Bill Emmott - International Author & Adviser


The euro isn´t to blame for Ireland´s woes
The Times - November 22nd 2010

When you are in trouble, especially trouble of your own making, it is always nice to have someone else to hate. During the financial crises of the 1980s and 1990s, in Asia and Latin America, that role was played by the International Monetary Fund. A 1998 photograph of the then head of the IMF, Michel Camdessus, standing imperiously behind President Suharto of Indonesia, arms folded, while the old dictator signed a bail-out deal, was even credited by some with a role in bringing about Suharto’s overthrow later that year. Who, we should now be asking, will the Irish choose to hate once their bail-out deal has been signed?


            As with Suharto, the first answer is the government itself: the Fianna Fail party that has led Ireland for most of the past two decades must surely soon be kicked out of office. With the ruling coalition’s tiny majority likely to get even tinier after a by-election on Thursday, collapse and early elections cannot be far away. Not that the opposition parties, Fine Gael and Labour, will relish taking over a country still stuck in recession and forced to implement another drastic fiscal austerity plan. But that’s politics, and at least they will have Fianna Fail to blame.


            There is also, once again, the IMF. If dire predictions of civil unrest, made at a big trade union conference in Galway on Saturday, come true, protestors can save money by asking to borrow old anti-IMF placards from Argentina or Indonesia. The British offer a nice, traditional target too, given that sterling’s 20% depreciation against the euro since 2007 has made it harder for Ireland’s economic recovery to be led by exports—which ought otherwise to be happening, since wage cuts have made Irish industry more competitive.


            It would be nice to think that recognition of that point explains why so many British eurosceptics have rushed to ascribe Ireland’s crisis to the euro, and to see in it impending disaster for the single European currency. In truth, this is just wishful thinking, blended with Schadenfreude.


The euro had nothing to do with Ireland’s property boom and bust, which is what has brought its banks and economy so low: membership in 1999 did lower Irish borrowing costs, but so it also did for plenty of others who didn’t have housing bubbles and who, unlike the Irish government, took the trouble to regulate their banks properly. Iceland’s similar banking crisis in 2008-09 shows that Ireland would have been in just as much difficulty outside the euro, except that a currency crash would have made it bankrupt even sooner, and the IMF would still then have been called in.


Nor is it at all obvious why Ireland’s current troubles should put the euro in danger of collapse. As long as euro members’ governments have the political will to stage financial rescues when other members get into difficulty, the currency will survive. They showed in May, when they assembled a huge financial-rescue facility, in that case for Greece, that the will is there.


Another danger point would come if countries appeared to be tempted to leave the euro and reintroduce drachmas or punts, for then speculation would begin as to who would be next. But there has been no sign of that, given that the costs of withdrawal would be very high. After all, the problem faced by Greece and Ireland is precisely that they owe huge debts to foreigners, denominated in euros, and that a devaluation would increase the value of those debts—unless the country were to default. For the moment—emphasise that word—that is not in prospect.


             There is, however, another potential target for Irish hatred, and it is the country that came up with that word Schadenfreude. It was clunky statements by Chancellor Angela Merkel of Germany that private investors should be made to share the losses in the event of a sovereign-debt default or restructuring that led to the market panic that has culminated in Ireland’s bail-out. Ironically, she is surely correct: bond investors ought to share the risks inside the euro-zone, just as they did when Argentina defaulted in 2001. But just saying so, without producing any proposals for how this could be implemented, was irresponsible.


            So, now, would be failing to develop exactly those proposals. For as things stand, the financial problems of Ireland and Greece have simply been deferred by their rescue packages, not solved. In both cases, only miraculously rapid economic growth will enable them to reduce their public debts, avoid drastic increases in debt-servicing costs and dig themselves out of the holes into which they have fallen. Miracles not being dependable tools of public policy, both countries are likely eventually to need some sort of debt restructuring, to cut their burdens. The same may well apply to Portugal, and might eventually to Spain too.


            It is often said that in financial crises, governments pass through the classic cycle of grief, from denial through anger and eventually to acceptance. So, however, do creditors, and Chancellor Merkel’s indecision suggests that she has not yet got far enough beyond denial. For while there are genuine technical difficulties in fashioning a mechanism to govern sovereign-debt restructurings in Europe, the real difficulty is this: that a restructuring will involve accepting losses at the European banks who have been lending to Greece, Ireland and the others—and the biggest of those will be German.


            Part of this painful financial story has not yet been told. We have heard all about the big spending cuts required in the borrowing countries, which in this case means Ireland. But we have not yet heard of the write-offs (or, likelier, write-downs) by the lenders, when they acknowledge that the price of continuing to honour these sovereign debts in their entirety is too high. At that point, German taxpayers will not just be taking a risk by participating in a bail-out loan; they will be paying for real losses.


            This is almost certain to happen. The choice is whether it happens in a disorderly, damaging way, as continued recessions and civil unrest force one government or another to suspend payments on its sovereign debts and to demand a renegotiation, or whether it happens more carefully and deliberately, by agreement between all concerned. If the former happens, then the euro really will then be in danger and the Irish will have been given good reasons to hate Germany. If the latter, then the recovery of the European economy and the future health of the euro will both have been assured. And Chancellor Merkel will genuinely deserve praise, not blame.




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