Ireland’s government becomes the first, but likely not the last, to be brought down by the shocks battering the euro. Parliament was dissolved this week, and elections are scheduled for later this month. Fianna Fail, the party that has ruled Ireland for most of its independent history, may be headed for an epochal defeat.
Voters rightly blame Fianna Fail for the reckless policies of recent years, when the “Celtic Tiger” investment boom gave way to a speculative housing bubble fed by lax regulation and cozy ties between bankers and politicians. When that bubble burst in 2008, Fianna Fail pledged more than the government could afford to rescue its banker friends. The bankers emerged nearly whole. Ireland emerged nearly broken.
The European Union provided bailout money last fall, but with austerity conditions so strict and interest rates so high that Ireland has been left with no realistic prospects for resuming growth and paying off its debts.
There are lessons that go well beyond Ireland, and Europe’s leaders need to understand them before the next economy founders. They also need to look hard at the costs of the growth-choking conditions they imposed on Greece last year, at German insistence. New challenges are already on the horizon with Portugal and Spain the most vulnerable to speculative attack.
Too much austerity too soon can trap an economy in a vicious downward spiral of decline. (Congressional Republicans please take note.) Shrinking economies cannot shrink their ratios of debt to output. Only recovery programs premised on renewed growth can do that.
Ireland’s debts are so large, and its interest rates so high, that it now needs 5 percent annual growth just to stay afloat. Because of the harsh austerity budgets Europe has demanded, it is generating no growth at all.
Irish opposition parties want to revisit the bailout terms. The Fine Gael party, on the center-right, wants to negotiate down the 6 percent interest rate. The Labour Party, its usual center-left ally, wants time to phase in spending cuts and tax increases. Those positions make economic sense. Creditor nations like Germany insist there can be no renegotiation. They need to think again.
At Friday’s summit meeting in Brussels, European leaders must resolve to manage these crises, rather than limping along from bailout to bailout and destructive austerity program to destructive austerity program.
To restore Europe’s economic health, they need to agree on a comprehensive solution to the euro-zone crisis. That will require much stronger coordination of national fiscal policies, a much larger market intervention fund, negotiated debt rescheduling and an explicit link between deficit reduction timetables and the return of economic growth. There is no more time to delay.