Europe's Robust Common Currency Why the Euro Will Survive the Crisis
Part 2: The Difference between Ireland and Greece
Granted, Greece was saved first, and now it's Ireland's turn. But, it would be wrong to conclude that the problems faced by the two countries are somehow comparable. The only thing they really share in common is their marginal importance to the euro zone as a whole. Greece only generates roughly 3 percent of the currency union's total economic output. And, for Ireland, that figure is 2 percent.
Otherwise, the two states couldn't be more different. Greece suffers from massive structural problems. For example, the majority of its companies aren't competitive, and the country imports signficantly more than it exports. Moreover, its corruption- and cronyism-plagued government lived well beyond its means for decades, spending much more money than it had. It wasn't even able to properly collect taxes.
Ireland, in comparison, is a modern, prosperous state. And what's more important, the country has in recent years already proven both its business model and its ability to institute reforms. After joining the EU's precursor, the European Economic Community, in 1973, Ireland evolved from being Europe's poorhouse to the Celtic Tiger with an internationally competitive economy. And Ireland continues to export more than it imports.
A Second London
In the years before the financial crisis, Ireland ran a budget surplus and made massive reductions in its national debt. That's more than can be said for its Greek counterparts -- not to mention Germany. At the end of 2008, its public debt stood at 44 percent of GDP. In Greece, it was already 100 percent at that point; in Germany, it was 66 percent.
Until 2008, Ireland was fighting against the curse of success: Its economy was growing too quickly. The economic boom had led to a real-estate bubble. During the final stage of the overheating of the residential and commercial property markets, Ireland's construction industry was contributing 20 percent to the country's total economic output -- twice as much as in Germany and a European record.
And the more feverish things got in the real-estate sector, the more the finance industry was infected. The loans that Irish banks had extended to the non-financial sector, such as private households and companies, are equivalent to more than 200 percent of the country's GDP. At that level, the financial industry is just as important to the economy as a whole as it is in Britain -- but with one big difference. Dublin has only been something of a financial center for a few years. London, in contrast, has been one of the world's most important banking cities since the end of the 17th century.
EU Money Is Simply Cheaper
When Ireland's real-estate bubble burst in 2008, the country's banks also got caught up in the mess. During the boom, the banks had lent out all the money they could get their hands on. But, over the last few years, as these loans have significantly decreased in value, the institutions have been forced to write them off. At the same time, anxious customers have been withdrawing their deposits. As a result, Ireland's government has been forced to support the banks, to the tune of roughly 45 billion so far.
Now that the banking crisis has turned out to be bigger than was initially predicted, the Irish government needs more money. And since loans from the EU and the International Monetary Fund (IMF) are cheaper than those the country can get on the open market, Ireland has asked for help from Brussels, in the form of the euro rescue fund.
Still, there is no doubt that, in the middle or long term, Ireland's government will once again be able to obtain loans at acceptable rates on the financial markets, especially once the economy gets back on its feet. If real-estate prices also pick up again as the result of an upturn, those banks that are currently in danger of going bust could once again generate healthy profits.
Bottom line: Greece almost went bust because of economic mismanagement stretching back decades. In Ireland , the danger that it might not be able to refinance itself is tied to the bursting of its real-estate bubble.
- Part 1: Why the Euro Will Survive the Crisis
- Part 2: The Difference between Ireland and Greece
- Part 3: How Debt-Ridden Countries Should Bring Their Finances into Order
- Part 4: Why the Euro Does Not Need to Fear the Dollar or Yen