Time for Europe’s ‘pusillanimous politicians’ to do the right thing?

Right, stop me if I’ve got this wrong, but it seems to me that Ireland faces two big problems: bank liquidity; and a debt mountain (which has just got way bigger). In order to service the first, the second (whilst already large due to a massive fall in tax receipts) has been made unfeasibly high (how’s that small panic attack going Robert?).

The Economist has an obivious solution, but one that is not going to popular with European heads of Government: let Ireland, Greece and Portugal default. Their reasoning? Everything else the EU has tried has either failed or is in the process of failing. And not for the want of effort on Ireland’s (and Greece’s) part:

…the economies of both Greece and Ireland, Europe’s two “rescued” countries, are shrinking faster than expected, and bond yields, at almost 13% for Greece and over 10% for Ireland, remain stubbornly high. Investors plainly don’t believe the rescues will work.

They are right. These economies are on an unsustainable course, but not for lack of effort by their governments. Greece and Ireland have made heroic budget cuts. Greece is trying hard to free up its rigid economy. Portugal has lagged in scrapping stifling rules, but its fiscal tightening is bold. In all three places the outlook is darkening in large part because of mistakes made in Brussels, Frankfurt and Berlin.

It continues:

As if that were not enough, the European Central Bank in Frankfurt seems set on raising interest rates on April 7th, which will strengthen the euro and further undermine the peripherals’ efforts to become more competitive (seearticle). Some politicians are still pushing daft demands, such as forcing Ireland to raise its corporate tax rate, which would block its best route to growth. Most pernicious, though, is the perverse logic of the euro zone’s rescue mechanisms. Europe’s leaders won’t hear of debt reduction now, but insist that any country requiring help from 2013 may then need to have its debt restructured and that new official lending will take priority over bondholders. The risk that investors could face a haircut in two years’ time keeps yields high today, which in turn blights the rescue plans.

It’s the equivalent of pushing the flailing economies’ heads back under the water, just as they are coming back up for air. Currently Ireland, Greece and Portugal are dependent upon Frau Bundeskanzerlin’s money, who, in turn, is prepared to wait a little longer in return for certain conditions.

But the Economist argues, feeding the debt mountain whilst simultaneously crippling Ireland’s recovery only intensifies the problem. They further suggest that the IMF call time on the internal politicking of the French and German (governments):

Its economists have the most experience of debt crises. Some privately acknowledge that debt restructuring is ultimately inevitable. It is time the Fund’s top brass said so publicly and, by refusing to lend more without a deal on debt, pushed Europe’s pusillanimous politicians into doing the right thing.

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  • Mack

    That just about sums it up. You could also add in the fiscal crisis (which we have made heroic efforst to solve, a recent post on Irish Economy website – showed we have gone through and are continuing to experience one of the largest fiscal adjustments in a developed country ever). And the biggie – the European political crisis.

    The stress tests have bolted the door shut on the option of a European backed default on banking debt. Yves Smith warned it was a trap, let’s hope she is wrong.

  • There are two ways to enslave a nation: one is by the sword and the other is by debt. …. John Adams

    To whom are all these humungous mountains of debt owed to? And what do they need them paid for, for it is not as they need any of the money, is it, whenever it is just conjured out of thin air whenever it is needed.

    Look at the really big picture and you will see yourself reflected in it as the ignorant fool being shafted from cradle to the grave.

    And here is another reminder, to support all of the above, from a well enough known and respected figure, who knew more than a little about how to work the population for a fabulous living and milk and/or bilk the system ……. It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.…… Henry Ford

    But Man is just such a slow learner and as an original thinker, well, that is practically a barren field and quite alien landscape to them.