IRELAND’S government is expected to publish a new austerity plan that would pave the way for an IMF and EU bailout believed to be worth €85 billion. It is believed that about €35 billion would be used to prop up the country’s troubled banks in which the government had already invested €45bn while the remainder would cover the state’s other funding obligations.
Ireland is the second euro-zone country, after Greece, to ask for a bailout and does not look like it will be the last. According to the BBC, Spanish government yields also rose suggesting that markets doubt that the country would be able to tackle its high budget deficit without seeking help from the IMF and the EU.
The yield on Irish government bonds rose to 8.69 per cent, reflecting low investor confidence in the economy.
The euro’s slide against the dollar continued yesterday. This week it has fallen by more than three cents against the dollar. Economists are already asking questions about the future of the euro, with some already concluding that the euro experiment had failed. How many more bailouts would Brussels sanction? More pertinently, how many more bailouts would Germany be able to fund in order to keep the euro in its current form?
There had been warnings that 16 different economies could not possibly function under a single interest rate. Ireland, for example, should have increased interest rates to cool down its over-heating economy, but the European Central Bank kept interest rates low because this suited the German economy.
In Ireland the low interest rates resulted in a property bubble which eventually burst and put the banks on the brink of collapse.
Greece used the low interest rates to increase its borrowing until it could not repay its loans. Had it kept the drachma, it would have been unable to borrow such huge sums and when things took a turn for the worse it could have devalued its currency to kick-start the economy again. But with the euro, devaluation, which would have suited Cyprus as well, is not an option. The weaker euro-zone economies have work with a strong currency, which suits Germany, the economic powerhouse of the EU.
After the disastrous experiences of Greece and Ireland, Brussels is now considering taking control of the fiscal policy of euro zone states, threatening wasteful states with big fines and expulsion from Club Euro. There is even talk of a euro-tax being imposed, over and above national taxes, which would further delay economic recovery. But if more bailouts are required it would be the only option.
But even if it is accepted that the euro experiment had failed what would be the alternative? Could the weaker economies be allowed to leave euro zone and revert to their old currencies? This seems unlikely at present, even though it would suit countries like Greece, Spain, Ireland and even Cyprus.
