Euro crisis: “This is Europe’s awful dilemma. The patient is the euro.”

Taoiseach Enda Kenny has warned that Dr Doom Morgan Kelly’s prescription for Ireland would deliver “a lethal injection to the Irish economy“.

At the Guardian’s Ireland Business blog, Stephen Kinsella, in part one of a two-part post, identifies some of the implications of “an immediate balancing of the books”.

The fiscal problem is pretty clear. There is a big gap between what Ireland spends, and what she makes. Including promissory notes, the Irish government has been taking in roughly €53.3bn and spending close to €72.4bn with the difference of €19.1bn coming from borrowing, first from the international markets, and then from the EU, IMF, the UK, and Sweden.

The benefit to Ireland of implementing Professor Kelly’s plan is the non-payment of about €160bn in bank debt.

The current spending we enjoy would have to drop, because the EU and IMF wouldn’t be funding the country any more. There would be lots of short-term and long-term economic pain. This post looks at whether we could actually cut €15bn off the government’s spending, and where that might come from. A second post tomorrow will examine what the effects of these cuts on the broader economy might be.  [added emphasis]

Back at the Irish Times, former Taoiseach John Bruton looks at the international implications of walking away from the EU-IMF deal.

The effect of a comparatively well-off country like Ireland (a founder member of the euro which had benefited more than most from EU agricultural, regional and cohesion funds) failing to pay money it owed to an EU institution would undermine the mutual confidence on which the EU is based.

If Ireland were to walk away from the EU-IMF deal, that would leave the European Central Bank itself with a huge shortfall. In fact the ECB might be insolvent. It might have to go to the member states to look for more capital. Emulating Ireland’s example, they might refuse, and then the euro would collapse. If they even hesitated about recapitalising the ECB, the resultant uncertainty could have a devastating effect on the world economy; an economy on which Ireland is more dependent for sales than most.

If the euro collapsed because of a failure of other EU states to recapitalise the ECB, or because of a breakdown in trust between its members, Ireland would have to launch a currency of its own in the same year that it would also have to cut wages by perhaps 40 per cent and increase tax revenues to meet Prof Kelly’s other requirement of balancing its budget in one year.

In walking away from the EU-IMF deal, Ireland would be reneging on freely contracted debts to an EU institution and to other EU members, so we would also presumably be excluded from the benefits of EU membership. For Ireland, the Common Agricultural Policy would disappear overnight, as might its access to EU markets for other products, at least until the debts it owed had been collected by other means.

And on that international perspective, amid speculation on the future of the “European project”, the paper’s economics editor, Dan O’Brien, has an excellent overview of the doctor’s Europe’s dilemma

YOU HAVE a long-term, serious illness. Your medication has many debilitating side-effects, some of which manifest daily, while unknowable others may only manifest in the future.

On one of your regular visits to the doctor, he tells you of a new untested operation. If successful, you might recover to enjoy a normal, healthy life. But there is no certainty about the outcome. The doctor looks you straight in the eye and tells you that the surgery could kill you.

Do you continue taking the drugs in the hope that they will eventually work, or do you plump for the radical solution telling yourself that life as is – with constant illness compounded by the side-effects of the drugs – is just not worth living?

This is Europe’s awful dilemma. The patient is the euro. The medication: bailout. The untested surgery is debt rescheduling/ restructuring/default.

Note that would be an agreed “debt rescheduling/restructing/default”. 

Dan O’Brien adds that “Germany is wavering” on the European prescription

From a political perspective, the calculation for Germany’s government is whether to put more into bailing out foreign countries or to let those countries restructure their debts, resulting in huge losses for German financial institutions, and then recapitalise those same institutions. German taxpayers may be less likely to choke on a rescue of their own banks than on a transfer of their taxes to profligate peripheral countries.

Restructuring could make economic and financial sense, too, if it were not for the unknowable effects of what it could trigger.

Better to plough on, take the pain and hope for the best than risk everything.

Calling Frau Bundeskanzerlin..?

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  • GreenBack

    Pete, there may be some good news at least.

    http://www.rte.ie/news/2011/0510/bailout.html

    “EU economic affairs commissioner Olli Rehn has said to ‘expect’ a drop in interest charged to Ireland on its bailout loans.”

    However, so large is the loan that it will still cripple the Irish economy in my view.

  • Pete Baker

    Greenback

    Call it altering the dosage of “the medication”.

  • DC

    The only bother I have with the medicine approach is that it is taxpayers money being used to keep shares alive and of *any* value to the banks. For instance, if Northern Rock or Anglo Irish Bank were allowed to fail totally and absolutely – to the point of insolvency – the share value would never ever be recovered. That would be it.

