The storm goes on unabated

After a week of political uncertainty and bad management of its banking crisis, Ireland has decided to request a bailout from the EU and the IMF. Brian Cowen's government abandoned its reticent, self-reliant stance, in exchange for a line of credit of some 80 billion euros, aimed mainly at recapitalizing the banks, which have been practically ruined by the bursting of the real estate bubble. Ireland has also promised to further adjust public expenditure (the cutback will be 6 billion eurosin 2011, and 15 billion eurosover the next four years), in a decision hurriedly made to save face in terms of sovereignty; and to raise taxes. Germany and France want to impose a rise in company taxes: the 12.5-percent rate, half as much as in the rest of the EMU, being a clear case of dumping. Higher-paying contributors should not have to help an Ireland that still maintains a far lower tax.

Assuming that this is the only solution for Ireland, and that political resistance to the bailout has further hardened the oppressive conditions of the country's financing, it has to be asked whether the rescue request has come in time; whether it will be sufficient to calm the markets in a lasting manner; and whether the bailout announcement dispels the risk of contagion to other countries.

There are no final answers. Firstly, the EU financial backing has triggered a political crisis in Dublin that will lead to early elections. The public rightly deplores the hesitant handling of the crisis, with the banks on the brink of a crash, a public deficit exceeding 30 percent of GDP, and a debt differential of more than 540 basis points. Worse, it has been unable to calm the unease of the markets about the Irish situation. On Monday the markets rose in response to the rescue request, but as the day went on they shifted to pessimism, headed by the Ibex. Tuesday brought further falls. Risk premiums for Ireland, Portugal and Spain all rose, reflecting investors' doubts that Ireland will successfully implement its adjustment plans; nor did they trust in an adequate restructuring of its banking sector. It will soon be known whether the bailout announcement has at least served to stop the run on the banks.

The risk of contagion remains. This is no doubt the gravest crisis of the euro, and it is likely to deepen in the future. After Ireland come Portugal and Spain, and there is no political and economic solution for Europe other than that of sustaining the single currency. In the medium and long term, it is not hard to predict that the solidity of the currency will be assured by reducing the asymmetry between a complete monetary union and a nonexistent fiscal union. Faced by global financial markets, we must advance on the road to complete federalization, including budgetary policy, renouncing considerable areas of national fiscal sovereignty.

But the worst problem is in the short term. Investor confidence in Greece, Ireland, Portugal and Spain demands further fiscal adjustments to refinance public and private debt and achieve stability. Yet these adjustments are of little use if growth remains minimal and unemployment high. This is the contradiction that condemns these economies to long-term stagnation, and threatens to overturn the euro.