Global Economic Crisis

The Taoiseach of the Republic of Ireland, Brian Cowen, has a paper-thin majority of a mere three seat in the Dail, Ireland’s parliament. Its junior coalition partner, the Green Party, is already threatening to pull out and force a general election, unless Cowen agrees to call new elections by late January. Whether or not the current Irish government is forced into an immediate dissolution of the Dail, or agrees to new elections in January, it faces certain retribution at the hands of an increasingly irate and depressed Irish electorate.

There are two primary causes to the soon-to-be finale of the Cowen government. The first involves the disastrous management of the Irish economy and its acute financial crisis. Reckless speculation by the Anglo-Irish Bank created one of the worst banking crises amid the global financial crisis of 2008. As in other countries facing a similar predicament, the Irish government used the taxpayers of the nation as a backstop for the banking system. In effect, the troubled institution was nationalized, and the entire banking system had its deposits and obligations underwritten by the government, meaning the taxpaying citizens. The net effect has been an ever-escalating figure for the cost of bailing out Anglo-Irish Bank, and the concomitant public obligation to cover the surreal expenses of the banking bailout. While the banking system was being “saved,” the ordinary citizens of Ireland have been punished with higher taxes in synchronization with sharp cuts in social appending, as the unemployment rate reached historic highs.

Despite the cuts in public spending and tax increases, the cost of the bank bailout and the increasing spreads  on government bonds defied the ability of a nation of four and a half million people to cover such a large fiscal obligation. Yet, when word leaked out regarding the secret negotiations between Dublin, the EU, IMF and European Central Bank over the terms of a bailout of Ireland itself, the Cowen government at first sharply denied the widely circulated accounts. It turns out that the Cowen government was lying through its teeth, and has now openly admitted to the need for an EU bailout of the Republic of Ireland, to the tune of at least $120 billion.

With Ireland already confronting an annual deficit equal to about 35 percent of its GDP, the even higher levels of tax increases and public spending cuts the EU and IMF bailout will require, on top of the emergence of political instability, point to the meager prospects for the long-term future of the Irish economy. Her sovereign debt crisis is now clearly of catastrophic proportions, and the Irish nation is facing the very real danger of a sustained economic implosion.

First it was Greece and now it is Ireland. In each case, the European policymakers boasted that their massive binge of public borrowing to put together sovereign bailout packages has saved the continent from a much worse financial and economic disaster. But given their track record, how certain can we be that Portugal and Spain won’t be the next dominos to fall? The financial and economic disarray within the European Union appears to be metastasizing rapidly.

Ireland’s own case of a financial institution that is “too big to fail” will probably in the end impose a penalty of €70billion on the already beleaguered people of Ireland, according to a prediction made by the Irish prime minister, Brian Cowen . The tale of woes concerning this bank I have reported on in a previous blog posting.  Let us just point out that if this projection is correct, every man, woman and child in Ireland, which has a population of about 6.2 million, will pay 11,280 euros for this financial disaster not of their making, or about 14,500 U.S. dollars at the current exchange rate.

If a typical Irish family of four is told they must fork over approximately sixty thousand dollars to bailout the no doubt well paid (and well bunused) executives of  Anglo Irish Bank and their bond holders, will they remain quiescent? On top of massive unemployment, brutalizing austerity and a shaky economic future, the people of Ireland must now add  higher future taxes to pay off the excesses of a few to their growing tab of  financial and economic suffering.

With expenditures of 55 billion euros and revenues falling below 35 billion euros, Ireland is facing the daunting paradox confronting a growing host of nations, including the United States. The politicians maintain they cannot implement draconian spending cuts in the face of severe human hardships being created by the Global Economic Crisis. Yet, mathematical realities may constrict the ability of political leaders to infinitely borrow money in order to maintain high structural deficits. With the rating agencies having made their move, the ability of Ireland to finance its deficits through the largess of the global credit market will become increasingly more problematic. It appears that the IMF may be the ultimate lender of last resort for Ireland, and that kind of assistance will impose costs of its own.

The economic catastrophe facing Ireland will cause sorrows that cannot be suppressed by a pint of Guiness. Nothing less than national insolvency threatens this once robust economy. And lest the United States pretend that the economic collapse now underway in Ireland is irrelevant to its own situation, the elements that have brought down the “Celtic Tiger” are almost identical to those now eating away at the very foundation of the U.S. economy.

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com