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Analysis

Ireland’s penalty

by David Marsh, Chairman

Ireland’s penalty

The Irish election on 25 February, returning a government that is strongly in favour of alleviating the penal terms of the bail-out package assembled for Ireland at the end of last year, marks a watershed for Europe. March 2011 is the most important time in the unfolding European debt crisis, a month in which the European Union and the governments of the euro area are due to make concrete some of the landmark proposals for better governance that were outlined at the end of 2010.

We describe the main issues under discussion, always against the background that Europe’s politicians may once again prove unwilling or unable to live up to the expectations vested in them by the indebted states and the ever-fickle financial markets. Sabre-rattling by the European Central Bank as it prepares to end the period of abnormally low interest rates ushered in by the collapse of Lehman Bros in September 2008 adds to the unpropitious nature of the environment.

Niels Thygesen believes the elements of a ‘grand bargain’ that should be assembled for Ireland by the policy-makers of the euro area must include lower interest rates on official borrowings, a wider mandate for the EFSF rescue fund and a restructuring of debt to allow private creditors to shoulder some of the adjustment taking place in Ireland. Lorenzo Bini Smaghi, on the other hand, warns that no industrialised country has defaulted on its debt since the Second World War and such an eventuality for one of the peripheral euro states would lead to a ‘major breakdown of their financial, economic and social structure’.

Ahead of the OMFIF meeting at the Nederlandsche Bank on 23-25 March, hosted by Governor Nout Wellink, we put some Dutch political and economic issues under the microscope. Roel Janssen analyses the results of the 2 March Dutch elections, which he says confirms the trend of the past 10 years for the Netherlands to become more inward-looking and less interested in European leadership. These are hardly positive signals, in view of the highly fraught European position. Moreover they contrast with the economic picture, as evinced by Stefan Bielmeier, who shows that the core group of euro member states, with the Netherlands in the vanguard, are among the few to have increased trade integration since the euro started.

There is another contradiction across the Atlantic: the build-up toward higher European interest rates is in stark contrast to the studied calm on monetary developments shown by the Federal Reserve, as Darrell Delamaide writes in his latest BankNotes.

Looking at Asia, Hon Cheung investigates the dynamism behind the burgeoning Asian bond market. In Africa, Malan Rietveld looks at new regulatory moves in South Africa, and also comments on the implications for general dealings with sovereign funds that stem from the tragic events in Libya. Governor Emmanuel Tumusiime-Mutebile of the Bank of Uganda underlines how East African states preparing for monetary union are trying to learn from European developments.

William Keegan sheds acerbic light on the contrasts between Jean-Claude Trichet and Mervyn King – and unveils some disturbing parallels with the 1970s.

Despite the clouds on the economic and political landscape, I do hope you enjoy reading this month’s Bulletin.

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