Monday, 22 November 2010
Celtic tiger endangered
The Unionist strand of British politics were quick to point out that the Celtic tiger was no more. John Redwood, former Secretary of State for Wales was heavily critical of his own Chancellor’s use of borrowed money to contribute to the bail out of Eire’s economy and banks.
Such views may gain some currency amongst ordinary voters. Some may be bemused by the fact that they are subjected to cuts in their living standards when the UK are bailing out the economy of an independent government to the tune of £7bn.
Such views are understandable but wrong.
Eire’s economy is much smaller than that of the UK and their banks became to big for that economy.
But the banks grew in size not on ‘real’ growth but on overseas borrowing. And what did the banks do with the money? They lent on. To who? To commercial and residential property. Resulting in a rapid increase in property prices which in turn fuelled a boom that was unstainable and the bubble eventually burst. With dire results for the economy - the overall burden of debt in the republic was 700% of its GDP.
So Eire found itself in a situation that it could not pay its way in the world, its economy was in dire straits and this weekend had to admit it couldn't dig itself out of the hole it had created for itself.
It is to deal with this black hole in the public finance and to bail out the toxic debts of the Irish banks that the current IMF and European Union rescue is all about.
But why is it in the UK’s interest to help bail out the Irish.
Well, the UK and Irish economies are closely linked. The Republic is the UKs largest export market and the crucial role played by Irish banks in Northern Ireland. If these banks were allowed to fail there would be devastating knock on effect on our own economy.
But that apart, it makes good business sense to lend to Eire. The UK is still able to borrow money at very low rates of interests. The rate they’ll charge the Irish will be much higher and provided Eire doesn’t default, it would yield a profitable return for the UK tax payer.
So those right wing politicians who are such advocates of free market forces should recognise a good deal when they see one. But perhaps their attachment to the union is such that they would love to see the one part of these islands to gain independence become a failed state.