    Now the government has stepped in and subsidised the banks and its shares, but the fall guy will be the taxpayer or specifically those working in or relying on public services. Basically they will lose their jobs anyway in the hope that 10 years down the line say the economy rises and bank shares become sought after and valuable again, the shares will be sold and money returned to the government.

    So – the rich win again, the little guy – the fall guy – in the short to medium term the loser.

    At least under the default and restructuring option the little guy would lose his or her job but so too the capitalist, the big guy – his or her shares would take a hit in term of value.

    The compassionate option is to keep on taking the medicine but only if budget deficits become the norm until such times as the economy catches up and that the ‘structural deficit’ is lowered, perhaps over 10 to 15 years.

    Failing that go for the deflate option – and default ‘walk away’.

    The medicine approach may still cause the system to collapse any way just as much as a default based on choice or principled position i.e. walking away from the EU-IMF deal. If the debt levels turn toxic, there will ultimately be a forced default. This is what is happening to Greece now, it can’t keep up with the previous repayments anyway. So, what next? More debt on top of debt, or a forced default.

  • DC

    I never did buy the David Cameron concerned argument about ‘passing debt down to our children’ – sure didn’t financial services compress 10-15 years worth of credit into 5 years (between 2002-07). What choice does the public have not to pass the debt on?

  • Alias

    So europhiles don’t think that the national interest should take precedence over the EU’s interest. What else is new? If Bruton was to follow his own logic in his claim that the fate of the euro and, indeed, the world economy depends on Ireland assuming respnsibility for the debts of reckless eurosystem lenders, he’d realise that Ireland could not be in a stronger position and could demand that the world’s economies act to save themselves by sharing the debt among them. Instead, as a europhile, he wants Ireland to be sacrificed to save the EU and its spawn, the euro, by assuming the burden of French, German, and British bondholder debt alone.

  • EU economic affairs commissioner Olli Rehn has said to ‘expect’ a drop in interest charged to Ireland on its bailout loans.

    So the ECB which does invent money from nothing so that trade and prosperity can shared/carved up, loans funds to a nation which will spend them on that which the people and the nation want, and in so doing create a modern society and return the money to the system from whence it came, and they are to be penalised with an unnecessary arbitrary charge of interest? How crazy is that whenever the system invents/prints/credits itself with whatever it needs from nothing.

    It is the Great Scam that is called banking and fractional reserve lending and it is outed as such. Henry Ford warned of the dangers which its business would ignite/awaken, whenever he said …… “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.

    Wake up, and smell the coffee. You’re being taken for the ignorant fools that you are, and for a ride too, by tools who will bleed you dry for all that hold dear for a fistful of dollars/euros/pounds/pretty paper.

    The thinking is that the deception is so great and fantastic that no one will believe it possible and no one would dare to try it. Well, now you know so what are you going to do about it? Accept your slavery and unpayable debt burden to printers of artificial wealth or explore the premise further?

    Go on, do something smart and intelligent for a change, and think about the tales you are being told by strangers who are stealing the brightness in your future and forcing you to be serfs to their magic kingdom. Surprise yourself and prove you are no fool.

  • Alias

    “The thinking is that the deception is so great and fantastic that no one will believe it possible and no one would dare to try it.”

    That’s true, and the EU now owns Ireland – not just politically and economically but physically too. The ECB holds the assets of the Ireland-based eurosystem banks as collateral for the 186 billion of eurosystem debt that it has used its exclusive executive control of the Irish Central Bank to convert into sovereign debt. Essentially, the ECB loaned it to the CB who in turn loaned it to the Ireland-based eurosystem banks who in turn used it to repay laons to eurosystem banks who are not based in Ireland. Since those assets are effectively everything that you see in the Irish state, it is fair to say that the EU now owns Ireland and that the Irish must now buy back their own country from their new colonial owners if they can raise the several hundred billion required for the purpose. It’s all a paper trick that sees the owner of the currency own the country.

    The other big lie is that the EU has no ambitions to become a state. John Bruton was the EU’s ambassador to the US. Now you might think that only states have ambassadors… and you’d be right.

    No point appealing to the people, however. They’re too stupid, and easily scared into compliance. Plus, of course, they prefer to picture you beneath a tin-foil hat rather than accept the reality that is occuring right before their eyes.

    And one other ‘conspiracy’ is that the europhiles have ensured that democratic dissent to EU rule is silenced in Ireland by ensuring that the main political parties implement a policy of only selecting other europhiles to run for political office and by ensuring that those europhile parties implement what is called a bi-partisan policy on the EU so that neither of them opposed the EU’s colonial agenda. That is why, for example, 160 out of 165 TDs voted for the Lisbon Treaty but 54% of the population voted against it.

