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by rpm4321
4943 days ago
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Thanks for your post, appreciate it. One follow up question if you don't mind? If Ireland ditched its "debts" and left the EU, in addition to the negative credit rating impact, wouldn't it significantly lessen US companies' interest in investing and hiring in Ireland? My impression was that EU membership was one of the primary drivers of this phenomenon, in addition to the tax situation and great workforce. |
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This is a complicated question. I'll try to answer it but it's very difficult as there's really no historical precedent for this kind of situation.
- Ireland ditching it's debts and leaving the EU are mutually exclusive. Ireland could technically renege on it's obligations and still remain an EU member (the EU has no formal mechanism for the exit of a member, believe it or not, so we couldn't be forced to leave. Hence some of the confusion over Greece's future EU status.) There is a 'troika' of institutions overseeing Ireland's bailout program - the ECB (european central bank), EC (european commission) and IMF - and they do not all speak with the same voice. The IMF was of the opinion that Ireland should be given more of a debt 'haircut' to make the debt more sustainable. That opinion was rejected by the Irish government strangely (I believe the government doesn't want to look bad to Germany, who are effectively paying the bills, hence "the Irish government being europe's little bitches" comment). I think action will be forced eventually, the debt is completely weighing down the economy and the situation can't continue. The Irish government actually has the power to unilaterally renege on the debt, but they're scared to do so. The phrase used by cowardly Irish government officials and Eurocrats is that "the economic bomb won't go off in Frankfurt, it will go off in Dublin" if Ireland suspends debt repayments.
- There is zero political will to actually leave the EU. There are some economists saying that Ireland's best option would be to leave the EU (http://www.independent.ie/opinion/columnists/david-mcwilliam...). The Irish business community is quite conservative and would be dead against leaving the EU. Any political party that suggested this would be committing political suicide.
- There is historical precedent for countries writing down sovereign debt and then growing quickly once feed from the shackles of debt - Argentina is one example. How much it would impact US companies' willingness to invest in Ireland if Ireland a) wrote off some/all bank debt b) left the EU or c) both, is very hard to say. On the one hand, leaving the EU would mean returning to the old Irish pound, meaning a currency devaluation is once again possible - making the country more competitive internationally, boosting exports. We wouldn't have to listen to the French Government moaning about Ireland's low tax status (France has an official corporation tax rate, then the effective rate which companies actually pay, which I believe is lower than Ireland's tax rate). A debt write down would mean no more idiotic wasting of tax revenue into the black hole of our banks. However on the other hand, for a small country to receive such a negative credit downgrade could make matters dramatically worse in the short-term, potentially leading to serious political upheaval. Transaction costs would be increased as companies have to convert Irish pounds into Euros when selling into Europe.
This is a long-winded way of saying it's complicated, no historical precent, so I'm just speculating at best.