Checking the contagion

Even as Ireland braces itself to climb out of a deep, debt-burdened crisis, a comparison with Greece that had plunged into a crisis in May becomes inevitable. There are striking similarities between the two Euro zone economies. In terms of size, both account for a small portion of the Euro zone's GDP. Yet as in the case of Greece, the ramifications of the Irish crisis are being felt well beyond Europe. Almost certainly, global institutions such as the IMF will complement the efforts of bigger European nations in rescuing the Irish economy just as they did in Greece.

In both, the economic crisis has been accompanied by a deep political one. There was a change of government in Greece and, with the likelihood of the Irish government calling for elections, there is a great deal of uncertainty. The austerity packages involving substantial cuts in social sector spending and higher taxes are part of the bitter medicine that crisis-hit nations have to swallow to qualify for bail-outs. For all these similarities, Ireland, till recently referred to as the ‘Celtic tiger', is different from Greece in many other ways. Fiscal imprudence, in the form of vastly enhanced public spending even after achieving full employment some years ago, pushed up wages and costs to uncompetitive levels. The housing bubble that followed was inflated by some extremely reckless lending by the leading banks, which are now in deep financial trouble.

In fact, the epicentre of the Irish economic crisis is in its financial sector. In circumstances very similar to what obtained in the U.S. during the sub-prime crisis, the Irish government has assumed control of three of the leading domestic banks, and guaranteed the liabilities of the entire financial sector until 2011. This , however, has not stabilised the system. As bank losses from real estate mount, there are fears the government may not be able to infuse the massive capital that will be required to save them. With the government finding it difficult to borrow at competitive rates — bond yields are at very high levels — the possibility of a sovereign debt crisis emerging has become real. That in turn could lead to a run on banks in some of the other European countries with troubled economies.

Besides, the banks in the better-off countries such as Germany, France and the U.K. that have large exposures on Ireland are bound to suffer. The Irish crisis has once again shown that in a globalised world it is becoming increasingly difficult to check the contagion from spreading across national boundaries. Hindu News