The Irish “programme” solves exactly nothing – it simply kicks the can down the road.
...The interest payments that the Irish sovereign will have to make
have not been reduced by a single cent...
...Nor is the situation economically sustainable.
Ireland is told to reduce wages and costs.
It must engage in “internal devaluation”
because the traditional option of external devaluation
is not available to a country that lacks its own national currency.
But the more successful it is at reducing wages and costs,
the heavier will be its inherited debt load.
Public spending then has to be cut even more deeply.
Taxes have to rise even higher to service the debt of the government and its wards...
This in turn implies the need for yet more internal devaluation,
which further heightens the burden of the debt in a vicious spiral...
...Ireland will be transferring nearly 10% of its national income
as “reparations”
to the bondholders, year after painful year.
...This is not politically sustainable,
as anyone who remembers Germany’s own experience
with World War I reparations should know.
A populist backlash is inevitable.
The Commission, the ECB, and the German Government
have set the stage for a situation where Ireland’s new government,
once formed early next year, rejects the budget negotiated by its predecessor.
Do Mr Trichet and Mrs Merkel have a contingency plan for this?
...Bondholders could have been offered 20 cents on the euro,
assuming that the Irish banks still have some residual economic value.
If those banks are insolvent,
the bondholders could – and should – have been wiped out.
Barry Eichengreen
Professor of Economics and Political Science
University of California, Berkeley
Formerly Senior Policy Advisor at the International Monetary Fund.
Naked Capitalism via VoxEU
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