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Irish lessons for the eurozone

Stephanie Flanders | 12:43 UK time, Monday, 22 November 2010

Ireland has surrendered. All that now remains is the detail - and we may not get that for some time. But some broad lessons for the eurozone are already clear, and not encouraging.

Euro

The first lesson is that Europe is further than ever from a pragmatic approach to the debt mountain sitting on the balance sheets of Europe's more troubled banks.

Negotiators appear to have gone into the Irish negotiations with an assumption that senior creditors to Ireland's banks will not see their bonds restructured as part of the deal.

If so, the eurozone is pressing ahead with the same approach it has followed ever since the collapse of Lehmans set us on this path. That is: when in doubt, sign another blank cheque to private creditors, and try not to think about the money, or the moral hazard.

Jean-Claude Trichet

19 November: Jean-Claude Trichet at the European Banking Congress in Frankfurt

As we know, the Irish are furious that the German chancellor started talking about restructuring sovereign debt in future crises. Their anger is understandable: as the European Central Bank President Jean-Claude Trichet warned at the time, you shouldn't go public on that kind of discussion without a clear strategy for dealing with the inevitable market reaction. Apparently, Angela Merkel didn't have much of a plan at all.

But those who care about the future of the eurozone - and, incidentally, the global financial system - will also be angry that the issue was raised in such a cack-handed manner. It may well have left the system further than ever from addressing a problem that even investors would now like to see addressed.

At the start of this year (Thinking the Unthinkable), I considered whether what the world needs now is not just a mechanism to allow banks to fail in the future, but to allow sovereign governments to fail as well. Chancellor Merkel may be right to want to find one, but right now the eurozone looks weaker, not stronger, for her efforts. We don't have a reasonable way to talk about restructuring any senior debt at all.

The second lesson relates more to the real economy, and to the message that Ireland's failure sends to other countries in trouble.

In the case of Greece, a string of governments had borrowed and spent too much, and delayed the day of reckoning by hiding a good part of that debt from the rest of the eurozone. That is why, deep down, many in Europe see a kind of justice in what is happening to Greece and its economy. They broke the rules; now they have to pay. In a sense, the feeling is that they should be grateful for whatever help they can get.

That is less true of Ireland (and I don't think I'm saying that because Dublin is so much nearer to London). They did play by the rules. The government did not run large deficits during the boom years - quite the opposite. Even its current-account deficit was not so different from Britain's. And when the crisis hit, ministers made early and politically very difficult efforts to preserve market confidence and rebuild the country's competitiveness within the constraints of the single currency system.

Yes, the Irish authorities let the property market and the banking system get far out of control. In a sense, they let the whole country go slightly mad, high on rising property values and a tidal wave of cheap credit. But didn't they all?

Robert Peston is right to remind us that Britain's mistakes, in the boom years, were different in scale to Ireland's - but not in kind. The biggest difference is that we did not choose to join the euro.

This is what should be troubling Europe's leaders about Ireland. Greece is seen as a country that broke the rules and has to pay. Ireland has its faults, which European officials may choose now to play up. But, at bottom, it is a country that played by the rules of the euro and failed. Other countries striving to make a go of the single currency will reasonably ask whether the same fate awaits them.

Comments

Page 1 of 3

  • Comment number 1.

    In what sense did Ireland fail? When Ireland, like others in the West, believed that it could keep on building ever more expensive houses without end, the so-called "markets" were willing to fund them to the hilt.

    When the GDP levels began to drop, and the banks needed state handouts, the debt-to-GDP levels rose, and suddenly those very same "markets" were fully willing to short-sell Irish bonds, raise the interest rates and basically set themselves up to profit from an Irish fall.

    What the EU stability fund does is simply deny these so-called markets (a handful of speculators and hormonal day-traders) the pleasure of acting as blinkered, irresponsible amplifiers of whatever sentiment happens to be prevailing at the expense of everyone else involved.

    If being free of the shackles of this socially tragic market driven system means failure, then let us all rejoice in it and wish failure upon everyone else too.

  • Comment number 2.

    Thanks, Stephanie. The problem is that one can never be fully sure why Ireland came under pressure at the point it did. Most of the real politics is hidden behind the secretive doors of the ECB, Ecofin and EU Commission. The lesson I see being learned is that the only way errant members of the eurozone can be bailed out is with other members' money through a system of pooled sovereignty nobody wants.The lesson learned for Germany and its ilk will be to construct a new firewall to make sure it is never again the Guarantor of Last Resort. I agree that means that a way will be found to let countries and banks, and their creditors go to the wall.

    Mr Osborne will be sucked along in the backdraft. By the way, I now take it that he agrees with the legal premis of the EU loans ie that these peripheral countries are victims of circumstances beyond their control ( and not their own ineptidude). Never again do I want to hear him say UK troubles are down to Gordon Brown.

  • Comment number 3.

    Stephanie,

    Yet more evidence of fictitious capital - exchange-values becoming seriously out of line with underlying values.
    But the concept of value is way outside of your concept of how the world works.

    More blank cheques, more fictitious capital, the sooner the debasement of the world's currencies & the collapse of world capitalism.

  • Comment number 4.

    'It is a country that played by the rules of the euro and failed'

    Ireland didn't fail.
    Ireland like the UK is not in control of its banking system.
    The uncontrolled fractional reserve banking system failed.

    The irony of it is, that the banking system having failed, is the only thing that gets bailed out.

  • Comment number 5.

    I am and have been a frequent visitor to both Greece and Ireland during the boom and the bust periods. When their economies were ( apparently ) growing fast I used to look around and wonder where the money was coming from. Both Greece and Ireland depend upon tourism and agriculture to a significant degree and in both cases these activities declined due to higher prices - massively so in Irelands case. Greece had little else going on ( shipping profits are kept outside of the country ) and Ireland appeared to depend upon foreign companies setting up shop in a low tax environment. This helps employ people but the profits go back to the home country. When I started to ask questions it soon became obvious that the new standard of living was credit fuelled and driven by ever increasing house and asset prices. Both countries had an internal ponzi scheme running as well as a credit debt to the ECB and other banks.

    I look around now and still see little going on that will generate income from outside the countries and yet there is still a standard of living that has not dropped back to a level that would be commensurable with the true economic level. My conclusion is that in both cases there is much more economic pain to come as the ECB and EU commission force both countries to become competitive once again. It is the only way that they can survive within the Eurozone.

  • Comment number 6.


    Masters of the Universe 2 Euro 0 (Half time)

    I am expecting a 4 - 0 thrashing...

  • Comment number 7.

    Total amount paid in staff bonuses to UK banking sector in 2010: £7bn.

    Total amount of bilateral loan to Ireland to protect UK banking sector: £7bn.

    I actually agree with all of this because I was born yesterday.

  • Comment number 8.

    Gordon Brown was the most un-prudent chancellor - EVER.

    He has to take responsibility for a good proportion of the UK's banks debt bubble and 100% of the public sector deficit. When it came to "No" to spending he just could not do it. Wait until the full effect of the PFI "Mortgage" bubble becomes public knowledge. You only need to look at the contracts for aircraft carrier debacle to understand his warped sense of mis-management.

  • Comment number 9.

    The problem with Ireland was the Government's disastrous decision to guarantee all of the banks debts. At that moment a small economy was landed with a +E100bn billion bill that it couldn't afford. Had it allowed the banks to gracefully start defaulting where possible, then it would not be in a position that the issue becomes Sovereign default.

    Throughout this whole mess the consistent approach of many governments after the failure to manage the demise of Lehman's has been to essentially act as guarantor. This was essentially Gordon Brown's solution to the crisis - exercising the concept of Lender of Last Resort. The problem this creates is that the sums are way beyond the capacity of governments really to deal with. The next crisis but one (Spain) will drive this home. There is simply no way for the ECB/EU/Eurozone etc to provide enough liquidity to prevent a Spanish default. A Trillion dollar economy cannot be rescued in this way. Trichet et al need to be on the phone to Geithner and Bernanke now, to work out a plan for banking defaults - call it Lehmann pt 2 - the unfinished business. Essentially Brown's plan has run it's course and the system needs a new solution.

  • Comment number 10.

    I'm not an economist. How can a collection of countries with vastly differnt styles of economic income possible have a common currency where the value in each county is the same? Beats me how this Eurozone can ever work...

  • Comment number 11.

    Wow - this is getting done to death but for those posters who think the end of capitalism will herald anything drastic here is my mini play on what will happen:-

    Actors enter stage right. Two men in pinstripe suits.
    Actor 1:"Jeez we don't have any money now, but luckily I got all of these shiny beads and dry fruit so I can trade."
    Actor 2: "that's right - lets go and swap them for some other stuff.."

    the two actors go off to barter

    10 years later. Pinstripe suits are now furs and they are surrounded by lots of goods.


    Actor 1:"you know, this bartering business is all very well but its not very efficient. What we need is something small and easily exchangable.."
    Actor 2: "why don't we swap all of this stuff for some gold and make coins. Because they are worth something people will be queueing up for them!"
    Actor 1: "Great idea! Let's do it!"

