A LEADING Irish economist welcomed the decision for no immediate bail-out of Greece, warning that any such move could be to the detriment of all euro countries, including Ireland.
Dr John Fitzgerald of the ESRI said handing money to Greece now could be a signal to other heavily indebted countries like Portugal and Spain that there was an easy way out.
If the member states do decide to bail out Greece to safeguard the financial stability of the eurozone, Dr Fitzgerald said that they will impose stringent conditions.
“If the pain is too little and Greece fails to understand they have to sort themselves out and it ends up costing Germany, the interest rate will go up, which will affect us all. It would mean an additional .25% on borrowing, so the cost to us all could be huge.
“In Ireland it will slow our recovery, more people will have problems with mortgages and companies will be unable to expand,” he said.
On the other hand, if the EU allows Greece to become bankrupt it may strengthen the euro area as it would make clear that no country was liable for any other in the zone. It would have little detrimental effect on the currency, given that Greece accounts for just 2.5% of the euro economy.
“It is not clear that this time last year Ireland would have been rescued or that we could have brought down the euro area, and similarly with Greece. The Greek banking system, like the Irish, is not essential to the euro,” he said.
Greek loans are spread all over the world so a default is not going to affect any one country to a great extent.
While Ireland and Britain are on record as having a quarter of the Greek government bonds sold over the past four years, most of these would have gone through the International Financial Services Centre, so the ultimate owners are somewhere else, he added.
Any bail-out for Greece would be accompanied by extremely harsh conditions that would go much further than the steps Greece has already taken in raising taxes, cutting welfare payments, raising the retirement age and cutting wages.
“The EU will make sure that the world knows it is serious about making Greece reform its economy, and that will relax the markets,” he added.
While Ireland has not solved its economic problems, it has shown it is serious about doing so. The margin being paid for borrowings compared to Germany is down to 1.25, three quarters more than it should be, Dr Fitzgerald said.
Efforts by the European Commission to distinguish between Ireland and the other countries with high budget deficits is based on the fact that Ireland’s balance of payments is so much better, with the country moving to a surplus of exports over imports this year.
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