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A Tale of Two Bailouts

November 22, 2010
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Yesterday, Ireland announced that it would indeed receive a bailout of about €80 to €90 billion from the EU, IMF, and United Kingdom.  This is second bailout of a Eurozone economy orchestrated by the EU this year, as Greece received €110 billion in May.  The next country that may be in need of a bailout is Portugal, whose government bond interest rate has also been climbing dramatically in recent weeks.  Fortunately, these countries represent a small proportion of the region’s economy and population, but the fourth domino would be Spain, which is much larger.

 

Source: The Economist

 

While most news analysis so far has examined the Irish bailout, a comparison between the Greek and the Irish bailouts shows a potentially worrying trend—two very different economies are now facing the same end game.  In the lead up to the Greek bailout, the media was full of reports of people retiring at 50, professions that were highly regulated and pervasive tax evasion.  In addition, the Greek government had been spending large amounts of money on infrastructure, perhaps wastefully, as I suggested in July.  However, the Irish economy is a model much more familiar to Americans and Britons, based on a very open economy with low tax rates to attract foreign direct investment.  In addition, the Irish government has been actively trying to avert a bailout for months by introducing austerity packages to cut government spending.  Unfortunately, these actions were not successful, because while the Irish government cut spending, its troubled banking sector continued to suck up government funds, pushing the government deficit up to a predicted 32 percent of GDP this year.

 

Source: BBC News

 

This is rather worrying because Ireland’s open economy had made it the pride of the EU, with a rapid growth rate since joining the EU that had made Ireland one of the richest countries in the 27 member club.  However, its collapse now puts it in the same group as Greece, and suggests that a valiant effort by a government is still not necessarily enough to save an economy from the wrath of investors and outside assistance.  As a result, one must wonder what could have been done differently.  Is Ireland the classic case of “throwing good money after bad,” with it being better to have let the banks fail at the beginning of the Global Recession?  Are austerity packages really not the cures on which many European governments have staked their futures?  Unfortunately, only time will tell.

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