    50 years later. The two men are very old but very rich in material wealth.

    Actor 1:"The problem with these gold coins is that its diffuclt to get hold of. We have lots of land and goods but how can we use that?"
    Actor 2: "Why dont we use some of the other metals. Not the good stuff just the scrap and we'll say that its worth is based on our ABILITY to pay."
    Actor 1: "what if everyone wants paying at the same time?"
    Actor 2:"dunno - maybe we can just make some new coins and say that those are worth more?"

    Oh dear.

  • Comment number 12.

    Re Jimmicks /7,
    The reason given by banks for the need for inflated salaries and ridiculous bonuses has always been the need to get and retain top class staff. Ireland is only the most recent example of how these 'top class staff' members operate.
    It seems that banking recruitment needs a major overhaul.

  • Comment number 13.

    Ireland only did on a small scale what the UK (and USA) were (and in the case of the UK is) doing on a grand scale.

    Inflated House Prices are the very worst and most economically destructive kind of inflation.

    I know I have explained this many many times before, but it is always worth repeating as there are so many banking apologists who spout the reverse.

    Normal (i.e. non house price) inflation on goods and services can be purged from the economy by putting up interest rates in a fairly short time. However house price inflation takes decades to expunge from an economy. This is because of the relative inflexibility and illiquidity of the product (i.e. house). When a consumable good such as a pat of butter is overpriced the customer buys less next week and so forces the price down.

    When there is too much consumer product inflation in an economy the remedy (indeed, the only remedy) is to put up short term interest rates. When a so called asset (really an illiquid product) price rises too much then interest rates have to remain high for a long time to forced the inflation out of the system.

    The added complication of security, and how this is used to support the whole banking industry multiplies the harm that asset price inflation causes to an economy and makes even more terrible the consequences. (This should have been blindingly obvious to those in charge for decades!)

    The asset price deflation that MUST take place in the UK if we are to regain anything near a competitive position will cause immense economic disruption, but we MUST do it OR we will not be able to recover. (This is the Japanese Lesson!)

  • Comment number 14.

    6. At 1:49pm on 22 Nov 2010, hughesz wrote:

    Masters of the Universe 2 Euro 0 (Half time)

    I am expecting a 4 - 0 thrashing...



    LOL

    The Euro have the Germany playing for them.

    Which means

    Masters of The Uranus 2 - Germany 8

  • Comment number 15.

    I've said it many a time...we must thank our lucky stars that we had the good sense not to join the euro.

  • Comment number 16.

    #10. firewarden wrote:

    "I'm not an economist. How can a collection of countries with vastly different styles of economic income possible have a common currency where the value in each county is the same? Beats me how this Eurozone can ever work..."

    Think a bit, please.

    The logical implication of your worry is that Wales and Scotland (to start with) should regain/have their own currencies as they are as economically different from Chelsea as chalk is to cheese.

    The ONLY way that different currencies work beneficially is that they can be devalued to aide competition. Sterling needs to halve in exchange rate to make houses in the UK competitive with Ireland let alone with our real competitors. So you continental holiday will double in price - do you want that? - do you think that that is sensible?

    The people who make money out of different currencies are then bankers and money changers. Do you want to transfer more and more of your wealth to them? If so please support the creation of the West Country pound and the customs depot and money changers at Membury Services.

    Contrast this with being inside a currency. When I buy goods from Birmingham I pay in the same currency that they use and so I know how much it will cost me, even though many Brummies are on a different economic to me in Hendon (be it in Sunderland or in London). If they want Brummie Pounds and that floated against the Sunderland/London pound than not only will the price of the transaction be unknown this will always cause me to include a bit extra to account for not only the increased transaction costs but also the exchange risk.

    The problem with Sterling is that it is double its real European value (comparing relative house prices) this needs to be deflated and as devaluation has been ruled out (??) we are stuck between a rock and a hard place, but we have to fix the problem and the ONLY way is to put up interest rates for the long term (because of the incompetence of the Bank of England over the last decade.)

  • Comment number 17.

    #14. Richard Dingle wrote:

    "Masters of The Uranus" - somewhere off of this planet anyway! (I wonder if as in Douglas Adams's book we could send them there?)

  • Comment number 18.

    Dempster, John from Hendon - you've said it all.

  • Comment number 19.

    In all of this, isn't the following relevant:
    'If it looks like a duck, and it quacks like a duck, the chances are it IS a duck...'
    My point is - neither Greece nor Ireland are out of the woods - and come to that, neither are Portugal and Spain. The euro is, surely, fundamentally flawed - and is simply a grandiose 'project' by the EU politicos..

  • Comment number 20.

    Ireland did NOT play by the rules.
    3% and 60% of GDP were the rules (for the Euro).

    That nobody has stuck to the rules, that they are not enforceable, or that there would alsways be excuses not to enforce them - is why it is doomed to fail.

    Re. Ireland specifically, but also Europe, it might be better to bite the bullet and default rather than waste all that money and then do so, anyway.

    The underlying issue is Dublin house prices greater than London. Madness. Low interest rates will just encourage more reckless borrowing - loans which will hit trouble when rates return to anything like their historic average.

    8% mortgage, anyone? 10%? That's when the real trouble will hit. It MUST either that, or massive inflation to get rid of the problem. That of course, would reward rash borrowers even further, and penalise those who did the right thing - savers - more. But it will probably happen.

    So long as we think high house prices are a good thing - they are not, except for a few downsizers, they just make it more expensive for everyone - we will have such problems.

  • Comment number 21.

    Im no economist but you can have my 2 penneth any way.As I see it,if someone owes me 50p they tell me can not pay me back but if I lend them another 25p maybe at some future date they might be able to pay me back.I would be considered an idiot if I threw good money after bad.KEEPING MY LOSS TO 50p MIGHT JUST BE THE PRUDENT THING TO DO.

  • Comment number 22.

    Nick Roinson's blog: "Irish lessons for the Euro zone"

    The biggest lesson is that Euro was 'thriving' at a time when 'lending' interest rates were at there 'artificially lowest rates' - and savings rates were driven even lower.

    So, no incentive to save. Therefore, banks became cash poor which increased their share price and leverage?

    ANYWAY THE DETAIL IS NOT IMPORTANT: BUT
    Banks and Bonds running on thin air - as are the debts owed by countries held to ransom by those invisible bond managers also living the high life on the invisible debt.

    Who exactly do tax-payers owe this so-called debt to - that they have already bailed out? Who are the creditors causing one crisis after another? Will our governments disclose those who are making so much money out of so much misery that will, eventually blow back to these invisible money/bond speculators?

    Yes, the bond managers' invisible new clothes have never been more disgustingly obvious?

  • Comment number 23.

    Live by the rules, die by the rules or make them up as you go along. Anyway you choose to look at it rules will always be broken. Why bother making them in the first place?

  • Comment number 24.

    just who are the people making profit out of the misery of the little common folk? can't we publish their names and addresses? can't we simply inform those who would apparently run off to Switzerland or Belize that we no longer recognize the paper they hold? why play by the speculators and carpet baggers rules? who owns this debt, and where did they get the money from to loan it?
    this is all the kings new clothes, can't we stop the madness?
    yours very ignorantly
    banker fodder

  • Comment number 25.

    #1 Oblivion

    It is easy to blame the markets, but surely we are to blame for our indulgence? The markets do not force money into peoples hands.

    Is it the markets fault that Ireland is basically a tax haven for big companies, and has unemployment benefits of €200 a week?

    No wonder the country is struggling. A tiny 1% population shift from paying taxes to receiving €10,000 a year from the dwindling tax pot would hurt most countries due to the lack of contingency in budgets.

  • Comment number 26.

    'In the case of Greece, a string of governments had borrowed and spent too much, and delayed the day of reckoning by hiding a good part of that debt from the rest of the eurozone. That is why, deep down, many in Europe see a kind of justice in what is happening to Greece and its economy. They broke the rules; now they have to pay. In a sense, the feeling is that they should be grateful for whatever help they can get.'

    What a pathetic comment. The simple people who pay for this right now they had nothing to do with these decisions. Greeks do not want any 'help'. Vast majority is against the new loan which is with worse conditions than the older loans in case of default. It is new imperialism. The same Greek politicians that betrayed the citizens during all these years, they betray Greece once more by getting this so-called 'help' that will end up in default under worse conditions and with even more debt. Default and out of the Euro now. The sooner the better. No more debt. Let's live within our means. The 'help' is no real help, they make money out of our misery. Ireland do not go to the mechanism, let the banks default.

  • Comment number 27.

    Q - What's the difference between an economist and an accountant?

    A - An accountant has to balance the books. An economist just has to read them.

    GC

  • Comment number 28.

