Sunday, November 28, 2010

Euro Crisis: Calling the Little Dutch Boy

Ireland's financial house is on the brink of collapse, the transatlantic media is incessantly telling us. If the floodgates are to be held back indefinitely, Europe will need to coordinate both a stability plan and a mechanism by which the Eurozone never again finds itself prone to being swept away. 

Ireland's troubles began at roughly the same time as every other beleaguered state in the eurozone, following the financial crisis in 2008 that spawned the generalized, global economic downturn that persists today. The country formerly known as the "Celtic Tiger" for its stellar growth and market conditions -- including a business-attracting 12.5% corporate tax rate, far below the 35% rate in the U.S. Ireland has since fallen from high up the totem pole of Europe's most robust economic performers. 

A major element of the current worry over Irish finances is that the instability it has caused within investment markets will spread to other at-risk countries in the eurozone, namely Spain and Portugal. The 16 European countries that comprise the bloc all face serious exposure to a currency sapped of investor confidence; if market professionals decide en masse that the euro is a fool's bargain, the EU faces a nightmarish self-fulfilling prophecy by which dimmed hopes on the euro will fuel a sell-off of eurozone assets, which will depreciate their value, which will further dim investors' hopes, which will lead to more selling and more depreciation... The trick will be to stanch this vicious-circle psychology before Ireland and other precarious countries bring the entire eurozone to rock-bottom.

To combat this, European leaders have adopted a common and steely demeanor by which they hope to hold off full-fledged exodus from eurozone markets.  The Prime Minister of Spain, Jose Luis Rodriguez Zapatero, declared through what seemed like gritted teeth that “I should warn those investors who are short-selling Spain that they are going to be wrong and will go against their own interests," as quoted in the FT on Nov. 28.  

Zapatero “absolutely” ruled out any need for a rescue. But his words came just one week after Irish Prime Minister Brian Cowen caved to pressure from fellow eurozone senior officials and requested a bailout from the IMF. Cowen had initially denied the need for an Irish bailout, and the dustcloud kicked up by Cowen's reversal of words has triggered demonstrations, feelings of betrayal among Ireland's citizens and further tumult on the waves of international finance. 

It seems Cowen, Zapatero and others are scrambling to play the proverbial Little Dutch Boy, who in sticking his finger in the dyke was able to prevent a large-scale flood of his entire community. European leaders have in the last days all put their fingers in, but the levee doors are straining and leaking both confidence and political capital--neither of which the eurozone can afford to lose. 

For more on the intra-Irish politico-economic situation, see this article from The Economist. Gulf Stream Blues provides a good big-picture summary. And the FT's Wolfgang Munchau ponders the formerly "unthinkable" moves still available to the eurozone, namely, in his own turn of phrase, "fiscal union or break-up."

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