  • Excellent post, Alias [11 May 2011 at 3:02 am] and whilst presently No point appealing to the people, however. They’re too stupid, and easily scared into compliance. Plus, of course, they prefer to picture you beneath a tin-foil hat rather than accept the reality that is occuring right before their eyes. may be oh so true, do those who have control of, and power levers in ….. well, let us just call it and IT for now, AI Command and Control of InterNetional Virtual Forces for the Edutainment of Hearts and Minds, Free Spirits and Captured Souls* …… every opportunity to explain, in simple language that even the slowest of minds can understand in order to see, the bigger hidden pictures which others, in dark and dismal and dodgy dealing shadow positions, would be painting and presenting through main stream media [MSM] channels to scare and imprison them with thoughts that control them.

    Hearts and Minds Work is Brainwashing by A.N.Other Name and IT Presents the Future with Beta Ideas made Real with their Selfless Sharing on a Global Scale and a Great Media Game Stage with Virtual Grand Master Sets and believe it or believe not, but Northern Ireland leads the way in the technologies and methodologies which render IT an Enlightening Tool of the Masses.

    And don’t just take my word for it, whenever the OFMDFM have evidence of it too, and you might like to ask the two principals, newly re-elected to serve you at your expense, what their response was to the free offer which was presented to them in “The Future ….. is a Present Program currently stuck in the Past. IT has a Novel Solution to kick-start it into a Series of Progressive Movements with AI Motions.” and which was delivered to them on Wed, Feb 2, 2011 at 9:52 AM, before it is leaked to you from others who would know of the truth.

  • Oops,sorry, I forgot to explain and expand upon the * MkUltra Sensitive Internet Control.

    MUSIC for Minds at REST ……. http://en.wikipedia.org/wiki/Representational_State_Transfer

  • And what is one to do with the likes of this, apart from sharing it far and wide, that is, for peer review and public comment ……… “Banks to hire 6,000 to handle PPI complaints …. Lloyds, RBS, Barclays and HSBC face huge staff costs and admit £5bn needed to compensate PPI customers” …. http://www.guardian.co.uk/money/2011/may/10/banks-hire-6000-handle-ppi-complaints

    So, let me get this right, ….. the banks and/or individuals within banks and banking circles and broader banking business type circles, and which have no money of their own, and which had to be recently bailed out with an obscene multi-billion pound/multi-trillion dollar injection of the public’s funds because of the losses which they, the bonky banking industry, generated in some right dodgy dealings and quite criminal actions, are now planning to compensate members of the the public they definitely screwed with designedly and decidedly dodgy deals which they never intended to and would never be delivered, from public funds, whenever the problem is really privately owned and a result of bank business executive greed, for that is who received/where all the money went?

    The arrogance of that ignorant proposal beggars belief, does it not, and does itself create an even bigger problem which needs to be addressed, for it suggests that the public are being played for great fools and useless tools whenever that particular and peculiar shoe is only a perfect fit which reveals that it belongs to the banking sector and its executives, …… and the public are not having any of it, for they are neither fools to be used nor tools to be abused by anyone/anything anymore.

  • Pete Baker

    Alias

    “Ireland could not be in a stronger position and could demand that the world’s economies act to save themselves by sharing the debt among them.”

    Should that particular proposition be put to a referendum in those other countries?

    And the post is not just about Ireland.

  • Greenflag

    So Mr Bruton is persuaded that a small country like Ireland with barely 1% of the population of the EU could bring down the Euro and the world economic system ? If Bruton seriously believes that then the Euro is a house built on sand and the sooner Ireland leaves it the better .

    What an opportunity for Ireland – All the more reason to do it. Here’s a reminder of how Iceland got into it’s mess . I’ll bet nobody knew it was John Cleese what done it -indirectly of course 😉

    http://www.npr.org/blogs/money/2011/05/10/136149022/the-island-that-ran-out-of-money?print=1

    And the difference between Iceland and Ireland ? The same as the difference between the reckless local and European banks in each country -i,e none .

    Sooner or later there will have to be a ‘default’ not just for Ireland but for several other countries – perhaps even the USA as State after State fails generate enough taxes to pay for essential services . And on that note the ESRI are now asking for higher taxes and more pay cuts in order to- wait for it – spur economic growth from it’s current sluggish 1% so that the country can meet the ECB loan repayments ?

    A worldwide financial revolution and further economic chaos seems inevitable as the leaders of all the main economies cannot agree on what needs to be done to restore financial stabilty and credibility to what we call ‘paper’ money 🙁

  • DC

    “Ireland could not be in a stronger position and could demand that the world’s economies act to save themselves by sharing the debt among them.”

    It’s clear the Irish government and the British one as well plus many others acted to save capitalism from itself, they did so by calling on the taxpayers to fund multiple bank bailouts.