    “When in doubt, sign another blank cheque to private creditors, and try not to think about the money, or the moral hazard”...well that just about sums up the sticky plaster solutions that have been tried to hold it all together. Can we really expect markets to have long term confidence in the union? I am with economists like here http://www.mindfulmoney.co.uk/2406/economic-impact/eurozone-shakeout-highly-probable.html who argue that some massive upheaval of the whole flawed project will eventually take place. It might take a few years, might happen next year but it will happen for sure. Interestingly the economist suggests this could all actually trigger moves towards fiscal union though cklearly that aint gonna happen anytime soon!.

  • Comment number 29.

    13. John_from_Hendon:

    Totally correct, but the west will never learn. So long as you can suck in the average clueless public with the idea of increased wealth through housing, every political party on the planet will keep driving policy towards illiquid asset based wealth.

    The irony is Labour wanted to decrease the divide between rich and poor, but by powering the economy with an asset bubble they did the complete opposite.

  • Comment number 30.

    6. At 1:49pm on 22 Nov 2010, hughesz wrote:


    Masters of the Universe 2 Euro 0 (Half time)

    I am expecting a 4 - 0 thrashing...

    -----------------------


    Never underestimate the Germans until the game is really over and they are sitting in the bus. ;-)


    I think, a system of regulary outbalancing between richer and poorer Eurozone countries will be established more sooner than later, and the paying countries will therefore get a much more harmonised taxation and social welfare system. The next step to a federal system.

    We couldn't do without it, as the time is over, that the people in the different countries believe and trust in the good-will of the member states.

    But that essential: the EU and to a much greater scale the Eurozone is based on good-will and solidarity, while it will break, if any country is only lookimg for it's national benefit.

    Obviously, if the biggest part of the export of the EU nations is based on export between the member states itself, not any of the members states can have a trade surplus. So, the german modell is not fitting to any EU country.

    Otherwise: in a single market with a single currency you cannot allow tax dumping, because it canibalises foreign and even inter EU investments.

    For a while, you can allow lower taxes as a kind of aid package for countries ho have to close up, but when the gap closes, it is simply not acceptable for net contributing countries, that they give money to the poorer countries and this contribution is used for an unfair tax competition by the receivers.

    I see a system coming, where national depth funding will be cancelled and substituted by one single Eurozone bond.

    Maybe, on a certain day , not so far away, all EU national dept, at least all Eurozone member dept will be collected in one Euro bond.
    In relation to their per capita level of dept and some other indicators, some countries will be under a cut line, some will be over it. The countries over the cut will get promissory notes from those under the cut. ECB will then print money to buy out all these promissory notes.
    External depts to private oversee banks will also be paid out by newly printed Euros.

    That will be the day of restart. Euro devaluation at the level of the poorest countries.

    Benefit: Every EU / Eurozone country starts with zero dept. And from then on, no member country is allowed to lend from private financiers anymore, but only from the ECB under sharp control from a common EU advisor board.


  • Comment number 31.

    27. At 3:58pm on 22 Nov 2010, Guy Croft wrote:
    Q - What's the difference between an economist and an accountant?
    A - An accountant has to balance the books. An economist just has to read them.

    Someone on this blog (not me) once wrote:
    'ECONOMISTS' is there any other profession where you can be wrong most of time, but still be considered an expert?

    I think climate-change scientist was one of the answers.


  • Comment number 32.

    Stephanie, perhaps in a future blog you could delve into how Ireland plans to pay back these loans. With mass migration of young economically active citizens and massive state debt tied to a low-inflation currency I cannot understand how this money can be paid back to the lending governments?

  • Comment number 33.

    I can't help wondering that the whole media is either British or American trained or owned and you have a very good system to take peoples eyes off the ball.Ireland is a small country and the economy is not important the problems in America and Britain haven't even started yet and the media will not stop them

  • Comment number 34.

    I know very little about the Greek economic situation, but in the cases of Spain and Ireland it was clear that the economies were overheating, the pace of house price growth in the first half of the decade was unsustainable. When higher interest rates were required the ECB was too busy worrying about tempting the German consumer to spend a little to worry about the ever-expanding property prices bubbles in Spain and Ireland.

    Despite the problems, in Spain there does not appear to be much anti-euro rhetoric while it seems the UK's eurosceptics have taken to gloating about the euro's demise. I would be interested to know how public opinion on the euro is in Ireland, do the Irish see it as a 'failed economic experiment' as the sceptics like to call it?

  • Comment number 35.

    Get rid of your Euros! Before its too late ... and they're junk!

  • Comment number 36.

    Yet again we dance around this subject. The reality is that the banks are not part of a free market they are in a rigged market. This was the fundamemtal flaw in Gordon Brown's big plan which is why it has failed. This is also the reason why the bankers keep giving themselves big bonuses, which is nothing more than theft. The banks have to be allowed to fail with the bankers like Fred Goodwin being made personally responsible and losing their shirts. Only then will you get fiscal responsibilty because it will be their neck on the line not ours.

  • Comment number 37.

    The solution should come from a common german, french, british initiative where they describe a way to handle the whole situation in all it's complexity, like preferential creditors do it when a company wents into administration.

    The solution for the Eurozone could come frome Germany and France alone, which would mean to make a much bigger difference between Euro and non Euro EU members, but would be better with GB in the boat.

    But neither in the two continental powers, nor in Britain, I see politicians at the helm, who have the vision to see what is in need, or the power to push through.

    These are not the times of small steps and little adaptions, these are the times of general restart.

  • Comment number 38.

    Just curious

    If we join the Euro, essential to long term prosperity and stability, why do the Euro phobes think we will end up like Greece, Portugal or Ireland, rather than Benelux, Germany or France.

    Is this part of the rich tapestry of national inferiority complex.

  • Comment number 39.

    Stephanie, I read in your bio that you worked for Lawerence Summers. I find him to be one of the actors that helped create this economic monstrosity by allowing banking and financial systems to merge.Furthermore we the people are partly to blame by taking out morgages on McMansions many could not afford or really hoped to flip. Problem is that a functioning regulatory body should have called fowl in the late 90's when this started,but Summers and pals(both Dems and Republicans) said oh no this is free market greed at its best. Now we the people are paying dearly for regulatory failures at the highest levels.

  • Comment number 40.

    So a coalition government has collapsed under argument and internal and external stress and as a result a market has spooked. A politican not wanting to face the reality of getting the dirty end of a stick and wriggling. Never seen that. Oh yes I did in the US following Lehmanns. Equity card holders the lot. And this is classed as 'Ireland has failed'. What is this tabloid journalism. 'Ireland has played by the rules'. Isn't this a technicality. Anybody who pumps up a bubble is detatched from reality. There are accounting rules too. Ireland will continue to be offered money and those offering the money will want tighter T&Cs than Ireland wants to immediately accept which seems to be the root of the problem. If you want the money its best not to argue too much about the T&Cs. Perhaps Germany is getting a bit cheesed off at the expectations placed on it.

    I wouldnt bank on the euro dropping that much. Guess what the traders will talk it down and then buy it back. Meanwhile the media plays its part of the yo-yo game. Its more and more like a panto, its that time of year. Behind you behind you.

    As for reference to Pestons piece that also had tabloid emotive terms, 'dont gloat' and 'swank' and all looked very familiar.

  • Comment number 41.

    32. At 4:10pm on 22 Nov 2010, Gerry Lynch wrote:

    Stephanie, perhaps in a future blog you could delve into how Ireland plans to pay back these loans. With mass migration of young economically active citizens and massive state debt tied to a low-inflation currency I cannot understand how this money can be paid back to the lending governments?

    -----------------

    Let me try to answer out of my view:

    Almost no country will ever be able to balance his dept.

    We are in the endgame and it's not about recovery anymore, but about: who (which mayor currency) will default first and then will be blamed.

    Ireland, the EU is only buying another 3 or 4 years of time, as the bail-out only guarantees that Ireland will get the funds to renew it's credits in the next years to pay their interests.

    They only hope, that the US Dollar collapses earlier, or USA has at least to ask for a common solution.

  • Comment number 42.

    34 njc874

    'Despite the problems, in Spain there does not appear to be much anti-euro rhetoric while it seems the UK's eurosceptics have taken to gloating about the euro's demise'

    Too true.

    Is the minority party pulling the plug on the Irish coalition acting in Irelands interest as such an action was bound to cause problems.

  • Comment number 43.

    @ Post 24 Mr Beige

    If you want to see who these bond holders are have a look at the directors box at a certain London club. google Mr. Abramovich and Anglo Irish Bank and you will see what happens when you dont pay off a Russian. It wouldnt be that Ireland is now suffering because of this...

  • Comment number 44.

    Irish lessons for the eurozone.

    Will Scottish tax-payers be the next victims of Osborne's English tax payer loans?

  • Comment number 45.

