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Could Germany Benefit from the Irish Crisis?

November 16, 2010
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Pressure is mounting for Ireland to accept a bailout from the European Union, yet Ireland appears to be hesitant to accepting more financial support. Besides the obvious blow to the “Gaelic Tiger’s” confidence that would come with a bailout, another reason that Ireland is reluctant to accept a bailout are the possible strings that might come with any money.  Both the BBC and The Economist blogged yesterday that as part of a bailout, Germany would want Ireland to raise its corporate tax rates from 12.5%.  As a result, Ireland has started to consider receiving a bailout from the IMF, since Ireland’s low corporate tax rate was one of the cornerstones of its economic rise.  However, today it appears that Germany might be backing down on this demand.  Part of this reversal appears to be that if other countries contribute more to the any bailout fund, then the German government might not face the domestic backlash of the Germans having to support yet another Eurozone member.  Ironically, the Irish crisis might be helping the German economy.

As the above graph shows, the euro had continually risen against the dollar since the Greek bailout in May.  Since the engine of the Germany economy are exports, this high dollar would hurt German export competitiveness and hence the German recovery.  For instance, the German economy set a record growth of 2.2% during the second quarter (March through June) of 2010, as the euro declined against the dollar basically the entire period.  On the other hand, this growth slowed to 0.7% of GDP for the third quarter (July through September), and during this period, the euro appreciated by 13%.  However, the euro has plummeted in the last 10 days by 4.4%.  If this depreciation were to continue and the euro were to stay between $1.20 and $1.30, this would help the German economy.  As a result, Germany may benefit from the Irish crisis both by having a stable Ireland as well as having a weak euro.

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