Irish Prime Minister Brian Cowen has defied calls to call a snap election in the midst of a breakdown of the Irish economy, which saw the former Celtic Tiger having to accept a bailout from the EU.
Ireland’s gross mismanagement of its ‘bad bank’, which was set up to absorb the losses of all other banks has compounded the burst property bubble and the already huge budget deficit that the nation has to deal with.
Before accepting the bailout, Ireland’s deficit was in the region of 12%, but with this new loan, that percentage will exceed 30% of GDP. This figure is in uncharted territory and is the highest ever in post war Europe.
It is shocking. Ireland insisted that it had everything under control and that it had money to see it into Spring of 2011. Europe disagreed and so did the markets. Ireland’s initial resistance to the bailout prompted market jitters and fears of contagion spreading to Portugal (which will happen regardless).
In the end, when the chips fell down, Ireland admitted that it did need the bailout and that its ‘bad bank’ plan had gone awry. The plan was to stack all the bad debts into one state owned bank. But the process was slow, the bank never got out of gear and instead of working to turn those bad debts around, more toxic rot set in.
The Irish government – which effectively has lost its majority in parliament – now intends to pass a budget containing austerity measures for the next four years. Quite how it expects to do that with no broad support in parliament is anyone’s guess. Cowan has said that it is his responsibility to get this budget through before calling early elections in the new year.
Good luck with that.
The reaction of the Irish people has drawn fury across Europe, with statements such as “Ah we’ll be grand,” or “Ireland always gets fair weather”, being commonplace. Much of it is bluster and banter to ward off the shame of being one of the worst performing economies the European Union has ever seen. But it is a major annoyance to fiscally prudent nations – such as ourselves.
While Greece got themselves into the situation they find themselves in today by blatant cheating, lying and cooking of books, Ireland’s situation is more one of gross mismanagement and “let’s see what happens” once the fallout of the crisis began to hit economies. They simply did not react. In an echo of populist politics, Ireland insured all bank losses incurred and that drove the deficit even higher.
Where will it all stop? We are sure that Portugal will also falter and need recourse to a bailout. Europe has already said that it can afford to bailout Greece, Ireland and Portugal. But Spain is already on the radar and the economy is far too big for Europe to afford a bailout. If Spain cannot borrow on the commercial markets due to market pressures, Europe will not be able to afford to dig it out of trouble. Spain is in the eurozone. What on earth would happen in Spain defaulted? The euro would be in dire, dire straits. If the euro did eventually collapse, then we, tiny Malta, would be in a real pickle. The basket of currencies which propped up the lira are gone – sold off to buy euros. We would not have a hope in hell of setting up a new currency. To set up a currency with ‘no value’, we would need to back it with foreign cash. But how exactly would we do that when EUR100 euro would not buy you anything in return. Scary times. Spain must not falter.