    Stephanie,

    Ireland playing by the rules? A dozen years (or so) ago, Ireland was given a special dispensation to lower its company tax rate for NEW businesses relocating in Ireland. The EU felt sorry for the poor Irish and wanted to help them temporarily. The rule was that this specially low rate had to revert to the general company tax rate after a period. The Irish outsmarted the EU by LOWERING the general rate to the special, concessionary rate. This made Ireland extremely attractive to US companies wishing to have an EU presence. The UK has also suffered as UK companies relocated to the low-tax environment in Ireland. Some solidarity with their EU partners!

    Beggar thy neighbour: see the Irish for how to do it successfully.

  • Comment number 46.

    While the Eurozone certainly has its issues, Ms. Flanders seems to recycle the argument that Ireland would be so much better outside the Eurozone. How so?

    The issue is Irish banking debt which (as a proportion of GDP) is much higher than either the U.S. or U.K. Given that the Irish government (perhaps foolishly) chose to underwrite bank debt, how would having the Punt help the government and its people repay this debt? Has it help Iceland to have its own currency?

    Perhaps with the Punt, Ms. Flanders would then argue for a "helicopter Ben" moment, when the printing presses would roll. Cue inflation, which would then enable debt-holders to inflate away their debt and cut the purchasing value of anyone with savings. And people talk of moral hazard!


  • Comment number 47.

    31 Dempster

    The difference is a bad accountant can screw a company but a bad economist can screw the country.

    Politians tend to shoot the messenger till one is on message. Hence policy is always validated.

  • Comment number 48.

    Irish lessons for the euro zone - is the title of Stepanie Flanders blog.

    Indeed Ms Flanders is not wrong in her second paragraph.

    Balance sheets have been mentioned - but more curiously why have these bank balance sheets not been challenged by governments, political representatives and, ultimately the tax-payers who elect and fund them?

    Who are these mysterious, and hidden from view people/organisations and banks, who decide that a country needs yet another bail-out?

    Ordinary people need answers - asap - any chance of that from those who make laws and expect us to behave, work, pay our taxes and yet, somehow those that rule, don't?

  • Comment number 49.

    I visited the Irish republic before the crash and couldn't believe the cost of everything from houses to beefburgers. Listening to a radio programme on the economy I learnt that the average wage in the public sector was 50,000 euro.

    If ever a country was set up for a crash it was Ireland. The whole thing was unsustainable and (like the UK) their public sector was unafordable. Politicians all over Europe have only to get a sniff of a buoyant economy (perceived or otherwise) and they spend tax revenues and borrow money as if there's never going to be an accounting.

    There are other countries in the Eurozone that will follow. Once you're locked in to this manufactured currency, options to correct your economy are severely limited.



  • Comment number 50.

    43 thecarrigeenlad:

    ''... you will see what happens when you dont pay off a Russian. It wouldnt be that Ireland is now suffering because of this...''

    Why should a lender be excessively penalised when lending to a supposed highly rated borrower. If this is to happen then the outcome will be credibility will collapse when further loans are sought. There is no mechanism for a country to become bankrupt ie escape debt. Countries dont die or stop having a GDP.

    This why this blogs position is falsely founded. Countries have to keep borrowing so they have to keep paying. Failure to pay is simply shown as increased costs in future borrowing. There is no moral hazard, it is not applicable. If the people of the country dont like it then they do not have to take on further debt and suffer the inevitable cuts. The last thing anybody should be seeking is the crystalisation of debt overnight. The inevitable outcome of somebody seeking to escape debt by a reduction in due payments is that other sound borrowers have to pay more. That is exactly what is happening right now.


  • Comment number 51.

    43. At 4:49pm on 22 Nov 2010, thecarrigeenlad wrote:

    This is the problem with the bailouts. Assets have become riskless.

    If Ireland default, the super rich start losing out directly. The lower classes are screwed either way. It's sad that we cannot just play the default game and get this over and done with.

    It is not the taxpayers fault the creditors lent at interest rates that did not reflect the actual risk.

  • Comment number 52.

    Talking about thinking the unthinkable I was watching the telly last night and saw a large, very emotional man with the Irish tricolour blocking the road in Dublin and shouting things not unlike `No Surrender' or `Never an Inch'.

    I think we can all be thankful for a Peace Process that now allows Republicans to emulate the Loyalists.

    For my part if Ireland were my country then I would join that man as they are a nation betrayed. As Lord Bannside once said when he was just out of prison as the Reverend Doctor Ian Kyle Paisley `a bridge and a traitor have one thing in common, they both go over to the other side'.

    Would such as I, a long term critic of Provisional Sinn Fein, to stand alongside Sinn Fein in this new struggle for Irish freedom be considered a traitor by any party? I think not as like Gerry Adams I can accept that I too am a sinner.

    I was speaking to Ireland this morning as a matter of business and the gallows humour was mixed with a sense of humiliation. There is no need to feel humiliated dear friends as it is not your failing.

  • Comment number 53.

    As much as I dread even thinking this - could it be that the only realistic way to get the bankrupt countries out of their endebtedness is for a bout of EU initiated inflation, at levels not seen for many a year? Might sound implausible...and certainly a dangerous strategy...but the alternatives seem few and far between. I do wonder if one or two EU senior players are beginning to countenance such a risky gamble...

  • Comment number 54.

    I'm very sorry, this may be an interesting if somewhat provocative theory, it has one small flaw... It makes no sense whatsoever!! In fact you are confusing the roles of culprit and saviour!

    When the Irish banks decided to give humongous loans to hare brain real-estate projects, they did that of their own free will. Nobody, least of all the Euro area, forced them to do so.. The evidence is there for every one to see. There are plenty of Euro countries & banks who recognize(d) the dangers of a real estate bubble. Hence they stayed well clear of this disaster and today enjoy a banking sector that is gradually returning to relative stability after the turbulence of the global subprime crisis...

    Hence the Irish have only themselves to blame for the predicament they're in. The Euro's only role in all this is that its rescue efforts have saved Ireland financial chaos with the massive impoverishment that would entail.

    To those who feel this implies an infringement of a member nation's sovereignty, again the lesson is crystal clear. Keep your house in order
    and your sovereignty is safe "as houses". Make a mess of things and manoeuvre yourself into a position where you have to go cap in hand, well then don't complain about losing part of your sovereignty...

    Extending the reasoning of this blog the Euro might as well be blamed for anything you like:

  • Comment number 55.

    #13,#20 but why are house prices so high that is the question.

    Family breakdown is a factor on size and type having split and remade families requiring bigger homes to fit the peoples in.

    uncontrolled Immigration policy for the last 13 years. More people.

    Not building enough. Do we really want to live in a concrete UK.

    There are probably others too.

    Between 94-98 I paid £34K for a 2/3 bedroom terrace in the SE for hosues that peole could not sell

    In 2000 I paid £50K for a semi which was a reck. After that I stopped as the maths did not make seen.

    by 2007 The houses were 3 to 4 times the value that I had paided. But around 2 times there 1988 price.


    So from the above there are great problems to sort out.

    the SE is far too overcrowded.

  • Comment number 56.

    51. At 5:46pm on 22 Nov 2010, dj_gandy wrote:

    43. At 4:49pm on 22 Nov 2010, thecarrigeenlad wrote:

    This is the problem with the bailouts. Assets have become riskless.


    -----------------

    Yepp, that is the core problem at the moment.

    Speculators attack the weaker countries in the Eurozone, knowing that the bigger countries would not let these countries bust.

    The main core was: no harmonised framework for finances in a currency union, no powerful regulation.

    It should never had happened, that small countries with small manufacturing economies could host a financial sector that is much to big in relation to the country.

    Isn't it unbelievable? In fact Europe may be would not have a too big economical problem if Ireland busts, but if the irish Banks do. Banks have more power than nations, money is stronger than democracy.

    Democracy, the people have not the power to rule banking, banking rules society.

  • Comment number 57.

    How can this not be the fault of Ireland's government. They let a housing bubble get completely out of control. It then burst and Ireland is now left to pick up the pieces. This has nothing whatsoever to do with the Euro. A property purchase tax pitched at the right level could easily have sorted out the proprty bubble.

    All the so-called wealth is just borrowed money backed by over-valued assets (property). It is obvious to anyone with even the slightest bit of common sense that bubbles like this burst. What did the Irish governement think, that property could have kept going up in price until even a 1-bed apartment was worth 10 million, and then everyone could get a 10 million mortgage and everyone would be rich and live happily ever after?

    Many people warned about this. This is basic economics. Even a child could understand how these schemes will end up in failure.

    Ireland never did well. People just thought they did. In reality it was all borrowed money. Ireland is a complete failure. It's not the only country. Many countries did the same, but luckily for them they didn't go to quite the same extremes.

    But don't worry, there'll be another property bubble within the next 10-20 years and we'll all be rich again.

  • Comment number 58.

    Is Iceland all over again, forcing the people to pay for irish banks` debts (By the way, could BBC, for the sake of objectivity, name the creditors banks?) The next stop is moving to my country, well, what could we small potatoes do? Even now they are talking about World Cup, is ridicoulous, isnt it? And "Greed is good, now it is legal" so we, the people, are just preparing to watch the next wonderful game, just like the greeks at 2006 Olympic and letting the robbers do their job.

