The mood in Europe is currently one of alarm -- yet again. First, the EU's member states had to pull Greece back from the precipice of bankruptcy. And now they are having to save Ireland from financial ruin.
Earlier this year, when Greece was being rescued, there were those who warned of a domino effect among the euro zone's troubled members. It now appears that their warnings have been confirmed, with the result that advocates of a doomsday scenario now expect the rest of their prophecies to also be fulfilled. As they see it, Portugal will soon be the next to fall, followed sooner or later by Spain and Italy as well. And by then, at the latest, it will be curtains for the euro zone. Game over.
Given the current situation, these scary predictions might seem seductively persuasive. But the fact is that they are rather unrealistic. The situation in Ireland is obviously anything but rosy. And it would be careless to ignore the possible dangers facing the euro. But at the moment there isn't much evidence indicating that the currency union is under any serious threat, let alone that it is lurching into a crisis that will ultimately end in the death of the euro.
There are three reasons for believing that this is not the case:
- Ireland is not a second Greece;
- Europeans have learned something from their budget calamaties;
- The euro is actually in a good position compared to the dollar and the yen.
But what does that mean in concrete terms? SPIEGEL ONLINE provides the following overview.
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.
How Debt-Ridden Countries Should Bring Their Finances into Order
Many German citizens and politicians take a condescending view of their European neighbors. Looking at them, they say to themselves: "They can't even balance their budgets, and now they want to clean things up with our money?" But, in truth, this arrogance really only proves that everything in life is relative. Granted, when it comes to a comparison of fiscal soundness, Germany might look a lot prettier than Greece, Ireland and the other troubled euro-zone members. But that still doesn't make it by any means a shining example of stable financial policies.
Another reason Germans shouldn't be gloating is that, in recent months, all of the crisis nations in the euro zone have enacted brutal austerity measures. These days, the word "economize" actually does mean something in Portugal, Ireland, Greece and Spain. But, in Germany, we still have a different understanding of what that means. Our modus operandi is to spend a little bit more than planned and then introduce new taxes and levies. See, for example, the German government's "savings package."
Portugal's Problems Are Similar to Greece's
In hypothetical terms, if Germany had to save as much in one year as Greece has had to, its federal and state governments would have to cut €100 billion from their budgets in the coming year. The consequences would be lower wages in the public sector, pension cuts and less money for the unemployed. In other words, the national and state governments would be upsetting a major slice of the population. And there's no guarantee that they could win the resulting power struggle.
Since the beginning of the financial crisis, the government in Ireland has already passed three austerity bills, and it's currently working on its fourth. The goal is to shrink the budget deficit between this year and 2014 from an estimated 32 percent (11.9 percent, if you exclude state aid to banks) to 3 percent. These days, Irish public-sector employees are already earning as much as 20 percent less than they did before.
The government of Spain has also trimmed salaries for workers in the public sector, albeit by only 5 percent. In addition, thousands of public-sector jobs have been cut, and infrastructure investments worth billions have been canceled. As of 2011, pensions will not be adjusted for inflation, and a benefit for having children has also been eliminated. Likewise, the government has agreed to undertake structural reforms, including ones that liberalize the labor market.
In Portugal, citizens are also being forced to stomach an austerity package that will slash billions from the budget. It envisions tax increases and salary cuts in the public sector. Even so, Portugal is still widely viewed as being the next candidate to wobble in the crisis after Greece and Ireland. Like Greece (and unlike Ireland), the country is combating structural problems. What's more, the fact that the country is led by a minority government is making it even harder to implement reforms.
Bottom line: The debt crisis in Europe is far from over. But, compared to early 2010, a few things have changed -- and for the better. The recovery of the economy could aid the reduction of budget deficits. But that still doesn't mean that the EU doesn't need to hammer out a mechanism for handling potential future crises or national bankruptcies.
Why the Euro Does Not Need to Fear the Dollar or Yen
Earlier this year, the euro wasn't doing very well. In the course of the Greek crisis, the value of the European common currency had temporarily fallen as low as $1.20. A reverse trend has been apparent in recent weeks. It appeared that the financial markets weren't interested in the situation in Ireland, and the euro placidly hovered between $1.35 and $1.40.
The fact that no panic broke out in the markets can be explained by the habituation effect. Greece was a precedent-setting case, but Ireland is the second country to seek help and is thus no longer as exciting.
There is also some indication that the financial actors are reacting more rationally than they did earlier this year. Together, Greece and Ireland comprise exactly 5 percent of the economic output of the euro zone. And even if Portugal is added to that group, the total is still only 7 percent. This is still less than the share that the state of New York contributes to the United States' gross domestic product. And New York's collapse would hardly create turbulence for the dollar.
Global Investment Alternatives Unattractive
A serious threat to the euro would only emerge if the financial markets lost faith in major debtor countries like Spain and Italy. But there is little evidence of that happening right now. Firstly, that is because these countries have all passed austerity measures, and secondly because there is enough money available on the market.
Investors must be able to afford to spurn certain investment opportunities, and this is only possible when there are better alternatives. But within Europe, the chances of finding suitable alternatives are limited. Even if all international investors were to view Germany as the only safe haven on the continent, not all potential lenders would be able to get a piece of the action -- that would require Germany to take on additional debts worth hundreds of billions of euros a year.
And it's not as if a global investment alternative has emerged, either. Compared to the world's other two major reserve currencies, the dollar and the yen, the euro is not doing any worse. Indeed, it's actually faring better.
The Yuan Still Isn't a Global Reserve Currency
European governments are serious about austerity, while in the US there is no sign of how President Barack Obama plans to get his country's trillion-dollar deficit under control. Close to 9 percent of all US public spending this year was financed on credit, a considerably greater amount than in the euro zone. And whereas the European Central Bank has at least kept the inflation rate in mind with its currency policies, the US Federal Reserve keeps pumping billions of new dollars into the economy. It is unclear what the outcome of this gigantic wager will be.
The situation doesn't look much better in Japan. For a long time, the country was the world's second-largest economy after the United States. But the Japanese economy has experienced a lasting recession over the past 20 years, and this year it is likely to be overtaken by China. By comparison, Europe looks as dynamic as an emerging economy. The public debt in Japan is at about 200 percent of GDP, around 2.5 times as high as the euro-zone average.
And the much-celebrated emerging economies themselves are still packed with risks when it comes to investment possibilities. No one knows exactly how long the growth of the Chinese economy will continue. It will take a recession to truly determine the true condition of the country's economy.
Nor is it foreseeable at the moment that the yuan will become a serious global alternative to the euro and the dollar in the near future. The currency isn't even freely tradable in international markets. So far, that situation has suited the Chinese government just fine.
Bottom line: Europe's debt problems are without a doubt considerable. But compared to the United States and Japan, the euro-zone states can already point to initial successes in sorting out their finances. In addition, their economies are in better shape. That will help to ensure that the euro remains one of the world's most important, and thus attractive, currencies.