Stability of Europe Threatened by Ireland Financial Crisis

European Union and International Monetary Fund (IMF) officials flew into Dublin on Wednesday to save the euro and the European Union.

Irish Daily Star

EU Council President Herman Van Rompuy has warned that the euro and the European Union itself are fighting for their life as a result of the ongoing sovereign debt shocks, most recently in Ireland and Portugal, according to the EU Observer.

The Irish have been saying that they don’t need any help. Well, it’s true that Ireland had a huge housing bubble that’s now bursting, and it’s true that investors are panicking and dumping Irish bonds and pushing yields (interest rates) above 9%, and it’s true that the government will run out of money by June of next year. That may all be true, but the Irish are a proud people, and they want to fight this battle by themselves — not like those Greeks, who came begging for aid and got bailed out last May. At any rate, the Irish are saying that they don’t need any help NOW.

A lot of people believe that Ireland is simply turning the screws on the EU in a major negotiating ploy. The big fear is “contagion”: By refusing aid, investors are panicking further, and yields on Spain’s bonds and Portugal’s bonds are beginning to approach crisis levels themselves. So by stalling, Ireland can demand to keep more of its sovereignty in a bailout agreement, according to Ambrose Evans-Pritchard, reporting for the Telegraph.

Thus, there’s a widespread anger at Ireland for refusing to accept aid now, and thus causing a domino effect on other nations, and the EU/IMF officials are headed for Dublin to convince Ireland to accept aid, and save the euro and the EU.

By Friday, Ireland was finally playing the game. In attempt to calm investor fears and reassure the public, Irish officials are saying that all Irish bank deposits are safe, and that Ireland can expect to receive “tens of billions” in bailout loans when bitter negotiations over Ireland’s sovereignty are completed. A particular issue will be Ireland’s low 12.5% corporate income tax, which the country has used to lure many American companies to build plants there. This upset other EU nations, because it put them at a competitive disadvantage. Now they’re going to insist that Ireland raise the corporate income tax and give up that advantage, according to Bloomberg.

There’s also new fury directed at Greece, as well. Eurostat, the European statistical agency, published a report on Monday that confirmed a widely circulated story that Greece’s debt situation was much worse than previously understood, according to the Guardian. Six months ago, at the time of the $150 billion bailout, it was thought that Greece’s 2009 budget deficit was 13.6% of its GDP. The new figure is 15.4% of GDP, making their debt ratio the highest of all the European Union states.

Greece has been experiencing violent riots in response to the austerity program that Prime Minister George Papandreou announced last spring, but it was thought that the pain was worth it because Greece would be able to escape from debt by 2015 or so. But the new figures indicate that that goal is almost impossible. Furthermore, the new figures mean that Greece is violating the terms of the bailout, and they put into question whether Greece should be allowed to receive the next installment of the bailout aid, which they’re due to receive this month.

The Austrians are especially angry at Greece. The Austrians don’t want to pay their share of the next bailout payment, according to Reuters. Austrian Finance Minister Josef Proell says that “From the Austrian point of view, there is no reason to release the (aid) contribution in December with the (Greek) numbers as they are at present.”

What this illustrates is that individual European nations are increasingly adopting the “beggar thy neighbor” attitude that became prevalent during the 1930s, with the result that even if the Irish decide to apply for aid, it might not be forthcoming. That’s because of a proposal last week by German Chancellor Angela Merkel that’s also generating widespread fury.

The Germans HATED bailing out the Greeks because, as Europe’s strongest economy, Germany had to bear the greatest burden in the bailout. Furthermore, the penny-pinching Germans were furious at having to bail out the profligate Greeks, who had lied about their debt for years.

So now the time is approaching when Germany may be asked to help bail out Ireland — and Greece and Portugal as well. This has led Merkel to take a tough stance on euro bailouts, according to Spiegel.

Merkel is demanding that the rules change so that profligate nations should not be bailed out by other nations; instead, they should be bailed out by the investors who hold the nation’s debt. In other words, Merkel is saying that Ireland and Greece should go into default, and restructure the debt so that investors get only a fraction on the dollar.

Greek Prime Minister George Papandreou accused Merkel on Monday of worsening the crisis, because her remarks had pushed up bond yields. “This could create a self-fulfilling prophecy … This could break backs. This could force economies towards bankruptcy,” he said. Others joined in the criticism of Merkel.

On Bloomberg TV on Wednesday, Neel Kashkari, Pimco Head of New Investment Initiatives, was asked what lessons have been learned so far in the American and European financial crises, and what advice he’d give the Europeans now (my transcription):

“The lesson that we learned is that we’re always behind, always trying to play catch up, always hoping that the crisis won’t be as bad as we feared, and it’s always been worse.

So I see that happening in Europe now. It’s spreading from Greece to Ireland — people are very afraid that it spreads to Portugal to Spain, eventually, and that’s what the EU is so focused on – preventing it from spreading.

My advice to them would be – jump ahead. Look ahead 2-3 years . What is this likely going to look like in 2-3 years, and get to that solution as quickly as you can, because the band-aids that they’re putting on them right now are buying them some time, but unless they deal with the solvency issue, it’s not really a solution.”

This is a very interesting proposal because it makes so much apparent common sense and yet is impossible.

From the point of view of Generational Dynamics, there has already been a massive change in attitudes and behaviors. Boomers and Generation-Xers who were risk-ignorant in the early 2000s bubble have been badly burned, and will remain extremely risk-averse for decades, as happened after the 1930s. Policymakers don’t understand this, and think that with the right political speech or the right policy, the bubble mentality will return.

To make matters worse, there’s less money in the world every week than there was the week before, because the hundreds of trillions of dollars of synthetic securities that were created during the bubble are still being dissolved, causing a massive deflationary spiral.

So if the Europeans try to take Kashkari’s advice and look ahead 2-3 years, what they’ll see is a much bleaker situation. As Kashkari himself pointed out, politicians always think that the crisis won’t be as bad as feared, but it’s always been worse. This is the nature of a generational Crisis era.

If you want to understand what’s going on in the world today, one of the best ways is to read “The bubble that broke the world,” a 1932 book by Garet Garrett. He writes,

“Mass delusions are not rare. They salt the human story. The hallucinatory types are well known; so also is the sudden variation called mania, generally localized, like the tulip mania in Holland many years ago or the common-stock mania of a recent time in Wall Street. But a delusion affecting the mentality of the entire world at one time was hitherto unknown. All our experience with it is original.”

Garrett describes exactly how the mass delusion unfolded in the 1920s and early 1930s, especially the interactions between the Americans, the Germans, the French and the British. This kind of account is extremely valuable for a Generational Dynamics analysis because it shows what people were thinking at the time, unfiltered by later ideologies.

The same kind of mass delusion occurred during the real estate and credit bubbles, and is still going on today. This can be best understood by reading Garrett’s book. You have to make some adjustments, such as the fact that today America is a debtor nation and China is a creditor nation. This book provides a great deal of insight into how events will be unfolding for the next few years.

From the point of view of Generational Dynamics, the worst part of the global financial crisis has not yet occurred. What must still happen is a major international panic, like the crash that occurred on October 28, 1929, that will be remembered for decades. This panic will be necessary to unify policymakers and force them to make real changes.

It’s impossible to predict when and where that panic will begin, but as we see officials in Europe dithering around with Ireland, Greece and Portugal, it seems more and more likely that it will start in Europe.