  • Comment number 59.

    57. At 6:28pm on 22 Nov 2010, Bangkok Swan wrote:

    How can this not be the fault of Ireland's government. They let a housing bubble get completely out of control. It then burst and Ireland is now left to pick up the pieces. This has nothing whatsoever to do with the Euro. A property purchase tax pitched at the right level could easily have sorted out the proprty bubble.

    All the so-called wealth is just borrowed money backed by over-valued assets (property). It is obvious to anyone with even the slightest bit of common sense that bubbles like this burst. What did the Irish governement think, that property could have kept going up in price until even a 1-bed apartment was worth 10 million, and then everyone could get a 10 million mortgage and everyone would be rich and live happily ever after?

    Many people warned about this. This is basic economics. Even a child could understand how these schemes will end up in failure.


    ---------------------------


    And they all did know it, but hoped to get out just in time.
    And some may have made really big profits.

    Political class was in a two front war:

    1. Corruption and personal goals, most politicians might have been housing investors them selfes and the big funders of their parties and campaigns may have been property development companies.

    2. The electorate. Many of them, you get it, speculators on mortgages themselves. Would they have voted for property taxes?


    And even the banks and their clercs: what real opportunities did the have, in a hyper capitalistic framework? If they did not do it, their competitioner would have. If the small banker did not aggressively sell mortgages, his collaegue would have, and taking the bonus.

    A big, big snowball system. And the reason was: no regulation and control.

    But tell me, how is it possible to rule out buccaneering in a democracy of pirates?

  • Comment number 60.

    Is this terrible state of affairs in Ireland been caused by
    a) the global financial crises (sub-prime, Lehmans, etc) or
    b) by Ireland joining the Euro (thus losing the ability to set interest rates) or
    c) by ineffective control of bank lending and borrowing or
    d) by the Government's over-zealous support of its banks?

    I think it's all four - a perfect storm.

  • Comment number 61.

    Post 58 two of the largest creditor banks are RBS & Lloyds TSB (via the ex Bank of Scotland) both have large businesses in the Republic and seemed to be as lucky in finding bad businesses and over extended property developers to invest in Ireland as they were in the UK.

    Let no one be in any doubt the Germans pushed for a deal with no haircut for the creditor banks because their banks were only marginally behind ours in the mad rush to lend money to anybpdy for any reason in the Republic.

  • Comment number 62.

    Have I missed this but has the Irish goverment given in on the corporation tax issue?

  • Comment number 63.

    If politicans benefit from a debt fueled economy and seek to expand an economy by allowing debt to grow are they compromised in their regulation of the debt provision. Yes.

    If a business does not exercise due diligence in risk assessment and represents a false situation is this legal. No. If accounts are misrepresentive in there presentation is this legal. No. If major shareholders do not exercise due diligence in approval of the boards policy and accounts is this legal. No.

    Do those with major debt exposure misrepresent the situation. Yes.

    I see no rolling heads. The silence is deafening. Nobody is at fault. Extraordinary.

  • Comment number 64.

    #54 The cookie monster,

    ". There are plenty of Euro countries & banks who recognize(d) the dangers of a real estate bubble. Hence they stayed well clear of this disaster and today enjoy a banking sector that is gradually returning to relative stability after the turbulence of the global subprime crisis"

    Please tell me where these countries and banks are? If you take Germany then you will find that their banks are only just behind the UK in their exposure to Irish debt. If you take France then you will find that, along with Germany, their banks are frighteningly exposed to the debts of Eastern Europe. Let's not even bother talking about the state of the banks in Spain, Portugal and Greece as it will frighten the children. So perhaps we should think in terms of Italian banks - on second thoughts no. That really just leaves the Scandinavian and Benelux banks. But they are not big enough to carry the rest of Europe.

  • Comment number 65.

    56. At 6:27pm on 22 Nov 2010, starofthesouth wrote:
    51. At 5:46pm on 22 Nov 2010, dj_gandy wrote:

    43. At 4:49pm on 22 Nov 2010, thecarrigeenlad wrote:

    This is the problem with the bailouts. Assets have become riskless.


    -----------------

    Yepp, that is the core problem at the moment.

    Speculators attack the weaker countries in the Eurozone, knowing that the bigger countries would not let these countries bust.

    The main core was: no harmonised framework for finances in a currency union, no powerful regulation.

    It should never had happened, that small countries with small manufacturing economies could host a financial sector that is much to big in relation to the country.

    Isn't it unbelievable? In fact Europe may be would not have a too big economical problem if Ireland busts, but if the irish Banks do. Banks have more power than nations, money is stronger than democracy.

    Democracy, the people have not the power to rule banking, banking rules society.
    ------


    Well said
    BUT!
    So why are 'we' not going after these speculators, fund managers and banking institutes

    Maybe it is because most government funds are controlled by the said speculators, fund managers and banking institutes

    I'll ask the question again:

    Taking all the bailouts into consideration has the british government made anything out of the city in the short/medium/long term?

    If we are not then they are a liability and we the people should enpower the government to act in our favour, take the hit and move on.

    'banks are more powerfull than any standing army' is true only if you/we let them! it's a state of mind.

    So lets stop firefighting and tackle the cause

  • Comment number 66.

    38. At 4:27pm on 22 Nov 2010, Richard Dingle wrote:
    Just curious

    If we join the Euro, essential to long term prosperity and stability, why do the Euro phobes think we will end up like Greece, Portugal or Ireland, rather than Benelux, Germany or France.

    Is this part of the rich tapestry of national inferiority complex.


    So
    No takers then.

    Pathetic.

    I suspect the Euro is seen as a German construct hence foaming at the mouth by Euro phobes.


  • Comment number 67.

    22. At 3:12pm on 22 Nov 2010, corum-populo-2010 wrote:

    Banks and Bonds running on thin air - as are the debts owed by countries held to ransom by those invisible bond managers also living the high life on the invisible debt."

    Think about it. No one forces a government to sell bonds. Basically government bonds should be a last resort by a government to raise money in an emergency. However, successive governments have been using bonds as a way of funding general operating expenses, rather than raising taxes, or cutting back on spending.

    Without people buying bonds, most countries would be in serious trouble. So, you should blame the governments, not the people who buy the bonds.

    If a country defaults on their bonds' interest payments or capital repayments, they'll find it very difficult to raise more money in the future, so would have to run to a balanced budget, instead of having a perpetual deficit. If a country could do that, it wouldn't need to sell bonds in the first place!

  • Comment number 68.

    4. At 1:27pm on 22 Nov 2010, Dempster wrote:

    Ireland like the UK is not in control of its banking system.
    The uncontrolled fractional reserve banking system failed."

    Fractional reserve banking is necessary if people want to be able to borrow money with any level of ease, or for savers to be able to earn interest.

    Without it, if you wanted to borrow money, you'd have to arrange them with individual lenders rather than going through a bank.

  • Comment number 69.

    re #66
    Herr Dinkel,
    I enjoy your reasoned arguments but resorting to foaming at the mouth is letting things slip a bit!

    There is an amazing lack of reality on the major Beeb Blog sites at times but I never thought it would come from you. There is a cost to this EU/Euro lark, just as there is a cost to regional development administrations, regional Government, local authorities, a second central Government Chamber, supra-national organisations, such as NATO, etc. The bill for all this comes back to the taxpayer.

    Eventually, young people in Europe who do not consider themselves part of the old Grandee club will be starting to run things for themselves in fifteen to twenty years time. They will have no problem with being British or Belgian, Germans or Greeks, Irish or Italian, as well as being European. They will ask 'How much is this EU/Euro thing costing us?' 'Is it worth it?'

    And if the answer is no, they will start to unwind it all, pat what's left on the head, push it into the corner and divert the money being spent on it to something more worthwhile.

  • Comment number 70.

    re #65
    Might not just be speculators. Having waited two years, I heard someone on the radio, at long last, mention economic terrorism last week.

    That said, have you perhaps lost sight of the fact, that should recovery come to the UK/European economy, we stand to actually make money from the banking bail out?

  • Comment number 71.

    Stephanie, I still obstinately think that the Euro is an experiment that has failed and a way must be found to wind it up. In the end, there will not be enough money in the world to bail it out.

  • Comment number 72.


    Economist?

    More of an econofog, methinks

  • Comment number 73.

    Everyone keeps talking about the Irish housing bubble. The Irish PM spoke about how the Irish banks outgrew the country. The main exposure isn't and never was in Ireland. Irish banks lent out €54bn in Ireland. The entire mortgage market in Ireland is valued at €78bn. Why isn't anyone wondering why this figure is so much lower than the funds the banking sector have received off both the ECB, off the Irish governement and now the EU. Last time I checked banks don't need 400% capitalisation.

    Might it be the €1,008bn the Irish banks lent outside of Ireland? Where did they lend it to? Oh amongst others, the UK, Germany, the US, Eastern Europe. They spread their bets. Does this mean that all of those markets are toxic too? If so, where isn't?

