Ireland is teetering on the edge as their budget woes appear insurmountable and bond yields and credit spreads blowout to new highs.  It looks increasingly likely that Ireland will have to tap into the EFSF.  Angela Merkel, however, is not prepared for taxpayers to take all of the losses:

GERMAN CHANCELLOR Angela Merkel is refusing to back down from her push to force private investors to share the burden of the euro debt crisis, which helped send Irish borrowing costs to record levels.

Speaking in Seoul, where she is attending the G20 summit, Dr Merkel acknowledged her demands have upset the markets but insisted it was unfair for taxpayers to be saddled alone with the cost of sovereign rescues. “Let me put it simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world,” Dr Merkel said.

“We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”

It’s a sad state of affairs when a foreign central bank and German Chancellor decide the fate of the Irish people, but this is the mess that single currency systems create.  Quite honestly, it’s shameful that Irish politicians would even allow such a thing to occur.  They have ceded their monetary sovereignty and destroyed their ability to protect their people.  The ultimate role of any state should be to protect its citizenry at all costs.  That is not the case in Europe and it is nothing short of inhumane.

As I’ve repeatedly stated, there is a moral hazard here that is beyond absurd.  Setting the precedent that foreign governments will bailout struggling periphery nations is not sound policy.  Where does it end?  Does Greece tap into the fund?  Then Spain?  Then Portugal?  Then Italy?  At what point do the Germans realize that they are largely funding the deficit spending of all of these other nations?  Do the core nations become permanent funding sources for the periphery and what will certainly be consistent and prolonged economic problems in the coming years?  Surely something will give at some point.

The problem in Europe remains one of unity.  They are not fully united and personally I find it incredibly difficult to ever envision a Europe in which Germans are happy consistently paying for Greeks to work fewer hours.  They continue to kick the can in Europe.  True structural change needs to take place.  The periphery nations are not growing their way out of their budget woes.  Austerity is failing with flying colors.

David McWilliams of The Post wrote an appropriate article earlier this year:

“If a country decides to give up its currency and get into bed with another currency, it would seem ludicrous to entertain this move without being sure that the union was suitable. As we all know, there is a difference between fancying someone and making the thing last … In general, for a currency union to work, there should also be a single fiscal policy … This is how the currency unions in the US, Canada and Australia work … Guess what? None of these attributes was in place when Ireland joined the EU economic and monetary union (EMU) and the euro. So it is clear that we didn’t join for economic reasons. So why did we join? It seems that we were too insecure to behave logically and this national insecurity – particularly among our senior mandarins – prevented us from having a debate.

Are we expected to remain in this loveless marriage? As we saw in the past decades, divorces are now part of life. Ireland is, today, in a bad marriage – with no divorce. Like those Catholic fundamentalists who suggested that divorce would threaten the fabric of our society, the euro fundamentalists who run policy in Ireland suggest that, to leave the euro, would undermine the fabric of our economy. Like all fundamentalists, the thing they hate most is a sceptic. Lets hear it for the sceptics.”

There is a famous statue of James Larkin on O’Connell Street in Dublin.  Inscribed on it are the famous words he once spoke:

“Ní uasal aon uasal ach sinne bheith íseal: Éirímis.

In english it reads:

“The great appear great because we are on our knees: Let us rise.”

The Irish people are on their knees.  And for now, bankers and politicians are keeping them there.  Let’s hope they rise.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Nobody in Ireland voted for Merkel. In Most european countries the voters don’t get to decide while their elected government cede rights to the EU which consists mostly of unelected bureaucrats and a powerless parliament.

