German and British taxpayers are beginning to realize the downside of our economic interdependence in the global economy. When British banks have too much exposure to Irish banks, all of a sudden Dublin’s property crash becomes the UK’s problem. Similarly, when German taxpayers have to bail out bankrupt governments in Athens and Dublin, Greece and Ireland’s problems become Germany’s. How long will that model of international economic interdependence last?

Probably not too much longer, particularly if Portugal and Spain have to join the bailout queue, too.

What’s increasingly obvious, as I noted in my May 26th blog post, is that the European monetary union is no longer feasible. A monetary union between similar economies, like those of Germany, France and the Benelux countries, is. But clumping fiscally wayward economies with much lower per-capita incomes, like Portugal, Spain, Ireland and Greece, into a common currency union with Northern Europe is no more sustainable than is a monetary union between Mexico and its North American free-trade partners, the US and Canada.

It might have taken an oil-induced financial shock to unravel it, but the euro was an accident waiting to happen. By not allowing their loosely regulated banks to fail, countries themselves are failing as a result. So while Irish banks keep their doors open, schools and hospitals will soon close as the country tries to cope with a public-sector deficit one third the size of its economy. (Curiously, these are the very same banks that only recently passed financial stress tests.)

German taxpayers, who must shoulder the lion’s share of the financing burden for the 85 billion euro bailout package for Ireland, are understandably increasingly irate that they have to dish out billions so that Ireland can maintain a 12.5 per cent corporate tax rate that steals jobs and production from their own economy. And they weren’t any happier when even more of their hard-earned tax dollars were being sent over as welfare checks to Greece, a country where tax evasion is a national pastime.

Taxpayers in creditor countries are starting to ask themselves the same question that bond holders have been troubling themselves over. The burden of reducing a deficit as large as one third of GDP means that the Irish economy, like the Greek one, will be shrinking for the foreseeable future. And shrinking economies, riddled by growing social unrest, are not economies that are able to service gargantuan debt loads. That’s why the bond market was already charging Ireland as much as three times Germany’s borrowing rate.

Chances are that Ireland and Greece (and likely Portugal and Spain) are going to default, unraveling the monetary union. What will follow: a born-again drachma, Irish pound and perhaps escudo and peseta. And as those currencies plunge in value against what’s left of the euro (likely still to be traded in Germany, France and the Benelux nations), even the free trade zone may be up for grabs.

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  • JB

    The Eurozone is now paying the price for years of institutionalized state accounting hypocrisy and the wheels of the cart are now starting to come apart. However, to be quite frank, the situation is not much better for a number of major countries that lie outside the Eurozone.

    As for the capital adequacy and accounting standards used for most Occidental country banks, they simply lie in the same category i.e. institutionalized duplicity.

    In reality, TPTB are again trying to use the old trick of artificially inflating the economy to paste over the current systemic insolvency, except that this time there are simply not enough positive EROEI hydrocarbon reserves left to enable that to happen… Hence the falling apart cart is continuing to head down the net energy cliff.

    JB

  • Jonmar

    I certainly agree with the facts presented and your analysis. The end game may be different than you suggest, though. What makes this likely is that the European wars of the 20th century are a main psychological underpinning of those that conceived and are running the EU and its associated economic union (ECB/EURO). Linking Europe together this way makes it less likely that 20th century-style conflicts can develop. So, there will be terrific internal pressure to keep the EU and its national economies tied together. We will see if they can manage that, but for sure it will not be easily abandoned.

  • Herk

    I beg your pardon but you say “…clumping fiscally wayward economies with much lower per-capita incomes, like Portugal, Spain, Ireland and Greece…” and I would like to point out that for more than a decade Ireland had the highest per capita income in the EU after Luxemborg and Norway with it's oil riches. And if by fiscally wayward you mean governments that chronically run deficits there you are also wrong about Ireland, it has consistantly run surplus budgets until just the last 2 years and that is not due either to overspending or under taxing, but to the stupid assurance to gaurantee all deposits at all Irish banks, it is the shit shape of the banks balance sheets alone that sank the fiscal budget. Gross public debt as a percentage of GDP outside of the spending to clean up the Wall Street inspired mess that banks globally have wrecked economies with is near zero in Ireland, they did not call it the Celtic Tiger for nothing.

    My prediction is that the Irish elections will result in a government that will repudiate the IMF and EU bailouts, leaders will be installed that simply tell bond holders in Paris, Berlin, and London to take a flying leap at the nearest credit default swap because the people will not be burdened with more than $35,000 per man woman and child in order to make sure the government can continue to go to bond markets and borrow yet more, in short they will flip the bird to the banks that put them in this mess.

    I base my confidence in this outcome on the fact that originally Ireland voted no on the Treaty of Lisbon because of concerns about this very thing happening, but the EU rammed through a redo on the election and made it clear that a no vote was simply not going to be acceptable, they also provided assurances to the Irish that they conveniently forgot before the ink on the ballots was even dry.

    If the EU is serious about preserving the EuroZone and thus the EU itself they will rethink their response to the contagion sweeping the peripheries, and first they will stop using language that relegates smaller nations as being Arkansas East, if nothing else pissed the Irish off it was the German and French bureaucrats announcing on the eveing news the bailout agreement from Irish government offices before either the Taoiseach or Irish finance minister could tell their own people, talk about arrogant and insulting. So, a nation with a LONG history of resistance to external interference is now pushed to the wall, my bet is they simply pull the plug on both the EMU and the banks, and if that means Swiss style neutrality and withdrawal from the EU so be it.

  • JB

    If what you say is going to happen then there will be another hole of more than 400 billion $US in the books of international banks outside of Ireland…

    JB

  • cleitophon

    The very same argument could be made about the US and the dollar, since the economic differences diverge so greatly across regions. I mean, how do you think the civil war got started to begin with. Just look at the differences in unemployment rates according to state.

    http://en.wikipedia.org/wiki/L…

  • cleitophon

    How will the agricultural states booming on global agricultural demand, and demographic growth, respond to endemic unemployment in Michigan, Detroit and California?

    http://chicagobreakingbusiness…

    Just look at the 10 most debt laden states in the US – hardly prime farming land:

    http://www.businessinsider.com…#

  • K.Cobley

    What is needed is the end of band aid solutions that merely postpone the crisis the “kicking the can down the road to the next government solution”

    A big new tax is needed an international $100US per barrel oil tax/ $200 per tonne of coal and Natural gas to be applied across all OECD nations to finance bailouts.

    All nations must be held accountable for these problems in an interdependent world (the US can't get out of this as they are in a similar position to Greece).

    Countries would be declared bankrupt if unable to pay off loans.

    Bond holders of “bankrupt countries” to be paid out at 75c in the dollar, bond holders must suffer losses to discourage future adventureism.

    Once debt paid out to countries like Greece, Ireland, Portuagal, Spain , UK, USA as they go bankrupt, they would have conditions placed on the operations of their economy like “no more borrowing”, a forced budget surplus to pay tribute of %5 of budget receipts for a period of 20 years.

    People are'nt going to like one world government but they are going to get it anyway, especially when some form of oil rationing will have to commence by 2004.

    A controlled and managed economic decline is going to a much better solution than a chaotic collapse.

  • cleitophon