    By the way, if you think €1,008bn is a lot to invest outside of your country, probably best not to look at our bank's portfolios then.

  • Comment number 74.

    68. At 10:22pm on 22 Nov 2010, Paul wrote:
    4. At 1:27pm on 22 Nov 2010, Dempster wrote:
    Ireland like the UK is not in control of its banking system.
    The uncontrolled fractional reserve banking system failed."

    'Fractional reserve banking is necessary if people want to be able to borrow money with any level of ease, or for savers to be able to earn interest'

    Well that's a point of view.
    For an explanation of the reasoning around FRB failings go to:
    http://www.positivemoney.org.uk/
    It's too long for a blog.







  • Comment number 75.

    73. At 11:10pm on 22 Nov 2010, gbeast wrote:
    'The entire mortgage market in Ireland is valued at €78bn. Why isn't anyone wondering why this figure is so much lower than the funds the banking sector have received off both the ECB, off the Irish governement and now the EU. Last time I checked banks don't need 400% capitalisation.

    Might it be the €1,008bn the Irish banks lent outside of Ireland? Where did they lend it to? Oh amongst others, the UK, Germany, the US, Eastern Europe. They spread their bets. Does this mean that all of those markets are toxic too? If so, where isn't?'


    Good point: Alot of it was leant out in the UK by the Anglo Irish Bank. Flat developments were their speciality. I was working on six of them when the bubble burst in 2007. Some when to completion because they were nearly complete, the remainder are still empty sites.



  • Comment number 76.

    68. At 10:22pm on 22 Nov 2010, Paul wrote:


    Fractional reserve banking is necessary if people want to be able to borrow money with any level of ease, or for savers to be able to earn interest.

    Without it, if you wanted to borrow money, you'd have to arrange them with individual lenders rather than going through a bank.
    ========================================================================

    I don't understand this comment. What is the problem with a system where banks match loans made to deposits held? Isn't that how Building Societies used to (and in some cases still do) operate? So how would such a system stop savers earning interest? It seems to me that under the current system, savers are not really earning interest at all.

    I agree that credit would be a lot tighter, but surely, given the events of the last few years, that would be a good thing? And if credit was rationed, surely interest rates to savers would increase? Or am I just naive?

  • Comment number 77.

    John_from_Hendon: when it comes to the single currency you do like to reduce all arguments against them to absurdity.

    After all why stop at Scotland and Wales having their own currency why not every county or indeed every town. Similarly if the Euro is such a panacea why stop at one currency for Europe why not one currency for the entire world?

    Once you take the arguments to the extreme they become silly.

    I will try and put some commonsense (at least in so far as economics has any vague link to commonsense into the Eur argument).

    The problem with every town having its own currency is two fold. Firstly it is expensive to trade with your nearest neighbour because of exchange rates adding extra costs. The second problem is that because each currency is not backed by a large economic base the wider (geographically) the town trades the more difficult it would be to get "foreigners" to accept your currency because they had no idea of its real worth and no way of tracking in detail how each of thousands (maybe millions) of different currencies and their "home" economies are doing.

    For this reason it make economic sense (although there was a considerable amount of political power grabbing as well) for currencies to combine such that each country only issued a single currency. So we can theorise that in a modern and complex global economy, a currency needs a minimum size of "home" economy for it to be viable as a medium of exchange in the global trading economy. I am not saying I know what the minimum size is, just that there is one.

    Now the advantages of combining currencies are simple. Firstly you reduce the costs of trading within the currency union because there are no exchange rate costs to worry about. Normal economic theory would predict that the reduction in costs should lead to an increase in intra union trade. Which is exactly what happens in reality. Secondly it also helps trading with partners outside of the currency union because the currency is seen to have a stronger/larger economic backing and is therefore more likely to be accepted as a valid medium of exchange.

    But of course in economics there is no such thing as a free lunch. Or to put it another way you have to look at the costs as well as the benefits. The main costs are that each member of the currency union loses flexibility to devalue its currency and of course central bank interest rates are set centrally which may result in inappropriate rates for some of the currency union members. Interest rates and devaluation are shock absorber tools. They allow an economy to be rebalanced compared to its neighbours in a less brutal way. Losing those shock absorbers is not necessarily critical as long as they are replaced by other shock absorbers which will do the same thing.

    There are two other main types of shock absorber: movement of people and govt handouts from rich parts of the currency union to poor parts.

    Lets take the US as an example of a very large currency union where the component economies (ie the states) have very different types of economy. The US copes mainly through large scale movements of labour and a small amount of federal hands out. We see a similar position in the UK where over the centuries there has been very large migration (not always voluntary) towards cities and the SE.

    So large scale movement of labour is an effective shock absorber and can offset the loss of flexibility that a currency union implies. The problem in the EU is that whilst there is in theory and law freedom of movement the reality is much more limited due to different cultures and languages (Eastern Europe excepted as they seem to get on their bike and just learn to cope). So the EU has tried to adopt the other shock absorber of transfers of wealth. Now there are plenty of examples in large countries of this being tried over very long periods (UK and France have subsidised their poor regions for decades - at least a century or more). What we can see from that long term experiment is that in many cases it is not a very effective shock absorber. My own view is that in some cases a region performs very poorly economical because it has large scale geographical disadvantages that, without for example the discovery of large mineral reserves, mean it will always be poor. In some cases the shock absorber does not work that effectively because politically it is unacceptable to the "rich" parts of the currency union to transfer the amount of wealth necessary to make a significant difference. But generally it does not work that well because govt subsidies/wealth transfers are pretty inefficient as too much gets lost in bureaucracy.

    I am going to theorise that a currency union which relies on govt sponsored transfers of wealth from rich to poor regions is an inherently unstable union because the transfers are both inefficient and not sufficiently large to make as big a difference as the loss of exchange rate and interest rate flexibility. That means that logically there is a maximum size limitation on that type of currency union where the limitation depends on how many rich and how many poor countries are involved. Again I have no idea what the maximum size is merely that there is one and beyond that the costs outweigh the benefits.

    However, where the currency union has not just in law but in reality large scale movements of labour as a shock absorber, I suspect that the maximum size limitation either does not apply or if it does the maximum size is very much larger.

    Applying it the Eurozone my gut feel is that it is already above the maximum size limit based on its current component countries. Therefore the costs of the UK joining would exceed the benefits. If, however, the Euro kicked out a lot of poor countries (Greece, Portugal, Eastern Europe, southern Italy, most of Spain) then it is likely that the UK would benefit from being in the Euro. Of course because the Euro is mainly a political construct rather than an economic one, the concept of kicking out whole countries never mind parts of countries is highly unlikely

  • Comment number 78.

    66. At 9:15pm on 22 Nov 2010, Richard Dingle wrote:
    If we join the Euro, essential to long term prosperity and stability,
    =========================================================================
    The Euro will only survive if there is a single body responsible for fiscal control over Europe. Hence it requires the formation of a Federal States of Europe. As I cant see this happening in the near future the Euro is destined to limp from one catastrophe to the next until it collapses altogether. The reason for this is many fold but in the current climate it is each of the sovereign powers lack of control that is causing the biggest issues. This has been the case with both the failed economies of Greece and Ireland. The halfway house of an exchange rate that is set centrally and the interest rate without control of all aspects of fiscal control was and is a recipe for disaster.

    So unless there is a massive groundswell of public support for a Untied States of Europe or Federal States of Europe the Eurozone should at the very least be pared back to a very small group of two or three or more realistically done away with altogether.

    The experiment could be restarted at a later date if the above did become a popular option.

    A lot hangs on the Chinese holding onto its investment of Euros, for if they decide enough is enough then that would place the first and last nail in the coffin.

  • Comment number 79.

    65. At 9:00pm on 22 Nov 2010, common_man_123 wrote:
    "Well said
    BUT!
    So why are 'we' not going after these speculators, fund managers and banking institutes

    Maybe it is because most government funds are controlled by the said speculators, fund managers and banking institutes"


    Well this is the problem. Government boom funding came from the city. Primary dealers are obliged to buy government bonds. Demand for Govt. bonds is therefore, arguably, artificial to begin with. If the banks fail, so does quick and easy government funding. Banks start liquidating, stocks, then bonds go, and I won't even get onto what happens to derivatives in that scenario.

    So the government are really part of the problem we are facing today. They can blame the city all they like, but they are the ones that borrowed the money, and in huge quantities. The city lent like mad, but it takes two to tango. If the government cannot look after its finances, how can you expect citizens to do so?

    At the end of a 15 year economic (read asset) boom the government has nothing but debt and a deficit to show for it. Nothing saved for the day the rain came.

  • Comment number 80.

    38. At 4:27pm on 22 Nov 2010, Richard Dingle wrote:
    Just curious

    If we join the Euro, essential to long term prosperity and stability, why do the Euro phobes think we will end up like Greece, Portugal or Ireland, rather than Benelux, Germany or France.

