The sad saga of the Irish banks goes on. The government has fessed up that four of the country's troubled lenders would need a further €24bn to withstand a worse-than-expected performance by the economy, and even that colossal sum is likely to prove an underestimate.
Four big conclusions stem from the announcement. The first is that Ireland looks a dead cert for a default at some point in the next couple of years. By nationalising the losses accumulated by the banks as a result of their ludicrous lending during the property boom, the Irish government is saddling the Irish people with a burden of unpayable debts. This is not just grotesquely unfair but also economically stupid, since it has resulted in the Irish government imposing austerity package after austerity package in a uphill battle to put its fiscal house in order.
That, in turn, has hobbled the Irish economy, making it harder for the country to generate the growth without which the financial mess can never really be cleaned up. So, while a so-called haircut for private-sector holders of Irish bank debt would be unpopular in the rest of the European Union, the only alternative is for Ireland's depression – which has already lasted for three years – to extend way into the future.
The second conclusion is Ireland's quite impressive effort to dig itself out of the pit is being jeopardised by the failure, even now, to come clean about how bad things are. Ireland has a strong export sector and this has performed well over the past couple of years, helping to compensate for the collapse in the domestic economy. Given a clean start, Ireland has the potential to exploit the recovery in global demand seen since the depths of the recession two years ago. But this process will be slower and weaker if the banking crisis continues to be a drag on the economy.
The third conclusion applies as much to the other struggling eurozone economies as it does to Ireland, and that is the price of rebalancing the economy within a monetary union is high. Ireland has made itself more competitive by pushing up unemployment, slashing public spending and cutting wages. Without the ability to devalue its currency it has used the only other weapon available to price its goods into world markets: deflation. Other weak eurozone countries have less vibrant export sectors than Ireland, so face an even tougher task in making themselves competitive.
This leads on to the fourth conclusion: the eurozone crisis is far from over. Portugal looks likely to be the next in line for a bailout, since it has admitted it failed to meet its deficit reduction targets. After Portugal, the focus will switch to Spain – a country too big to fail and too big to rescue. What does all this mean? It means the question of default will not go away, whatever EU policymakers might wish. And, at that point, if not before, there will be speculation about whether monetary union can survive this crisis in its current form.
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