I’m with Ed and Marshall on this one. The Euro disproportionately favored one sector of Europe over another. The consequences will be felt by all nonetheless – more for some than others.

(full disclosure – I am of Greek heritage and though I have my criticism of Greek society – and yes, there are many faults – I also laud their willingness to stand up to the hypocrisy of the global financial system.)

But fiscal irresponsibility among house holders and the government was,
IMHO the real reason.
Leaving the Euro is not an option that’s on the table at the moment, wage
and price deflation are the only options we have, its not going to be
pretty, but we’ve been through worse.

Fiscal irresponsibility? I agree. None of the goverments in the EMU
spent enough, so employment was always suboptimal. In addition to the so-called
“PIIGS” countries, the larger — and wealthier — European economies have
never reduced their unemployment rates below 6 per cent and the average for
the EMU since inception is 8.5 per cent (as at July 2009) and rising since.
The average for the EMU nations from July 1990 to December 1998 (earliest
MEI data for the EMU block available) was 9.7 per cent but that included the
very drawn out 1991 recession. Underemployment throughout the EMU area is
also rising , reaching 20% in Spain and double digits in Portugal, Italy,
Ireland, and Greece. And yet the nations of the euro zone were constrained
from dealing with this problem adequately through stupid self-imposed
fiscal rules which have no theoretical economic justification, let alone the
misery that they continue to inflict.

I’m Irish I work in the private sector, I’ve taken a 10 per cent pay cut,
wages in my company have been frozen for the last 2 years. The company has
shed 20 per cent of its workers, by hook and by crook we are becoming
competitive again. The problem was not the euro, the problem was we though
borrowed money was making us rich. When we get through this we will be all
the stronger.

Yes, building up private debt is always problematic and when you pay it
back, you do feel stronger (although the process of repaying can often sap
one’s economic vitality).

But you’re mixing cause and effect. Ireland voluntarily agreed to submit
itself to the arbitrary constraints of the Stability and Growth Pact via EMU
and thereby lost its fiscal independence. This forced a greater reliance
on PRIVATE DEBT to sustain growth. You’re right. That’s fundamentally
unhealthy, but you’ve got the causation wrong in my opinion.

thanks for the links and the fast answers, that makes sense.

But as an engineer, I’m still convinced that in the long run, productivity (and innovation) is more important than a devalued currency. ;)

I wanted to find a chart that proves my view. Unfortortunately, the chart I found doesn’t. It shows that the UK has made big gains by devaluing their currency

http://www.spiegel.de/images/image-36902-galleryV9-ijhf.jpg

We’ll see if their manufacturing sector can profit.

“If more people in Ireland are willing to make the sacrifices you made, Ger, then you can get through this.”

I mean that you will get through this if you are willing to suffer a debt deflationary bust of major proportions. I would not be so inclined – and I suspect many Irish people are going to be of the same mindset when they realize what this bust will entail.

If more people in Ireland are willing to make the sacrifices you made,
Ger, then you can get through this. And certainly, Ireland is showing Greece
how to get it done on that score.

Really? Heaven help the Greeks if they follow the Irish example. And to
what end?
Ireland’s economic data is well-known now and shocking. Its unemployment is
over 12 per cent; it endured a national output loss of 11.3 per cent on
its level a year ago; and its inflation rate is minus 3 per cent (that is, a
serious deflation) which will further impoverish indebted house owners.
Consumption spending has dropped by 20 per cent since the onset of the crisis.
The Irish government has injected €54 billion into the main financial
institutions as insolvencies “more than doubled in 2009″. House prices “have
fallen by 26.7 per cent since February 2007 and now stand at October 2003
levels”
Here is what Bill Mitchell had to say about Ireland
(_http://bilbo.economicoutlook.net/blog/?p=6929_ (http://bilbo.economicoutlook.net/blog/?p=6929) _
Ireland was the protype asset price boom fuelled by an out of control
banking sector. The Times reports that by 2007 “the country’s houses were the
most overvalued in the Western world and construction accounted for one
fifth of national output.”
The automatic stabilisers in Ireland have been signficantly responsible
for driving the budget deficit towards 12 per cent of GDP so dramatic has the
collapse in income generation.
The problem though for Ireland is that it is part of the Euro Monetary
System (EMU) and its 12 per cent deficit (as a percentage of GDP) is according
to the Maastricht rules out of order irrespective of the state of the
economy.
The government already tightened discretionary fiscal policy in April 2009
by withdrawing €3 billion (increasing taxes and cutting spending). Most of
the new spending initiatives since the crisis has been to prop up its
financial institutions.
In November, the EC gave the Irish government one year extension (to 2014)
to get its budget deficit back in line with EMU rules.
So with that sort of outlook why would you entertain a “stinging budget”?
Why not follow Japan’s example of fiscal leadership and underwrite
aggregate demand to get employment growing.
But in the last week, the Irish government has delivered its “harshest
budget in the republic’s history” which is a direct consequence of being in
the Euro system.
The problem is that Ireland is an example of a country which moved to a
fiat monetary system after the collapse of Bretton Woods in 1971 but,
subsequently, decided to impose voluntary constraints on their fiscal capacity and
act as if they are still operating in a “gold standard” world. In this
case, the constraint is that the Eurozone governments voluntarily conceded
their currency monopolies to the European Central Bank without also ceding
their fiscal responsibilities.
They also decided, as a consequence, to voluntarily impose the Stability
and Growth Pact (SGP) which represent a denial of the essential opportunities
available to a sovereign nation.
In contrast to countries operating with their own sovereign fiat
currencies, such as Japan, Eurozone countries must formally borrow in order to run
deficits. Thus the intertemporal government budget constraint applies to
Eurozone countries, and will severely limit the capacity of the public sector
to fund recovery plans.
Ireland will eventually emerge from the recession when investors resume
building capital but it will take much longer than it should as a consequence
of its membership in the EMU.
In the meantime, people will become impoverished and a generation of youth
will lose access to employment and skill building opportunities and endure
life-time disadvantages as a consequence.

But, the borrowed money you speak of is a result of excess credit growth. When it was obvious that the Irish housing market was overheating in 2005 or 2006, the normal course of action would have been higher interest rates.

However, the Euro ties you in to a one-size-fits-all monetary policy. Again, it is in this respect that the problem is the Euro. People borrow a lot for a reason. It usually has to do with constant to declining debt service costs. And when this is driven by lower interest rates, it means high levels of debt.

See:
http://www.creditwritedowns.com/2009/12/on-the-sovereign-debt-crisis-and-the-debt-servicing-cost-mentality.html

If you are willing to live with the consequences of that, then more power to you. Eventually, I suspect your economies will be harmonized.

http://www.creditwritedowns.com/2010/01/bubbles-employment-and-recalculation.html

Also see the following:
http://www.creditwritedowns.com/2008/03/us-economy-2008.html

This is a post from two years ago now which predicts very well what we have seen thus far. Where you look at Spain, wages have been bid up as a result of excess consumption that flows from excess credit growth caused by low interest rates. That axiomatically means ALL industries feel the wage pressure including producers like SEAT.

Why do you think East Germans are having a problem with competitiveness vis-a-vis Czech or Romania, etc? It’s not because the Romanians are “more productive.” Again, its the currency. The Ostmark-Deutschmark currency union has left the East German economy wages too high and this means poor competitiveness, unemployment and loss of manufacturing, just as it is now doing in Spain.