Implications Of Financial Crisis Spread

Its still not clear what the actual settlement of the Irish Bail-out will be. But, the implications are already being felt. The Irish Labour Party has called for an immediate dissolution of Parliament, and the Green's, who are a partner in the Coalition Government,have called for a General Election by January or else they will leave the Coalition.

In exchanges in the Commons following the statement on the bail-out by George Osborne, it has become obvious that the deep schism within the Tory Party - let alone the divisions between the Tories and the Liberal partners - continue and will be opened up over this issue. The Tories, who have been praising Ireland for the last few years - Osborne having said we should learn lessons from Ireland - and who especially referred to the effects of the irish austerity measures are in a jam. Nearly all economic analysis coming out now, shows that the effects of the Irish Government's austerity measures will be to send the Irish economy into recession. In a similar vein, a commentator on CNBC today, commenting about Portugal, said that its problems were different. Its Banks were relatively sound, but its economy suffered from low levels of productivity and competitiveness. The austerity measures in Portugal, he argued could easily send it into a death spiral where lower growth sent the deficit higher. But, the truth is that the Irish economy has been built on a sham too. It was not high productivity, and low corporate tax rates that were behind the irish growth story, but high levels of debt financing a property bubble, and the construction industry that fed off it. That in turn fed a growth of the retail and otehr service sectors of the economy.

But, the issue of the Corporation Tax is another example of the problem the Tories face. Northern Ireland MP's, asked the obvious question - why should Northern ireland taxpayers bail-out the Irish banks, and the Irish state, when in Northern Ireland the Corporate Tax Rate is 28%, whereas a few yards across the border the rate is only 12%? This goes to the heart of the problem of the EU. A Common Market can only work if there are common tax rates across it i.e. if alongside a single currency, and a single Monetary Policy there is a single fiscal policy, a single set of Benefits rules and payments etc. The Tories want to oppose any closer union, but the reality is that the EU can only succeed if that closer union is created i.e. a single EU State. The idea that its right for the UK to make a bilateral bail-out to Ireland because of its importance to the UK economy applies with equal force to the EU as a whole. Britain might export more to Ireland than to China, Brazil, Russia and India combined, but it does not export more to Ireland than it exports to the rest of the EU!!!

Challenged by Labour to recognise that the real lesson of Ireland was that what was needed was measures to stimulate growth, not austerity, Osborne showed the same kind of separation from reality as his Irish counterparts were demonstrating last week. In none of his discussions with other Finance Ministers, he said, had it been suggested that what was required was a less tight fiscal position. Really? So why then has Obama, and the rest of the US Government been imploring European leaders to boost demand in their economies for the last year??? Why is it that economists from Right to Left, from Roubini to Stiglitz have been warning that austerity measures would send the world into a deep recession?

None of the Opposiiton, however, asked Osborne the obvious question. The Liberal-Tory plan is premised on the idea that cuts in the Public Sector will be made up by growth in the Private Sector, premised on the idea that British Exports will grow at a rate far higher than they have been able to do in decades. How on Earth, given that Ireland is going to go into recession, that austerity measures in the UK's other main trading partners in Europe will have similar consequences, is that even likely to occur. To pull that off would be a harder trick than turning water into wine, which is the kind of miracle that some of these economies are likely to depend on as part of their tourist trade.

Meanwhile, across the pond the Financial Crisis is manifesting itself in other forms. CNBC, quoting the FT, has a story that says that following the Basle III Accords, on trying to ensure that the Banks are adequately Capitalised, US Banks will be anything from $100 billion to $150 billion short, according to analysis by Barclays Capital. And typical to similar periods in history when financial crises have brought all other sorts of shenanigans and malpractice out of the woodwork, they also report, that Federal Authorities are close to filing a string of Law suits against major Wall Street firms and individuals over insider trading. Here .

In short, the climate is beginning to develop once again of fear that led to a reluctance to lend, which preceded the Credit Crunch. One of the main reasons that is occurring, is because the policy measures introduced in the intervening period have failed to create the kind of economic growth, which would itself have generated an increase in deposits, and cash flow that would have then financed further growth. Until such policies are put in place the crisis will not go away. On the contrary, all the signs are that policy errors are being compounded as they were at the beginning of the Great Depression, and a similar outcome may result.