Ireland: Great Example of Why the Eurozone Crisis Isn't Over

Wondering whether the world has put the spring eurozone sovereign debt crisis behind it? Check out this succinct summary of the massive issues confronting Ireland.

The NY Times article written by Messrs. Simon Johnson (former IMF chief economist) and Peter Boone (research associate at the London School of Economics) clearly articulates the overwhelming obstacles faced by just one of the euro currency member countries.

In fact, Ireland had previously been highlighted by ECB President Jean-Claude Trichet as an exemplar. Southern european countries such as Greece, Portugal, and Spain may actually be in worse shape than Ireland.

One of the interesting points Johnson and Boone make is about the artificial GDP bump Ireland accumulates due to its tax haven status:

"Many years ago, Ireland cut corporate taxes to attract business. This created one of Europe’s most impressive tax havens — it is possible to set up a corporation in Ireland, channel sales through that head office (with some highly complicated links to offshore tax havens in order to avoid paying Irish tax) and then pay a minuscule corporate profits tax. Ireland boasts a large industry of foreign “tax minimizers” that do this, but these tax minimizers hardly employ any people. Nearly one-quarter of Irish G.D.P. comes from the profits of these ghost corporations."

"The likes of Google, Yahoo, Forest Labs and many others helped Ireland’s exports grow in the first quarter, but the domestic economy (when excluding their profits, as measured by G.N.P.) actually contracted, and so did Ireland’s tax revenues and employment. Today, Irish unemployment is estimated at 13.8 percent, up from 13.1 percent at the start of the year."

And Johnson and Boone also highlight what's in store for the people of Ireland:

"Under the current program, we estimate that each Irish family of four will be liable for 200,000 euros in public debt by 2015. There are only 73,000 children born into the country each year, and these children will be paying off debts for decades to come — as well as needing to accept much greater austerity than has already been put into force. There is no doubt that social welfare systems, health care and education spending will decline sharply."

In late July when I last wrote about the euro it was valued against the U.S. dollar at just under $1.30. It has recently been trading in a range around $1.26-1.28. Even more dramatic has been the recent strengthening of the Swiss franc vs. the euro, at one point below 1.29CHF.

Euro currency bears have indeed returned to the dinner table for another helping.