Global Crisis/Innovation Blog

 Greece, Ireland,  now Portugal: Why the Poor are Bailing Out Europe, NOT Vice Versa

By Shlomo Maital


 Portugese People Protest!

  First, it was Ireland. Then Greece.  Now it is Portugal.  According to the press, the European Union, and its emergency fund, in cooperation with the International Monetary Fund, has arranged emergency loans for Portugal, amounting to between 75 and 110 billion euros.  Bailouts for Ireland and Greece were similar in size and terms.

   Portugal’s Prime Minister, whose name is Socrates,  fought hard against the bailout, but he had zero chance.  The global bond market kept raising the yields on Portuguese bonds, until the gap between Portuguese and German bonds exceeded 5 per cent, a level at which paying the interest and principal became nearly impossible.  Portugal fell, like Ireland and Greece before it.

   There is a fundamental misunderstanding about the bailout, and especially, about who is bailing out whom!   In Ireland, the Irish people will have to pay heavy new taxes for generations, to pay off Irish government bonds, so that Irish banks and those to whom Irish banks owe money (Germany banks) will not go bust.  So it is the Irish people who have bailed out German banks, not vice versa.  Of course, the Irish people know this, and threw out the incumbent government in recent elections for this reason. Now the new government wants to renegotiate the draconian terms of the emergency EU loan to Ireland.  This will happen eventually in Greece as well, and in Portugal.  The result is total chaos. 

    Greece is an especially difficult case, because the involvement of the International Monetary Fund always brings desperately strict measures (raise interest rates, slash spending) as a condition for providing the emergency funds.  And it is a self-fulfilling prophecy.  The tougher the loan terms, the lower the country’s growth rate, the bigger the hit government revenues take – and the tougher it is to pay back government debt. 

     Europe has badly mismanaged the bailout of Ireland, Greece and Portugal, endangering the future of the 27-nation EU and the 16-nation euro bloc.  And now, the outgoing head of the European Central Bank, Trichet, has begun raising interest rates, which will make it even harder for struggling peripheral nations in Europe to pay back their debts.  Why did he do this? To fight inflation?  Is there inflation in Europe?  There is no sign whatsoever of inflation – Trichet is fighting the phantom of future inflation, in economies that are still stagnating and fighting DEFLATION! 

     The situation in which the poor people of Ireland, Greece and Portugal are scalped into bailing out the wealthy banks of Germany, France, Belgium is unacceptable.  The result will continued social unrest and upheavals.  Let the wealthy banks take the hit, they can afford it far better than the unemployed struggling people of the peripheral European nations.