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EU builds a Euro firebreak – on the other side of the Irish and Greek people

by Aaron McCormack on July 26, 2011

Greece and Ireland are sitting on the wrong side of the Euro fire breakLeaving the Irish and the Greeks blissfully unaware of the their peril on the wrong side of the firebreak is a failure of leadership by the EU.  Staying there is a failure on the part of Irish and Greek people themselves.

Last week’s events in Europe may be hailed in some quarters as a signal that European leaders are waking up to the real crisis in the region. (see my post from last week  On the face of it, the headlines being peddled are of a reduction in onerous debt terms for the troubled economies of the region and a tacit realization by EU leaders that previous attempts to fix the Greek problem in particular were not going to work.

Upon analysis, nothing could be farther from the truth.  The people and the economies of Ireland, Greece and Portgual now lie on the wrong side of the new fire break that EU leaders have constructed.  This fire break is designed to stop the financial contagion spreading to the massive economies of Spain and Italy (see

The economies of the true periphery will be allowed to burn. The people will be allowed to cook slowly in their own economic stew.  That the elected leaders of these countries and their permanent government counterparts in the civil service allow this to happen is amazing to me.  That the people in those countries are not hearing the truth is a tragedy.
Sitting here in the USA whilst the partisan wrangling continues about the debt ceiling, I can see how easily narrative is spun.  But the crisis for Ireland is real and is tragic.  The people of Ireland are like frogs placed in cold water that is heated to the boil – their tragedy will unfold slowly and be upon them before they can do anything about it.

Let’s first consider the main headline from last week’s EU summit – the restructuring of Greek debt.  President Sarkozy and others have said that the restructuring is an effective reduction of Greek debt-to-GDP ratio of about 25%.

Real, independent economists, who know what they are talking about, have calculated that the new EU deal will actually INCREASE Greek debt-to-GDP by around 15%.  The best explanation of this is by the excellent Dr Dr. Constantin Gurdgiev in his blog at

Simply put, Greeks would pay more over time, not less.  All of this is slightly artificial, however, as it is likely that the Greek situation will have to be revisited soon in any case.

With respect to Ireland.  First things first – there is none of the doublespeak of the Greek situation.  The reduction in interest rate terms is, in and of itself, a good thing – if nothing else were to change.  The generosity of the British Exchequer is also a welcome move.

However, supporting the EU move are three primary motives…

1. Push the requirement for a 2nd Irish bailout down the road somewhat – now instead of early 2013 it may be more like late 2014

2. Maximise the chance of getting paid any money at all by walking Ireland away from the “nuclear option” of default

3. Secure significant concessions from all parties on deficit reduction (back to 3% of GDP by 2013) and from Ireland to consider increases in corporate tax – helping German and French leaders sell their actions to their own voters
Perhaps the second of these is most important.  The clamor for Ireland to do something selfish and decisive was building again.  The Irish Prime Minister is riding high on a feelgood factor from his outspoken criticism of the Vatican’s handling of the clerical abuse scandal in Ireland.  This move, at this time, seems to be genuine progress in the eyes of most Irish people.

It will prove in time that the whole episode is another proverbial kicking of the can down the road – similar to what will eventually happen in the US debt ceiling talks.

Modern capitalism must embrace failure as wholeheartedly as success in order to function.  Confronting that failure and dealing with it needs to happen sooner rather than later or good money will follow bad and moral hazard will distort markets.  Leaving the Irish and the Greeks blissfully unaware of the their peril on the wrong side of the firebreak is a failure of leadership by the EU.  Staying there is a failure on the part of Irish and Greek people themselves.

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