Europe's Reckoning --

By Samuelson, Robert J. | Newsweek, December 6, 2010 | Go to article overview

Europe's Reckoning --


Samuelson, Robert J., Newsweek


Byline: Robert J. Samuelson

-- and why it menaces recovery.

What you need to know about Ireland's economic crisis is that it's not about Ireland: a country of slightly more than 4 million people and an economy of roughly $200 billion. It's about Europe. For decades, Europe has pursued two great political projects. One is the democratic welfare state, designed to ensure that various "safety nets" improve economic justice. The other is European unity, symbolized by the creation in 1999 of a single currency--the euro--now used by 16 countries. The fact that both contributed to Ireland's troubles suggests that Europe could be on the brink of a broader crisis.

Ireland's problems are not isolated, and if they portend a wider meltdown, this would mark a dangerous new phase in the global economic turmoil that began in 2007. Europe represents about a fifth of the world economy, roughly equal to the U.S. share. If the continent relapsed into recession, economic nationalism would intensify as the already weak recovery faltered and countries competed for scarce sales. For example: Europe buys about 25 percent of America's exports. These would suffer.

The rescue package (reportedly about $120 billion) now being negotiated by Ireland, other members of the European Union, and the International Monetary Fund would prop up Ireland's loss-ridden banks. The aim is to contain the fallout by showing that Europe can cope with its own problems. But the rescue involves much bravado, because some lenders (Spain, Italy, Portugal) are themselves heavily indebted and possible candidates for future bailouts. Even Germany and France have huge gross debts, 76 percent and 86 percent of their economies in 2009. How much new debt can be piled atop old debt?

That Ireland, after Greece, has come to grief is ironic. Until recently, it was admiringly dubbed the Celtic tiger for emulating Asian countries in attracting foreign investment--Intel and others--and achieving rapid export-led growth. From 1987 to 2000, annual economic growth averaged 6.8 percent; unemployment fell from 16.9 percent to 4.3 percent. But then, solid growth gave way to a housing boom and bubble whose collapse left Irish banks awash in bad loans.

One cause was easy credit occasioned by the euro. With its own currency, Ireland could regulate credit. …

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