For the past month, contagion from Greece’s slow motion meltdown has been spreading west. Spain is now on the verge of collapse, and Italy and Portugal may not be far behind. Now the crisis may be spreading north as well. Despite recent signs of recovery in Ireland, concerns about a Greek euro exit and a possible Spanish bailout have hit the country hard over the past few weeks. According to Reuters, Dublin recently saw bond yields rise by nearly 60 basis points over two days. Short-term borrowing costs are beginning to rise again and appear likely to surpass costs on long-term deals. This has generally been taken as a sign that investors are skeptical about Ireland’s chances of weathering the current crisis, which will make it considerably more difficult for the government to reach its debt targets.
Ireland’s troubles should also be extremely worrying for the rest of Europe. Although much of the blame for Europe’s current troubles has been placed upon the “PIIGS”— countries with stagnant economies and high sovereign debt—Ireland has always been the odd man out in this group. In the 1990s, it was the success story of Europe: a small, formerly impoverished country that achieved enviable growth and prosperity through hard work and competitive, pro-business policies. Indeed, in many respects, Ireland’s pre-crisis policies were the polar opposite of those of the Club Med states.
This difference extends to their reactions to the 2008 crisis. Over the past few years, Ireland has become the “good kid” of the European crisis, adopting austerity measures and actually struggling back to some modest growth. While Greece continues to resist the changes demanded by its European creditors, Ireland has taken the opposite tack, immediately implementing nearly all of the changes analysts have suggested for troubled countries.
Unfortunately, it looks like this won’t be enough. Contagion from Greece and Spain (plus, we suspect, the slowdown in the UK) are now threatening the modest recovery Ireland has managed over the past few years.
This is the clearest sign yet that the euro may be beyond saving in its current form. If the Irish can’t manage this, nobody can.
[Update: This post originally claimed that Irish bond yields rose by 60 percent, rather than 60 basis points. The error has been corrected.]