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..?