By Hao Li: Subscribe to Hao's RSS feed
December 3, 2010 10:59 PM EST
The capital markets succeeded in strong-arming the European Union (EU) to provide an 85-billion euro bailout package for Ireland and for the Irish government to accept it with the imposition of some harsh austerity measures.
However, the aid package, so far, has not achieved its two main goals. It has failed to restore private investors' appetite for Irish government bonds. Perhaps more importantly, fears of a sovereign debt contagion are spreading to other peripheral euro zone members and even to quasi-core countries like Italy and Belgium, said Joachim Fels and Elga Bartsch, two economists at Morgan Stanley.
What went wrong?
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First, even if officials of the EU, the Irish government and the International Monetary Fund (IMF) played all their cards right, the type of bailout they were planning to offer could not, and were not designed to, solve some key issues.
The root of Europe's sovereign debt crisis was an economic system with a centralized monetary authority but de-centralized fiscal authorities. Monetary and fiscal policies must match and this flawed structure makes that impossible.
A related problem -- and a political dilemma -- lies with the competing interests of the bailout receivers and the bailout providers. For example, German taxpayers complain about footing the bill, while Irish citizens protest the draconian austerity measures and spending cuts thrust upon them.
Europe's bailout strategy -- involving "core Europe" sending money to "peripheral Europe", and the latter agreeing to austerity measures -- obviously does not address these fundamental problems.
On top of that, some critics argue that Europe's bailout concept is flawed because it simply piles up more debt ("bailout" loans) onto countries' whose problem was too much debt in the first place.
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