The periphery of Europe continues to exhibit the frightening features of ongoing financial crisis. There is a race between Ireland and Greece to gain the shameful distinction of the first eurozone country forced by circumstances to plead for relief from the bailout fund established in the spring.
Take a gander at these numbers:
Total foreign bank exposure to Ireland’s economy is $844bn, or five times the value of Ireland’s GDP or economic output. Of that, German and UK banks are Ireland’s biggest creditors, with €206bn and €224bn of exposure respectively. To put it another way, German and British banks on their own have each extended credit to Ireland greater than Irish GDP. Which doesn’t sound altogether prudent, does it?
The cost of state rescue of reckless Irish banks may reach €50, putting Ireland’s budget deficit above 30%, which is simply staggering, and quadrupling its national debt from five years ago. According to most reports, the Irish political class insists on making good on the debts its banks (some now nationalized, others half-nationalized) owe to foreign investors. The distinction between bank debt and sovereign debt is vanishing: another indicator of the drift toward plutocracy. Both America and the EU have fixed their policy against any further major bank failures, which in practice means that bondholders will be made whole by taxpayers.
The press of necessity increasingly constrains state spending. Numerous European countries present budget deficits far in excess of what EU rules allow. They’ll have to cut spending and raise revenue. Similar pressure is evident here in America, though in our case from a popular discontent that few expected at all and none at this level of intensity. But it is far from obvious that austerity — spending cuts and revenue-raising taxes — is wise policy. Governments that cut domestic welfare spending and raise taxes in order to service debts held by foreigners are governments looking right into the teeth of considerable political risk. What about the creditors to these imprudent banks; should they not feel the pain as well? What property right inheres in a bond issued by a bank that by rights should be gone from this earth?
Of course the dangers natural to defaults (which would certainly spread the pain to bondholders) are not trivial: a country that stiffs its foreign creditors better hope its domestic sources of capital can pick up the slack when the foreigners say “no thanks” to the next bond issue. In the case of Ireland, so far it appears that the dependence on foreign credit outweighs the fear of internal discontent. A Financial Times report speaks of a “stubborn” Irish “pledge to honour virtually all bank debts.”
The primary characteristic of most Western political economies right now is uncertainty. There has been a worldwide collapse of final demand. Much of it is due to the retrenchment of the American consumer. The common response to a shortage of final demand is the attempt to import it from other countries. Quite a few nations, beginning with Germany and Japan, have achieved prosperity by importing American demand (that is, by exporting products for sale in America). No one can say for sure if the American consumer will return with demand sufficient to maintain that model of globalization. If not, it will mark the end of an age and the dawning of a much more straitened and bitter one. The attempts to import foreign demand, now lacking the beneficence of American backing, will take on a more acquisitive quality; the world will return to something approximating the mercantilism of old.
Such is my expectation, anyway. Beyond that I can only say that we live in interesting times indeed.