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Portugal and Ireland fail to enact much-needed reforms
Institutional incentives in the eurozone were to blame for fiscal irresponsibility in Portugal and Ireland, says IEA.Is there an end in sight for the eurozone's sovereign debt crisis? It seems not. The latest eurozone debunkers predict that the single currency is headed for break up as the EU member states continue to throw water on the fire, but fail to put it out altogether. It appears that Greece, whose sovereign debt was downgraded to just below default by Standard & Poor's is verging on the inevitable; default or a restructuring of its debt.
While this may have taken the attention temporarily off Portugal and Ireland, they don't appear to be faring any better according to the latest research published by the Institute of Economic Affairs (IEA).
Repackaging debt and refinancing liabilities and simply spreading them around the eurozone will do nothing to solve the fundamental economic problems of the PIGS countries, says Dr Richard Wellings, deputy editorial director of the Institute of Economic Affairs (IEA).
“Portugal and Ireland desperately need to engage in the radical economic and fiscal reforms that are essential to their recovery,” said Wellings who blames “incentives” in the eurozone for fiscal irresponsibility in both countries. Yet, according to new research released by the IEA, Portugal and Ireland are both failing to enact the reforms needed to restore growth to their economies.
The IEA says their adoption of the euro, and the resulting loose monetary policy, led to a “vast expansion of the state” and “gross fiscal irresponsibility”. In Portugal it says the “influx” of EU money boosted public expenditure resulting in the expansion of both public and private debt levels. And as Portugal adopted the euro later, the IEA says interest rates were low making it even cheaper money. “For Portugal to avoid the possibility of default it must embrace labour market liberalisation, introduce pro-growth reforms and demonstrate fiscal responsibility; something it is not doing thus far,” says the IEA.
Ireland’s adoption of the euro pretty much tells the same story, says the IEA, with public and private debt levels increasing on the back of “cheap money” from the EU, which it says was “co-opted” by banks and construction companies. The IEA says the IMF/EU reform measures while welcome are not sufficient to reform Ireland’s economic policy and institutions. “Ireland must radically reform banking, bank regulation and the public sector, and reform its bureaucracy so as to remove the influence of ‘rent seekers’ who, in recent times, have held great sway over the establishment,” says the IEA.
If the eurozone is to survive, the IEA recommends that bankrupt financial institutions be allowed to fail and that any future bailouts should emphasise the need for “fiscal restraint” as well as creditors taking a “substantial haircut”.
Look out for the Q2 issue of financial-i where we will explore in more detail the impact of the sovereign debt crisis on European banks and bank ratings. Subscribe to ensure you receive a copy.