Following in the path of Greece, Ireland has been forced to seek a gargantuan loan to plug its yawning chasm of debt.
Around 80 billion euros in loans will be handed over to Dublin by eurozone countries, the IMF and Britain.
In Berlin, the real seat of European political and economic power, political leaders fear that Portugal and Spain will be next in line for a bail out.
The trouble is, conditions in the weaker eurozone economies mean that debt will continue to grow and the euro will grow ever feebler and possibly collapse unless fundamental reforms are carried out.
From the start, the project of European union, expressed through the single currency, was flawed. The euro was introduced across a jumble of countries that had widely differing levels of productivity and profitability. The financial crisis has dramatically exposed the uneven economic performance across the Union.
Germany’s economy is still on a reasonably sound footing, with strong exports. The same can’t be said for the southern European economies of Greece, Spain, Italy and Portugal.
French President Nicolas Sarkozy said this recently of heavily indebted economies:
“It’s obvious that when confronted with a situation like this, there are two levers to use: spending and revenues.”
That’s the European problem. There are too many countries in the union which are earning too little and spending too much. Despite the cries of protest from those opposed to cuts in public spending, the alternative is to plunge ever deeper into debt.
As Greece and then Ireland teetered on the edge of bankruptcy, European leaders have, perhaps inevitably, concentrated on trying to solve the immediate problem. Recognising that public spending is out of control, they’ve had no choice but to plug the gaps with loans in the absence of strong revenues. The bail outs are clearly crisis measures of last resport to fend of national bankruptcy and shore up the failing euro.
Once the immediate crisis is solved in Europe though, the longer term problem of restoring profitability must be addressed. The lopsided economies which have earnt too little and spent too much need to be restructured so that earnings can support more rational levels of public spending.
The problem of wealth creation in a Europe which has lost most of its manufacturing industry urgently needs to be addressed by political leaders like France’s Nicolas Sarkozy and Germany’s Angela Merkel. Providing services rather than making commodities is likely to be the way forward. Who can now compete with the prices of Chinese goods? But providing services means raising educational levels and innovating on the informatics front.
Europe has no choice but to rise to the challenge. The alternative would entail throwing ever more money at growing debt until the European economies and the euro collapse.
*** Britain joined the Irish bail out even though the Brits still use sterling and have resisted adopting the euro. Why on earth woud cash-strapped Britain help Europe solve a euro problem in Ireland? The answer is that Ireland is a major UK trading partner and British banks are horribly exposed to Ireland, having lent the Irish billions of pounds. The Royal Bank of Scotland, for example, has an Irish subsidiary, Ulster Bank, and has loaned 54 billion pounds to Irish banks and the Irish government. ***