    Merkel needs to smooth things over in Germany because the people rightfully fear that they’ll foot the bill for the other nations banks. The taxpayers in Germany will of course take the hit either way, most of them don’t realize that with many insurance contracts (there are around 80 million life insurance conracts in Germany, they are strangely used as a vehicle for saving) they are likely to hold a bunch of Bonds. The EU also has new guidelines for insurers (Solvency II) that will force them mostly into government debt, regardless of rating. Most Germans don’t like equity investing and rather put their money (I think mostly unknowlingly) in Bonds. Yet still everyone says government debt is always bad… Merkel seems to think that there is a group of evil traders raging around in the Bond Market who bid up spreads just for the fun of it. This might have to do with her upbringing in socialist east Germany ;) Also, considering the Greece Bailout, the German govnerment is guaranteeing for a loan made by a German Bank. Guess who’ll take the hit if they default. It’s just stupid rhetoric on her part trying to fool the voters.

    Somehow what is happening in the EU reminds me of the German reunification on a much bigger scale. Switching the DDR economy to Deutsche Mark instantly killed most of the industrial base because they weren’t competitive anymore (the exchange rate was inflated for political reasons). Even 20 years later, the eastern States of Germany still lack behind, there is over 20% unemployment in some state (that’s the official number, so it could easily be 25%). The western states keep on pumping money into the eastern states to fund welfare, retirement benefits and infrastructure projects (every village has a nice new Trainstation for example). Now the same seems to happen on a EU level: The Euro made the industries in the periphery less competitive and Germany lends money to southern states so they can keep importing German goods while upgrading their Welfare systems even beyond those in Germany (Germans have to retire at 67, the French are protesting an increase to 65, some Greek can retire as early as 55). They rack up spending, assuming they’ll grow into the budget. Now the strange thing is, while Germany is one of the leading export nations, the standard of living, unlike in China for example, doesn’t really increase. The Question I’m asking myself is, when Germany is so benefitting of the imbalances the Euro created, why can the Greek retire earlier with more benefits? Why am I paying the top income tax rate and still can’t afford a nice appartment or car? There is incredible GDP growth, yet the average German feels poorer every year (there are some tax hikes still coming, “austerity” is a bitch).

    I say to hell with the EU. You can’t create equal living conditions just by signing a law while ignoring the forces of the markets. To try and force this hasn’t worked in the German reunification. Fiscal and political union doesn’t seem very likely, and if the European Governments try to force it we might soon have the next European Wars on our hands. The transfer union that is set up now will sooner or later break Germany. It might be best to slowly unwind it now instead of having it all crash later. There don’t seem to be that many benefits to the current system that warrant giving up sovereign rights.

  2. Hmm I just wrote a lengthy comment bashing Merkel, tried to post it and it’s gone… Well it was an angry rant, nobody needs those.

    Anyways, the German taxpayers are bondholders, the German governemnt guarantees for a loan made to Greece by a state owned Bank. A nice little trick to keep that bailout off the national balance sheet. Also most Germans have insurance contracts which contain a savings component (80m life insurance contracts alone, strangely that’s a very popular way of saving here), usually those savings are placed in Bonds. The EU set up Solvency II to lower the risk profile on Insurers, which basically means they need to keep less “unsafe” assetss like equities and corporate bonds and more Government Debt denominated in Euro which is considered “safe”. Most insurers are working towards implementing Solvency II right now as they will be required to comply by law soon. So it’s not those supposed bond vigilantes who bid up the spreads to make a quick buck who will take the hit. It might hit a lot of ordinary people who mostly won’t even know they are invested in the bond market (most Germans are very unsophisticated when it comes to saving/investing).

    I am certainly sick and tired of the EU and I’m sick and tired of bailing out irresponsible Banks and out-of-control welfare states (Greece). I don’t see myself benefitting from the Euro in any way and the experience in Europe seems to be mutual. To hell with it ;)

    TPC – Nils, comment got hung in the spam. Sorry. Rants are entirely encouraged. Especially when it is regarding something as oppressive as this situation….

