European Financial Crisis- a Ireland Greece Comparison

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The European Sovereign Debt Crisis- A Comparison between Greece and Ireland

Jeremy Hutton
34738331

Econ326 European Debt Crisis- A comparison between Greece and Ireland. The European Sovereign Debt Crisis is an ongoing financial problem that has hindered the ability of many European Nations to re-finance their government debt without the assistance of Third Parties. Investors developed fear at the rising debt levels of European governments and this escalated in late 2009/early 2010. The Crisis has had severe Macroeconomic consequences for the most affected nations, rising unemployment, deflation, declining economic growth. External Parties have had to step in to stop the problem spreading and calm financial markets. Struggling nations have looked to the European Central Bank (ECB) and their implementation of Monetary Policy to help solve the problem, but are their intentions making the crisis worse? We will have a focus on Ireland’s and Greece’s problems and potential solutions to see what method is best to tackle their rising debt problem. The Crisis in Ireland started with a Banking Crisis after the Property Bubble burst during the start of the global financial crisis in 2008. Between 2000 and 2006, the average house price in Ireland went on to more than double during this period. At this time there was a massive increase in speculative construction and mortgage lending to potential buyers. Within a couple of years the value of people’s houses had fallen by 35% with them still repaying the full amount of their mortgage, and the number of approved housing loans fell by 73%. In September 2008, the Irish state guaranteed the six main Irish banks, which had financed this unaffordable property bubble. It guaranteed the banks depositors and bondholders. After the property bubble burst the Irish banks had lost an estimated 100 billion Euros, where much of it was related to defaulted payments on the speculative mortgages. The economy then collapsed, unemployment rose by 10% to 14% in 2010, and the government books went from a surplus in 2007 to a deficit of 32% of GDP in 2010.

Due to the fact that the Irish government had guaranteed both the Bank’s deposits and bondholders, the State had to borrow large sums of money from the ECB, this shifted the losses of the crisis directly onto the taxpayers of Ireland. As a result of the poor shape of the government’s accounts, harsh new austerity measures were put in place to curb government debt. For this bailout the government agreed to reduce the deficit to 3% of GDP by 2015.There were many protests against the austerity measures but really the government was backed into a corner, as once it joined the currency union of the Euro, Ireland lost its two main tools for stabilising an economy; interest rates and monetary policy. A statement made by Ronan Lyons, an Irish Economist at Oxford University, sums up the feeling amongst the Irish public well, “So, as voters, when thinking about Ireland's mess, be very angry about the banks, but be twice as angry about how the Government managed its spending and taxation.” Lyons makes a good point that, once monetary policy and interest rate tools are unavailable for you to use then fiscal policy becomes your main tool for smoothing the economic cycle. However the Irish Government was largely irresponsible with its finances during the ‘good times’. Government expenditures increased by 10% a year throughout the 2000’s, and adding problem to this situations the average worker in 2006 only paid about a 4% income tax. The Greek economy was one of the fastest growing during the 2000’s, with its Economy growing by 4.2% per annum as foreign capital flooded into Greece, until 2007. A strong economy at the time and falling government bond yields allowed the government to pursue large structural deficits and since the introduction of the Euro in Greece debt to GDP has always been above 100%. As the Global Financial Crisis hit, Greece was...
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