Europe's Robust Common Currency Why the Euro Will Survive the Crisis

The euro-logo statue in front of the European Central Bank in Frankfurt: No death in sight for Europe's common currency yet.
AP

The euro-logo statue in front of the European Central Bank in Frankfurt: No death in sight for Europe's common currency yet.

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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.

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Popateapa 11/25/2010
1. Warum und für welche Krise? /Why and for what crisis?
Popa Teapa Further development of the current economic crisis This crisis could have occurred much earlier! Why do I say this? The events of 1989, he was overthrown communism, came to favor the developed European countries! Savings on their already over-worked, creating heavy stocks to sell. There was a new market! Products that have not had access before, many East European citizens had an active market in that period. Stocks fell jump starting production! This boom was a false one! Markets had emerged from the communist system limited financial reserves. Consumption has grown, but the true producer of value-added industry and agriculture have declined. Bankers of the West European countries began to support the economy through loans. They needed further outlets! The first property purchased in Eastern European countries, banks have been! The economy of these countries has become a consumer economy, without producing other industrial and agricultural goods. Bankers needed to move their money, and Eastern Europeans had given more than one life easier! Savage capitalism, in these countries has led to widening the poor stratum who can not buy! Social budgets have seen an increasing burden. For financing, and especially for the frequent election campaigns, have taken other loans! There was a snowball effect. For Greece and Ireland, is different. Those countries with a predominantly tourist industry, an industry without too developed, borrowing contracted to develop the tourism. Portugal, Spain, Italy, imported more foreign labor! If they had stayed home, would have developed their own countries! The money earned by them were returned to their countries, where they created a property boom! Loans offered to buy Western products have reached maturity! Failure to pay leads to foreclosure. Saturate the market with such products has led to depressed prices. It's hard to believe that bankers will accept losses. To maintain these markets, but also profitable for the recovery of loans to other loans are backed by the IMF and the European Union! Bankruptcy countries such as Romania or Ireland, would bring huge losses Bankers! They're just opinions man went through life, reached 56 years. It's an Eastern European Review. I am a Romanian citizen! I apologize but I do not know perfect English, so I do not mind some corrections. Just please! Talking Pop( Popa Teapa)
Trojan Horace 11/28/2010
2. Euro stress
Completely agree with the analysis and all the anxiety helps boost Germany's exports into the US - but it's potentially quite a dangerous game to keep talking the Euro down - because if the dominoes go as far as Spain, we're looking at 12% not Greece's 2% - and that won't be pretty
BTraven 12/01/2010
3.
Zitat von PopateapaPopa Teapa Further development of the current economic crisis This crisis could have occurred much earlier! Why do I say this? The events of 1989, he was overthrown communism, came to favor the developed European countries! Savings on their already over-worked, creating heavy stocks to sell. There was a new market! Products that have not had access before, many East European citizens had an active market in that period. Stocks fell jump starting production! This boom was a false one! Markets had emerged from the communist system limited financial reserves. Consumption has grown, but the true producer of value-added industry and agriculture have declined. Bankers of the West European countries began to support the economy through loans. They needed further outlets! The first property purchased in Eastern European countries, banks have been! The economy of these countries has become a consumer economy, without producing other industrial and agricultural goods. Bankers needed to move their money, and Eastern Europeans had given more than one life easier! Savage capitalism, in these countries has led to widening the poor stratum who can not buy! Social budgets have seen an increasing burden. For financing, and especially for the frequent election campaigns, have taken other loans! There was a snowball effect. For Greece and Ireland, is different. Those countries with a predominantly tourist industry, an industry without too developed, borrowing contracted to develop the tourism. Portugal, Spain, Italy, imported more foreign labor! If they had stayed home, would have developed their own countries! The money earned by them were returned to their countries, where they created a property boom! Loans offered to buy Western products have reached maturity! Failure to pay leads to foreclosure. Saturate the market with such products has led to depressed prices. It's hard to believe that bankers will accept losses. To maintain these markets, but also profitable for the recovery of loans to other loans are backed by the IMF and the European Union! Bankruptcy countries such as Romania or Ireland, would bring huge losses Bankers! They're just opinions man went through life, reached 56 years. It's an Eastern European Review. I am a Romanian citizen! I apologize but I do not know perfect English, so I do not mind some corrections. Just please! Talking Pop( Popa Teapa)
Great article! I am quite surprised about the pessimism I made out while reading your article since I have thought the situation in your country would be much better respectively has been improved after harsh 90s when Eastern Europe were suffering from the collapse of its Economy. You give the impression Romania has been deindustrialised after the throwback of communism, however, here, in Germany, is the prevailing opinion that lot of jobs were relocated to countries like yours. An example is Nokia which relocated his mobile phone production from Bochum to Romania. And there is the opinion that the Balkan, with the exception of Hungary, of course, is not affected by the crisis at all. Therefore, I am quite astonished about your article.
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