ireland, to note that according to Professor Kelly, the Irish bailout terms were kept harsh at the insistence, not only of the ECB but of the US Treasury Secretary Tim Geithner, and the only person to speak up for the IMF’s very sensible and fair proposal to “hair cut” the debt was British Chancell0r of the Exchequer, George Osborne.
I’m probably biased, because my mother is Irish, I love the Irish coast and nearly went to work in the Irish central bank many years ago. But I hope that the UK does help to save Ireland. The ill-will being generated between Ireland the large Eurozone countries is a very bad sign for the future of European solidarity.