    Is this part of the rich tapestry of national inferiority complex.

    Dear Mr Dingle,

    I see that you would like a response to your e-mail.
    I am not a europhobe in any shape or form. I have been on German Boards, stayed with French and Italian families and generally admire much of Europe. I have no inferiority complex about Britain excepting its very poor educational standards.
    I still do not wish to join the Euro and do not believe, as you seem to, that it is essential to our long term prosperity.
    I would advise you:
    1. To look at the terms of trade between France and Germany since the creation of the Euro before you become too certain that France will be able to stay in the union forever. In case you cannot find it, you will find that they have moved agaisnt France between 25-30%. That is not sustainable;
    2. To recognise that the make-up of the different economies, coupled with cultural and linguistic difficulties of moving, make for a rather unhappy union. When the cotton fields became mechanised in the USA in the twenties, five million people moved north to industrial jobs, without leaving their own country. This was a marvellous stabiliser, but I cannot see it happening between, say, the UK and Germany (how many Brits speak good enough German?)
    3. To see that the very large imbalances are very difficult to reconcile with a long term stable union. The vast export surpluses of Germany against the UK's dismal trade deficits are bound to end up within a currency union with exactly what we have now seen, i.e. the deficit countries at first borrowing from the surplus countries' banks to buy the goods and then the surplus countries' governments having to bail out the deficit country or the banks or both..
    So, I am no eorophobe, but do think that it would be very unwise to join the Euro

  • Comment number 81.

    Posts so far here have shown how little people know about the economy of Ireland. I watched SDLP's Alasdair McDonnell talk on the BBC saying that intrinsically the South was financially sound and the economy was functioning well.

    Well if this is functioning well I don't know what everyone else around the world is worrying about. For at best they have enough reserves to survive for four to six months before they start to default on loans and wouldn't be able to pay their own wage bills. So by April next at the very latest the South would go into meltdown and coupled with the fact that their banking system is bankrupt they have no room to maneuver.

    The model down south (Celtic Tiger) was built on sand for they attracted commerce from abroad by ultra low corporation tax which is fine in the short term but is not sustainable in the medium to long term. For as is happening now their European partners are ganging up on them as they see this as an unfair practice. Now if as is likely they will be forced to raise the rate to the EU average it has to be questioned how many will want to stay when they are having to pay their own staff over the odds to compensate for the extreme tax regime and if they are not benefiting for artificially low corporation tax does it make sense. The inward investment would surly also dry up as the US See's the South as a way to get access into the EU on the cheap.

    Next we have a property market that was aloud to run out of control which in turn fueled the Celtic Tiger Myth. Which in turn fueled a Public sector boom, which in turn fueled a welfare system that was over generous to say the least.

    Unfortunately all their chickens have come home to roost at the same time. All are comparable;
    The banks lent recklessly,
    Politicians let it all just to continue with the never had it so good message,
    And the population lived the good life to the full.

    Now they have gone from having the best standard of life in the western world to having the largest personal debt. It is now running at about 190% which is the highest not just in Europe but in the developed world. So in other words they would have to work for nothing and not spend a penny for "X" years just to pay off their debt. Then we add the public debt and the ship starts to take on water. Then you add the bank bail out and it sinks, which is what is happening. And although their feet are wet and the water is rising fast no one wants to start bailing.

    Now there are many who are jumping ship and emigration is the order of the day. Ireland is the only country in Europe who's population has decreased in the last year. In a report last week it is now estimated that there is about 500,000 empty properties. With a population of around 4.5 million it will take a colossal population growth to take up these properties. It is estimated that no new houses would be needed to be built for at least 8 to 10 years and probably longer to take up the slack. And prices, well the same report estimated that it could be a quarter of a century before they reach parity with the 2006 prices.

    Now there are five stages of grief;
    1.Denial
    2.Anger
    3.Bargaining
    4.Depression
    5.Acceptance

    Many here are still at stage one, some are reaching stage two and some of the politicans are having to be at stage three.

    It is a comment on some of our politicans that they are at stage one and refuse to go any further. For in the past they were able to bury their heads in the sand and wait till things where taken care for them. Now they have entered the real world and have to stand on their own two feet means that they can't do their ostrich impression but they are still trying..... yes very trying.....












  • Comment number 82.

    #68 and 76

    The key phrase is 'uncontrolled' Fractional Reserve Banking.

    FRB is quite straight forward. Depositors rarely need access to their savings (at the same time) but some do, hence the banks holds on to a fraction of the deposits and lend the rest. The confidence trick is your deposit still reads the full amount – but only 10% is actually there (with 10% FRB for example).

    Thus with FRB, anyone can have access to their money but not everyone.
    This surprisingly works most of the time.

    With 100% FRB, banks hold on to the full deposit and can only lend their own capital. Or alternatively, they could be honest with the depositors i.e. your money has been loaned out and you can’t access it.

    However, I think Dempster is talking about when ‘uncontrolled’ FRB comes into play. This is where banks lend the money and look for the deposits later. Banks borrow money from the money markets (often short term) to make up the deposit for the loan they have already made (often longer term but at a higher interest rate).

    Thus, when the money markets stop working we get Northern Rock . . .

  • Comment number 83.

    76. At 09:56am on 23 Nov 2010, haufdeed wrote:

    68. At 10:22pm on 22 Nov 2010, Paul wrote:


    Fractional reserve banking is necessary if people want to be able to borrow money with any level of ease, or for savers to be able to earn interest.

    Without it, if you wanted to borrow money, you'd have to arrange them with individual lenders rather than going through a bank.
    ========================================================================

    I don't understand this comment. What is the problem with a system where banks match loans made to deposits held? "

    Because that is still 'fractional reserve'

    Fractional reserve banking means that the banks only hold a fraction of their deposits in reserve. So, if you deposit 10,000 in a bank, they will lend out, say, half of that, to borrowers, so they are only keeping a fraction of your deposit on reserve - hence 'fractional reserve'.

    The problem with fractional reserve banking is that if all the depositors want their money back, the bank can't give it, because it has lent that money out. That can cause runs on banks.

    If you get rid of fractional reserve banking, then the bank has to keep all of their depositors' money in reserve - so that money cannot be put to good use, earning interest. The bank can only lend its own money (which presumably it gets by charging fees to its depositors and lenders - which everyone would have to pay - the end of "free banking"), not the money of its depositors, unless the depositors have explicitly agreed not to withdraw their money, so it doesn't need to be kept in reserve.

    Fractional reserve banking started centuries ago when goldsmiths realised that they could lend out some of the money that was put on deposit with them, and earn interest. As long as they kept a fraction of the deposits in reserve, hopefully none of their depositors would ever find out...

    Some people seem to think FRB is something it's not - it doesn't let banks 'create money', it just lets them use some of a depositor's money for something else, rather than keeping it all in reserve.

  • Comment number 84.

    #81

    Good post.

    The only thing I would add is:- it is mostly the young who are emigrating, leaving Ireland with a demographic (pension) timebomb too...

  • Comment number 85.

    82. At 11:53am on 23 Nov 2010, newblogger wrote:
    FRB is quite straight forward. Depositors rarely need access to their savings (at the same time) but some do, hence the banks holds on to a fraction of the deposits and lend the rest. The confidence trick is your deposit still reads the full amount – but only 10% is actually there (with 10% FRB for example).
    ==========
    This is not a confidence trick; the account balance shows how much the bank owes to the customer (or vice versa). What the bank has done with the money is irrelevant.


  • Comment number 86.

    #83
    common sense at last!

  • Comment number 87.

    #77. Justin150 wrote:

    "John_from_Hendon: when it comes to the single currency you do like to reduce all arguments against them to absurdity."

    Perhaps that is because the innate absurdity of the arguments used by the xenophobes are just that absurd, and what is more immensely damaging!

    However the internal operation of any currency does inevitably throw up problems as well as advantages. That is easy to see within the UK and the sterling area. It would be of considerable advantage to anywhere outside the M25 to have their own currency and not be bound to the terrible damaging pound sterling used by the City of London.

    Indeed exchange control would also be a huge advantage to those regions outside the M25 to prevent the absurd (and unearned!) wealth appropriated by the City of London through unfair commercial and business practices and resulting from regulatory protection, from seeping out into the regions and destroying the ability of locals from being able to buy anywhere to live or even pay the rent. This is not an example of absurdity the problem is very real - just visit the west country or the peak district and compare local wage rates with the price of housing, be it house prices or rents.

    Just as within the UK; within the Euro steps need to be taken to address these problems. Just because the UK has been totally incompetent for a generation in its management of these issues it does not mean that the rest of Europe is the same - indeed the influence of the German model of house/rent pricing would be a substantial improvement for the UK.

    We need to join the Euro because we need to change our stupid ways, because they are not sustainable and are terribly damaging to the vast majority of the British people and real British business and trade.

