Wednesday, November 17, 2010

What Goes Up...

It's a strange sensation when a place where you have lived and known well is suddenly everywhere in the news.

For example, as a student, I lived in Chile from 1977 to 1978. Generally, outside of Latin America you don't hear much about Chile unless you go looking for information. But this past year Chile has been the focus not once but twice of intense international media attention. In February there was an 8.8 magnitude earthquake centered near the city of Concepción, where I lived and still have friends. It was a very strange experience seeing so much news coverage of a place I knew so well. Then in August there was a mining accident in the north of the country, in which 33 men were trapped underground for 69 days. Again, international attention focused on Chile, reaching a media frenzy in October when they were finally rescued.

For the past eight years I have lived full-time in Ireland. It's a country that everybody knows and many people have visited. But since things quieted down in the North in the late 1990s, you don't really see or hear much news about what goes on in the country in the American or international media. But lately I am hearing about Ireland from all sorts of American, British and international news sources. And, as with the two examples above regarding Chile, it is not for a happy reason.

The Republic of Ireland is on the verge of going broke. The country has become newsworthy because, like Greece before it, it has found itself on the verge of a sovereign debt crisis. The implications go beyond the fortunes of one relatively small European country. The rising cost of Ireland's borrowing has a knock-on effect on other European Union countries, particularly Portugal and Spain, as it affects their ability to borrow as well. Ultimately, the situation threatens the euro currency, as it could lead to countries dropping the currency or countries being expelled from the euro club. Since the euro was born in 1995 (euro notes and coins have been used since 2002), member countries have learned that, when you share a currency with other sovereign nations, it puts you at the mercy of other countries.

At the moment the United States is dealing with its fiscal problems by printing money. Technically, this is called "quantitative easing," and the current second round is abbreviated as QE2, which makes it sound more like a luxury cruise than the diluting of the dollar which it actually is. Unlike the U.S., Ireland has not had the option of currency manipulation to mitigate its economic problems because it does not control its own currency. Indeed, being a euro country probably exasperated Ireland's problems in the first place because, while the European Central Bank may have kept interest rates a reasonable level for Europe as a whole, they were really much too high for Ireland's already over-heated economy. But the ultimate fault for Ireland's current mess has to rest squarely with Fianna Fáil, the political party which has led the country's government continuously for the past 13 years.

But, depressingly, it's hard to imagine that any of the other political parties would have done any better at avoiding the current crisis since their main complaint about Fianna Fáil has always been that it is too stingy. Of all the possible causes of the present mess, clearly government stinginess wasn't among them. This is a country where the politicians delight in taking the citizens' money and then handing it back to them. During the Celtic Tiger tech and housing bubble, they found more and more ways to win voter loyalty by handing out entitlements or funding schemes. The problem was that the new or expanded programs were not financially sustainable in the long run or, as it turned out, even in the medium-short run. Especially, when the banks realized (this will sound very familiar to us Americans) they had lent out a huge amount of money that was never coming back. When the whole house of cards started tumbling, it gob smacked everybody.

There is a lesson here for the United States. Of course, Ireland and the U.S. are very different in lots of ways, but one thing they have in common is that neither can defy gravity forever. The most crucial difference may be that at least Ireland has Germany to bail it out. Will there be anyone to bail out the U.S. and, if so, what will China's price be?

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