  3. Merkel comments are being reported generally as controversial. Why is is controversial to ask private bondholders to assess risk and not rely on continued bailouts? Not only is it absurd to expect a government guarantee for everything, but we’ve just seen the results of what this does: the private sector then turns on the governments for bailing out, adding stimulus, and generally covering other people’s @sses, and then starts pointing the finger at them for being irresponsible and profligate. That’s a general comment by the way, noting the ridiculous situation Europe now finds itself in. The Euro was a joke in 1999 and, faced with it’s real test a decade or so later, is just a tragedy. The Euro has to to be the longest default process of all time, a slow train wreck where the nations involved want to close their eyes and not countenance a break-up or default….and it will probably do both. What’s your price dollar-mark? Or maybe Ireland just needs more deflation (according to the Irish Times). Yep, that’d do it.

  4. From John Taylor (FX Cocepts):”The Eurozone has begun its collapse a little later than we thought. My compliments to the political prowess of the euro-leaders for holding things together for so long, but this is an impossible situation and the crisis is on its way. Jean-Claude Trichet caught the spirit of the situation today in Seoul when he said that “it is absolutely necessary to change the governance of Europe” and called for moving “as far as possible in the direction of an economic and budgetary quasi-federation.” I only disagree with part of one word, ‘quasi,‘ as Europe must move to a full economic federation if the euro is to survive. With 16 countries using the euro and Estonia on the way, the odds of moving there is currently lower than infinitesimal. Things will change after the approaching horrible economic and political catastrophes that will wrack some of these economies and societies. Unfortunately nothing will happen before the current situation gets unbearable – this is the way of democratic politics. As all the leaders are still working toward the same goals, and no one has stepped forward express the inchoate fears of the European populace, this should take years. By the start of next year the Eurozone will enter a recession that will test the current leadership. The euro, which has been perceived as if it were a German mark, has already topped and will decline until it is priced like an Italian lira in the next few months. With Europe and the US in recession next year, commodity prices will drop again and global growth will suffer despite the outperformance of domestic Asian economies. With the policy stresses, and the risk of significant errors in judgment, international strife becomes more likely as well.”

  5. Attribute it to my hidden leftist inclination but, even though i do not like her and her austere troops of counselors, her remarks bout bailing out investor who pocketed spread to supposedly take a risk with taxpayer money is very good. i think now one can deny that pain was not inflicted to the proper persons in this crisis.

    Now in reality it could hurtgerman and french banks…based on those figures (which date a bit) :

  6. Peripheral countries strongly benefited joining euro zone. Very low interest rates. Strong currency forced productive businesses to become more efficient and competitive. It is simply stupid thinking to be competitive in the world because your currency is weak being able exporting shoes or t-shirts.China should export these products. In Europe, not all countries did their homeworks before the financial crisis.They didn’t cut debts and deficits.
    You keep speaking about the advantage of USA being a monopoly issuer of its own currency in a flexible exchange system. In my opinion this is true until USD is the currency used in global trades. Americans will not be hit by decreasing credibility of Federal Reserve (depreciation of USD) until they are able to use USD for import. If more dollars were necessary to import it would simply issue more. So for the near future, USD will have less problem than euro. But I am sure that in the long run the rest of world will shift to another form of reserve currency. At that moment MMT in USA will prove not so efficient.

  7. Well if only she knew it was actually her Buddy Josef Ackermann of Deutsche Bank she was talking about. Looks like his next birthday won’t take place at her Kanzleramt… The pain will probably be dished out to every german who has some kind of insurance, as insurance companies are now required to mostly invest in sovereign debt.

  8. “The ultimate role of any state should be to protect its citizenry at all costs.”

    Napoleon said that. Stalin, too. Hitler tried the “at all costs” part real hard as he was protecting German citizenry from real and perceived dangers and enemies. TPC, I am well aware you would never subscribe to a slogan like the one above,… I guess the heat of the rhetoric hijacked your sentence…

    The Greeks lived beyond their means. The Irish lived beyond their means, too, for more than 20 years. The Greeks were reluctant to apply austerity measures. The Irish readily took the bitter pill, but it did not work magic… The two nations share the same fiscal tragedy, and should be treated the same by the market, even if Mr. Market wears Mrs. Merkel’s badge on his lapel.