    The only part of the UK that benefits from a different currency is the banks. And (although I don't need to remind you) just look at what a terrible mess they have made and the enormous present and future cost of the present unsustainable banking system. We need to join to get back to basics of business and trade upon which all economy is founded - just ask the Chinese.

    PS 'The Sun' has praised itself I hear for keeping the UK out of the Euro - if anything should convince you that we must join, and join as soon as possible, it is surely this tabloids opposition!

  • Comment number 88.

    In the article, it is written "They did play by the rules". I have lived in Ireland until this year and I can emphatically state that many Irish did not play by any rules. Corruption in higher circles was endemic, just trawl through the Irish press in the last few years. They were constantly reporting on the financial abuses that make the shenanigans of British MPs look completely harmless. In 2007, while the leader of the country was explaining how he came by tens of thousands in foreign cash given to him in brown envelopes, he still managed to get elected and stated on 04 July 2007 that those who were complaining about the state of the economy should commit suicide. The Irish elected cowboys to rule them and ended up with a banana republic as a result. A shining light in the disaster which has been enfolding over years is the Irish media which has reported the many abuses only to be ignored. Please read the Irish press reports back to at least 2007 and it will be obvious why the country is in such a state. I am Irish and angry at the current state of my country - as a nation a large proportion of us played fast and loose with free money and now expect other taxpayers from other countries to bail us out.

  • Comment number 89.

    #82. newblogger wrote:

    "#68 and 76

    The key phrase is 'uncontrolled' Fractional Reserve Banking."

    Too right, the lack of control stemmed from the regulator - the Bank of England/The Treasury/The FSA - and we still have the same men in post pursuing their same stupid ignorant destructive economics - they MUST go!

  • Comment number 90.

    78. At 11:27am on 23 Nov 2010, Chris London wrote:
    66. At 9:15pm on 22 Nov 2010, Richard Dingle wrote:
    If we join the Euro, essential to long term prosperity and stability,
    =========================================================================
    The Euro will only survive if there is a single body responsible for fiscal control over Europe. Hence it requires the formation of a Federal States of Europe. As I cant see this happening in the near future the Euro is destined to limp from one catastrophe to the next until it collapses altogether.


    Your analysis is the standard analysis of the situation and a good one.

    I also accept it.

    However the advantages of the Euro are huge and worth defending. It is for this reason given considerable German and French political will I suspect there will be a considerable push towards a form of 'fiscal union'. The ideal outcome would be some system of regional independence across the EU with fiscal power moving to the centre.

    A Europe of free and independent nation states no longer reflects the reality of the real world.

    There really is too much at stake to let the Euro fold.

    The Germans will always be the 'European Problem' just by being.

    Too many of them, too rich, too creative, talented and hard working.

    The EU right from the beginning was all about keeping this particular genie in the bottle.

    Is Europe all about Germany ?

    Polite answer - of course not.

    Realistic answer - yes.

    The EU as a mechanism for diluting, channelling German energy is the realite.


  • Comment number 91.

    86. At 12:25pm on 23 Nov 2010, AnotherEngineer wrote:
    #83
    common sense at last!


    Yes. Seconded.

    Anti FRB lot remind me of 'flat earthers'.

    Not sure whether they can't understand or just don't want to.

  • Comment number 92.

    The question that everyone wants to know is where the billions of gone ?

    In the case of Ireland its simple its economy was one large property ponzi scheme.

    If a property company used a £1 overdraft for a 10% deposit on a £100 million scheme , "made" £50 million on this scheme ad used this as a deposit for a £500 million scheme. All is great until the last scheme is re valued at £200 million due to the credit crunch. The effect is a £250 million loss for the bank and a £50 million loss for the developer and bankruptcy.

    Magnify this by 1000's and you have your answer, I suspect very few people cleaned up during this period , but a lot of people had a very affluent lifestyle for over a decade...............

  • Comment number 93.

    85. At 12:24pm on 23 Nov 2010, AnotherEngineer wrote:

    'This is not a confidence trick'

    It is in the sense that if everyone (I mean everyone) insisted on pulling their money out of all the banks, they would realise they all have claim to the same money.

    This is called a bank run.

    Post 83 even mentions it which you seem to agree with...

  • Comment number 94.

    Based on experience to date it seems probable that Portugal will need assistance in the next 6 months and then possible that two currency blocks will form, but that would seem politically difficult to achieve.

    In fact I think it easier for Germany and perhaps France to decide to move out of the Euro rather than getting other nations to go into a new currency. Who would get relegated and who would decide? That would lead to endless arguments.

    Fear plays a big part in all this though, there is a disconnected wave of money travelling the globe which causes asset bubbles where ever it goes. I suspect speculators can push this along and make money from it, perhaps even more so when the losses are nationalised.

    I have become more aware recently that debt buys influence and is of strategic significance to nations.

    I think the storm is not completely over!!!

  • Comment number 95.

    #83 + #91 Richard Dingle plus Another Engineer - Incorrect. As soon as you have more than one bank, the deposit money greatly exceeds the deposits. Fractional reserve banking, unregulated, helped fuel excess debt, which is at the heart of this economic catastrophe still unfolding.

    #90 Richard Dingle

    While the most effective and quick solution would be a single EU-wide purchase of bonds and debt-restructuring, to avoid the domino effect, it is not yet in the EU;s interests.

    The irony is that the US and the UK should actually be asking for the EU to put such a federal arrangement in place, because delaying this and allowing the knock on effect to happen assists the EU in competitively devaluing the Euro through inaction.





  • Comment number 96.

    Another main lesson for the Eurozone is that the massive £'s size of the bail-out is to give the banks the maximum amount of support in managing their bad loans and debts ... when in fact the banks/bankers should be just working harder and turning over these assets with foreclosures on commercial assets and finding new owners and customers to get the market started for these properties ... at knock down prices if necessary.

    Not only do the banks get bailed out with tax payers money ... they've allowed themselves a 2-5 year cushion to sort out their mess.

    I say this is not acceptable, instead of taking their time gradually and lazily waiting for the markets to turn (and this may not happen) ... there is a massive issue of opportunity cost with 'stalemate assets' frozen in 'banking fiasco limbo' and not in productive use, in the local economies.

    As difficult as it is and very hard it would be for some of those holding loans ... many of these commercial bad loans need turning over more quickly otherwise the current recession/depression (depending one one's own location/situation) ... is a medium or even long term issue.

    The bank's should be turing over the bad commercial loans much more quickly so that the market can move on and get these assets moving again as the opportunity cost of frozen/staemate assets is itself very damaging to all economies that are affected by bad debts.

    Banks should indeed be turning over the commercial assets rather than the residential mortgage assets ... some banks have got this the wrong way around and seem to prefer turfing people out of their homes but leave the commercial risk takers alone?

    There is something very much wrong with this situation .. this is what immigration goon Vince Incapable should be dealing with now and not prancing for 'come dancing' ... too many people are still losing their homes while the banks lay off the commercial customers knowing that they have massive bailout monies to enable them to sit around indefinitely at the taxpayer and stakeholder expense.

    Why should anyone lose their house and a banker get any kind of bonus under these conditions?

  • Comment number 97.

    It is simply nonsense to expect banks to hold 100% of deposits , what would be the point of the bank ??

    The banks as a rule will pay relatively nothing out in interest for instant access deposits and pay progressively more interest for longer "locked in" money. This avoids headless chickens taking the deposits out on a whim.

    Although banks wrongly kept low levels of deposits (Regulators said they could )the bigger issue causing the credit crunch was the other forms of capital the banks obtained i.e Poor quality USA loans dressed as AAA safe investments.

  • Comment number 98.

    @91. At 12:37pm on 23 Nov 2010, Richard Dingle wrote:
    "Anti FRB lot remind me of 'flat earthers'. Not sure whether they can't understand or just don't want to."
    I wouldn't describe Bill Still as a "flat earther". Please could you enlighten me as to why Mr Still's documentaries are scaremongering or falsehoods.

  • Comment number 99.

    88##

    I suspect that no one "rocked the boat" because everyone including the media was getting a slice of the action one way or another . Greed is a powerful emotion on in the case of Ireland it's cost the public a few bob...

  • Comment number 100.

    85. At 12:24pm on 23 Nov 2010, AnotherEngineer wrote:

    ==========
    This is not a confidence trick; the account balance shows how much the bank owes to the customer (or vice versa). What the bank has done with the money is irrelevant.
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~
    Beg to differ.

    When I put the money in a current account in a bank or building society, I believed it to be going into "my" account. A safe store of value earned but not yet spent. I neither wanted, nor expected for my "savings" to be used as someone else's gambling fund.

    If I wanted to speculate, I would use the money to buy shares, or visit a casino.

    If instead of having a "savings account", I bought fixed term bonds, that were explicitly described as investments, I would be accepting that the bank can do what it likes with that money for the duration, as long as it honours the terms of the agreement.

    But to treat ordinary current accounts as a gambling pot looks to me like a "con trick". The small print on the account forms never said "the value of your savings could go down as well as up".

 

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