The scenario has a familiar ring. A country goes on a credit binge. Borrowers in large numbers receive approval for home mortgages and other loans that they can’t afford to repay. A sharp upswing in defaults and foreclosures of these now-securitized loans helps trigger a world financial crisis. And a frantic government bails out investors to prevent a depression and defuse political chaos. That’s Ireland we’re talking about.
By now almost everyone glued to financial news outlets knows that the Republic of Ireland, population 4.5 million, is set to receive a whopping emergency loan bailout worth 67.5 billion euros (US$89.4 billion). Irish lawmakers, by a close margin, voted on December 15 to accept the terms of the package. Two-thirds of that sum will come from the European Union (EU), fresh from staving off collapse in Greece a half-year earlier; the other third will come from the Washington, D.C.-based International Monetary Fund (IMF). The average interest rate is 5.8 percent. Lurking somewhere in all this are lessons for America, no stranger lately to bailouts either.
The rescue of the weakest links in the 16-nation euro zone, led by an increasingly recalcitrant Germany, likely will “work” – for now. But in bringing short-term stability, they also raise the risk of a more intractable crisis down the road. For if recipient nations of this largesse cannot pay back their loans – not inconceivable – they either must raise taxes to intolerable levels (triggering a capital flight and, paradoxically, foregone tax revenues), cut basic public services to the bone or ask other nations for help once more. Ireland’s crisis mirrors that of Europe.
Carl F. Horowitz is director of the Organized Labor Accountability Project of the National Legal and Policy Center, a Townhall.com Gold Partner organization dedicated to promoting ethics in American public life.
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