The European context of Ireland’s economic crisis

Abstract

The current economic crisis has hit all European countries hard, but some are more severely affected than others. The problems manifest in European peripheral countries that are also members of the Eurozone, that is, Ireland, Spain, and Greece, have roots in domestic policy mistakes. However, the European context of these policy profiles also needs to be taken into account. The creation of the Euro initially yielded large credibility gains for the weaker economies, extending low interest rates across the Eurozone. But it also introduced a set of perverse incentives toward fiscal expansion which were supposed to be managed at domestic level. Weak European coordinating capacity meant there were few effective external disciplines on national decision making. The sanctions built into the Stability and Growth Pact proved more controversial and, therefore, less constraining than originally envisaged. The problems accumulating in the weaker economies made them particularly exposed to crisis when the downturn came. The crisis is not merely one of peripheral economies’ policy errors, but extends to the design of European decision making and the management of monetary union, and to the underlying structural differences in relative trade capabilities between Eurozone member states. These issues are explored with reference to the Irish case: the crisis of the Irish and other peripheral economies points to a number of unresolved difficulties at the heart of European politics.