From Robert J. Samuelson, commenting on Ireland’s Crisis, in Newsweek – Europe’s Reckoning … “What you need to know about Ireland’s economic crisis is that it’s not about Ireland… It’s about Europe…”
…solid growth gave way to a housing boom and bubble whose collapse left Irish banks awash in bad loans.
One cause was easy credit occasioned by the euro. With its own currency, Ireland could regulate credit. If it seemed too loose, the Central Bank of Ireland could raise interest rates. Adopting the euro meant Ireland surrendered this power to the European Central Bank (ECB), which set one policy for all euro countries. The ECB’s rates, though perhaps correct for France and Germany, were too low for Ireland and some others. Moreover, financial markets pushed rates on government bonds of euro countries down to low German levels. In 1995, Ireland’s rates were a percentage point higher than Germany’s; by 2001, they were almost identical.
Ireland might have offset easy credit by increasing taxes or cutting spending. But this would have required great self-restraint. The housing boom produced a torrent of tax revenues from construction, home sales, and wealth-induced consumer spending. From 1996 to 2006, home prices almost quadrupled. Construction spending went from 11 percent to 21 percent of the economy. Government budgets were in surplus, despite increased social spending and higher government salaries. “When I have the money, I spend it,” said one former finance minister. “When I don’t, I don’t.”
… So now, the reckoning. In Ireland, the burst housing bubble left a massive budget deficit and lifted unemployment to 14 percent.
… The euro, intended to nurture unity, has bred discord…