    TPC – Wow, I’ve gotten some insulting comments here, but I’ve never been compared to Hitler. Hitler, so you know, was actually slaughtering a large portion of his citizenry so your point kind of falls apart right there….

    I’ve never said that the Greeks and Irish didn’t live beyond their means. But that doesn’t mean that their govt should not have the power to protect them when times get tough. This likely would have occurred on the Euro or off of it. The difference here, is that if they were not on the Euro their fate would not be in the hands of Germany.

  9. TPC,
    No insult intended… far from it. As already stated, and having followed your blog daily for more than a year now, I am well aware that the literal meaning of your statement does not appropriately represent your polit-economic position. We do agree that political leader do not have right “to protect” their citizens at any cost which the citizenry has not approved in a constitutional manner. Please accept my apologies if the above clarification does not satisfy you.

    Now, the Irish citizenry ceded some of their civil and political rights onto the European Union and also European monetary institutions. To that extent, citizens of Ireland and citizens of Germany now share an important segment of European polity, citizenship, as they share the same monetary system. My point is simple: Irish politicians do not have constitutional right to protect Irish citizens at the expense of German citizens and taxpayers.

    TPC – Ah. Thanks for clarifying. It’s an important point and one that I keep bringing up. The social barriers her are too strong for true unity in Europe. I don’t know what will happen, but I have a very hard time envisioning a day when Germans are okay paying for deficit spending for Greeks….These countries are all in a “bad marriage” and divorce seems like the only logical way out.

  10. One must distinguish between Ireland’s problem and Greece’s problem. Greece simply overspends. Ireland is an otherwise solvent State that is on the hook for a massive bill to bail out bad banks. It simply does not make sense for the function of regulating and insuring banks to remain at the State level when the power to print money is excersized at the Federal level. The ECB needs to take over all bank regulatory and insurance functions. The EU is already moving to impose an EU-wide VAT, so once the EU has acquired a full complement of soverign powers, it needs to take on the responsibility for all the banks in the EU.

  11. About a month ago I saw a news report that the EU is enacting an EU-wide VAT. The EU is becoming fully soverign faster than you think.

    TPC – Would be a good start, but far from a central tsy and full unification…..

  12. They see a high yield, a nice skim for the bonus pool and a bail out at par when those bonds fail…..that’s what they see.

  13. I sometimes listen to talk radio on my way to work and the topic of discussion was the bullying individuals experienced through their elementary or secondary education. While a few still had nightmares, everyone thought that this ended when they entered adulthood and now could take action as an adult to stop it.

    Unfortunately their minds still seemed constrained. We have more political and economic bullies than we’ve had over the past 80 years.

    “The great appear great because we are on our knees: Let us rise.” These profound words apply to the American people who are not aware that they are being ‘financially’ bullied. We are all adults, perhaps some day we will act like adults.

  14. The European monetary union has created a new situation. On one side it has increased trade between the countries “in the club”, it provides a protective shield for otherwise weaker currencies with respect to the outside world, on the other side it creates budget constraints and loss of sovereignety.
    It is a new model, a hybrid model. In its current form it probably cannot last. The EU needs to fund itself directly and control its spending in the block. Currently, spending planning is agreed at the European Council, and then the money is spent by the Commission.
    Something has to give, it will be either the currency union or the national budget, which will become a European budget. In any case, the will to keep the union appears strong, so a gradual move towards a European budget is possible as soon as it is recognised as the only step.
    What happens in Europe is of great interest for a more global government model. If things can be worked in Europe, they can be worked elsewhere.
    Of course, so far, as you pointed out many times, flaws are clear to the trained eye.

  15. The question is if the people will let them do it. The EU is already pretty unpopular, it is rightfully perceived as bureaucratic and undemocratic, it wastes billions and is notorious for taking choice and freedom away from the people while not really offering benefits.

    If the EU starts taxing the people will directly see another negative impact on their lives. That might not go over so well, especially since VAT is already very high in many states. It’s also the dumbest thing to do in a recession which will sure hit most of Europe come 2011.