Irish and Greek Defaults Will Reshape Europe
by Jeff Rubin
Wed, 1 Dec 2010
German and British taxpayers are beginning to realize the downside of our economic interdependence in the global economy. When British banks have too much exposure to Irish banks, all of a sudden Dublin’s property crash becomes the UK’s problem. Similarly, when German taxpayers have to bail out bankrupt governments in Athens and Dublin, Greece and Ireland’s problems become Germany’s. How long will that model of international economic interdependence last?
Probably not too much longer, particularly if Portugal and Spain have to join the bailout queue, too.
What’s increasingly obvious, as I noted in my May 26th blog post, is that the European monetary union is no longer feasible. A monetary union between similar economies, like those of Germany, France and the Benelux countries, is. But clumping fiscally wayward economies with much lower per-capita incomes, like Portugal, Spain, Ireland and Greece, into a common currency union with Northern Europe is no more sustainable than is a monetary union between Mexico and its North American free-trade partners, the US and Canada.
It might have taken an oil-induced financial shock to unravel it, but the euro was an accident waiting to happen. By not allowing their loosely regulated banks to fail, countries themselves are failing as a result. So while Irish banks keep their doors open, schools and hospitals will soon close as the country tries to cope with a public-sector deficit one third the size of its economy. (Curiously, these are the very same banks that only recently passed financial stress tests.)