    The bank bailout deficit should be separated from the total national deficit and repayment of it should be viewed differently than the deficit prior to the financial crash.

    In 2007 Britain’s deficit was 3% in 2010 it was 10% – the 7% should be separated and paid back differently, or more slowly.

    The reason? The taxpayers saved capitalism from itself!

  • Greenflag

    DC ,

    ‘the 7% should be separated and paid back differently, or more slowly.’

    Or NOT at all and ditto for every other country in a similar position . What happened in Iceland was just the worst example of what can happen when ‘banks’ are given free rein to create debt in order to reward their CEO’s and ‘shareholders ‘

    The banks and I mean internationnally not just the Irish ones went berserk following ‘privatisation and the dismantling of regulations and the non enforcement of even the limited regulation remaining .

    As of now the ‘banks’ have learned nothing and are merely trying to restore the 2008 status quo in terms . The very limited Dodds/Frank financial reform legislation -most of which has yet to be enacted is already under attack and being whittled away by the neo conservatives in the Republican Party backed by the looney Tea partiers .

    Capitalism or at the very least the Anglo American anarchic model appears to be in death wish mode . And now a new standard bearer of ‘reaction ‘ raises his head as Newt Gingrich the ‘newly ‘ Catholic candidate throws his hat into the 2012 Presidential race 🙁

    Suddenly even Sarah Palin is looking ‘moderate ‘

    A new world monetary system which will include replacing the dollar as the world’s reserve currency along with major banking reforms plus at international and national level is what’s needed .

    Sadly the leaders and Finance Ministers of all the major economies are hoping to somehow ‘muddle ‘ through .

    Not this time they won’t imo!

  • DC

    I agree with you on the privatisation of banks.

    There is a truism that the law and legal systems is always behind technology.

    The modern financial system and banking industry is so high tech that applying traditional regulation seems pointless, the only way to succeed is to take part. There should be publicly run banks playing the market and CEOs and shareholders should be restricted and managed better.

    More money to the people than the person.

    China-style capitalism, than anglo-saxon.

    Oh and the reason why banks are carrying on regardless and haven’t faced any sanctions in terms of stricter capital ratios or a shift to full-reserve banking is that if such ratios were applied many vital banks would probably become insolvent once again because the money still isn’t there!

  • Sean o Russell

    ..europes difficulty is eires opportunity….an Gael a ghlacfadg leis an socru ata Gaill/EU a thairiscint duinn nar shocru iomlan agus a dheanfadh cairdeas le Gaill/EU de dheasca an tsocraithe sin,chaillfeadh se a oineach ar mhaithe lena leas…

    Ni saoirse on IMF/GFA ata ona lan politicos ach siochain agus muintearas leo.Ni thuigid saoirse.Ni mhanaid saoirse.
    Siochain ata uathu agus saibhreas…

    20,000 jobs announced today-5% of the long-term unemployed targeted….25% increase in unemployment benifit gaurenteed….

  • Greenflag

    DC,

    ‘ that if such ratios were applied many vital banks would probably become insolvent once again because the money still isn’t there!’

    Indeed which is why we read the ESRI is proposing more tax hikes and spending cuts for Ireland as no doubt similar institutions are doing for the UK , USA , Greece, Spain, Portugal etc etc . The banks want the money they lost through reckless gambling and they want you and I the taxpayers to cough up because if we don’t they will ‘collapse’ the economy . At this stage the banks are throwing ‘anchors’ at drowning economies everywhere to eh ‘save them ‘ – while our elected politicians everywhere try to pretend that the cast iron anchors /shackles are floatation devices.

    The austerity practices that enrich banks and beggar nations courtesy of the IMF/ECB are implemented because of the increasing political and economic hold over nations which the top 20 multinational banks have at their command.

    Joseph Stiglitz (American Nobel Economist ) has a lot to say about this, both in his work ‘Globalization and its Discontents’ and recent lectures and interviews on how Iceland, Ireland, Greece (and soon America) should deal with their debt crises. David Harvey suggests bankruptcy for all and a global new deal. Context is everything – anyone not up on the global situation will be left thinking the Icelanders are all as nutty and detached from reality as a Monty Python sketch…

    They’re not – It’s just their eyes don’t see what their ears hear and their ears don’t hear what their eyes see . And when it comes to the current world financial/fiscal and monetary /euro/dollar crisis then I’m an Icelander too .

  • And as nothing has been fixed, nor anything fundamentally changed, and in fact, have things got significantly worse, can one expect another systemic collapse of both the markets and the banking system, which are both rigged to provide feel-good media tales and artificial paper fortunes for idiots? ……… http://www.moneynews.com/StreetTalk/Paul-Krugman-Disaster-Begins/2011/05/11/id/395933