Ireland may have saved civilization at one time, but now Ireland may be pulling down the European economic system. Robert Samuelson explains what is going on with the Irish economic collapse and the European bailout of yet another country in the Euro-zone:
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. If it seemed too loose, the Central Bank of Ireland could raise interest rates. Adopting the euro meant Ireland surrendered this power to the European Central Bank (ECB), which set one policy for all euro countries. The ECB’s rates, though perhaps correct for France and Germany, were too low for Ireland and some others. Moreover, financial markets pushed rates on government bonds of euro countries down to lower German levels. In 1995, Ireland’s rates were more than a percentage point higher than Germany’s; by 2000, they were almost identical. . . .