Ireland – The tiger that tripped the euro

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Presentation transcript:

Ireland – The tiger that tripped the euro Leif Beck Fallesen Europabevægelsen på Fyn 11.03.2013 lbf@information-audit.dk

Root cause: The financial crisis Global finance crisis started Spring 2007 on the U.S. mortgage market – transmitted to Europe in August 2007 Near-death experience: Sept. 14th 2008, Lehman Bros. collapsed and global credit markets froze completely Debt, public and private, suddenly became unsustainable, focus on PIGS; Portugal, Ireland, Greece and Spain lbf@information-audit.dk

Why Ireland? Ireland had been the growth champion and darling of international investors and banks – including Denmark’s largest; Danske Bank Housing bubble; extremely sensitive to credit (that disappeared) Like Denmark, Ireland is a small open economy, global demand dropped sharply Public finances hit by lower growth and higher unemployment lbf@information-audit.dk

How Ireland tripped the euro Original euro blueprint for a solution; Irish banks would write off bad loans, markets would impose higher borrowing rates on the Irish government, forcing it to enact austerity policies. Irish problem solved in Ireland. BUT: 1) Banks could not write off bad loans without going bankrupt 2) Financial markets could or would not lend money and feared next PIGS-collapse, i.e. CONTAGION lbf@information-audit.dk

Source: Eurostat lbf@information-audit.dk

Source: Eurostat lbf@information-audit.dk

Source: Eurostat lbf@information-audit.dk

Source: Eurostat lbf@information-audit.dk

EU limit: 60% of GDP Source: IMF lbf@information-audit.dk

Source: IMF lbf@information-audit.dk

Source: IMF lbf@information-audit.dk

Italy the new I in PIGS? Ireland was first in, and is looking to be the first out of the battle to stay in the euro. Italy is a much bigger I in PIGS Greece was able to reduce unsustainable debt levels by a (partial) default. Foreign banks (Danske) have written off private debts, will public debt be reduced? Political challenge; will (any) government survive implementing austerity policies? lbf@information-audit.dk

Repairing the Euro: Systemic change Real Europeans call it political (fiscal) union. Sounds great to many in France, Benelux, and Italy (with caveats). Non-starter in Germany, Scandininavia and the U.K. (which may leave) Pragmatic changes required. Who saved the euro; The European Central Bank. Who should have more power: the ECB. Banking union is all about controlling the banks lbf@information-audit.dk

Saving the euro (and the EU) More (pragmatic) European integration is needed; irresponsible national banks and contagion was not foreseen by euro architects Only a stronger EU (eurozone) can provide collateral or finance stronger growth in the EU. Real challenge; austerity is suppressing growth and more importantly: destroying the political parties that support reforms (Italy: send in the clowns …) lbf@information-audit.dk