If you have Euros, and you want a bank account, you can put your money in an Irish bank. But then again, you could also put it in a Dutch or German bank. And increasingly, nobody wants to keep money in Irish banks where private sector deposits dropped at an annual rate of 9.8 percent in February. Tyler Cowen explains the significance:

This flight of capital reflects a centuries-old economic principle known as Gresham’s Law, sometimes expressed casually as “bad money drives out good money.” In this context, if two assets — euros inside and outside Ireland — are not equal in value in the eyes of the marketplace, sooner or later the legally fixed price parity will fall apart.

If enough depositors fear frozen accounts, the banks will be emptied out, and they also will require additional government bailouts, on top of the bailouts for the bad real estate loans. The banks come to resemble empty shells, conduits for public aid but shrinking and unprofitable as businesses — and, to a large extent, that is already the case in Ireland. Portugal is moving in this same direction, toward being a land inhabited by zombie banks.

It seems like only six years ago that Ireland was the hottest thing in right-wing think tankery.

Timothy Naftali’s been doing the Lord’s work since he was sent by the National Archives to wrest control of the Nixon Library from the Nixonphiles, and while the anti-semitism revealed in the latest tapes won’t surprise anyone this seems like a very strange thing to say about Irish people:

In a conversation Feb. 13, 1973, with Charles W. Colson, a senior adviser who had just told Nixon that he had always had “a little prejudice,” Nixon said he was not prejudiced but continued: “I’ve just recognized that, you know, all people have certain traits.”

“The Jews have certain traits,” he said. “The Irish have certain — for example, the Irish can’t drink. What you always have to remember with the Irish is they get mean. Virtually every Irish I’ve known gets mean when he drinks. Particularly the real Irish.”

Drunk Irish people are fun! Everyone knows that. Meanwhile note that Irish affection for booze is not just a lazy stereotype, the people of Ireland do in fact have the world’s second-highest per capital alcohol consumption after Luxembourg, a tiny oft-ignored outlier in many ranking lists.

From Nick Rowe: “Countries like the UK, US, Japan, have large debts and deficits. But they control their own monetary policy, and none of them have monetary policy anywhere near that tight. If they did set monetary policy that tight, they too would have a solvency crisis.”

How tight is “that tight”? Well, it’s Ireland tight. Coincidentally, Ireland doesn’t control Ireland’s monetary policy.

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It's not the biggest deal in the world, but since I mentioned it once before it's worth noting that Kevin O'Rourke's dispatch from Dublin indicates that the IMF has abandoned its austerity-loving ways, but the European Central Bank is insisting that the people of Ireland indenture themselves to various banks:

The finger of blame was clearly pointed by the Minister of Finance, Brian Lenihan, and several of his colleagues: it was the European Central Bank and the Commission who had vetoed the proposal to force some of the bank losses back onto the bondholders. This interpretation is generally accepted in Dublin, although many observers also blame the Irish negotiating team for caving much too easily into pressure from Brussels and Frankfurt. The implication is that the IMF were the good guys: an unusual position for them to find themselves in, perhaps, and one with political implications in a country whose relationship with the European Union has been uneasy in recent years, and which has conserved close ties with the United States. On Monday night, an opposition spokesman made it clear that he would be much happier negotiating with the IMF, who are reasonable people, than with our European partners. The fallout from this will be toxic.

There are a bunch of reasons for this, but the key one is that if Irish taxpayers don’t fully repay the debts of Irish banks, then that’s going to leave some of the European banks who lent them money undercapitalized and in need of a bailout from taxpayers in the European “core.” The austerity package is a way of trying to make sure the losses fall exclusively on Irish taxpayers, though realistically I can’t imagine this deal being remotely sustainable.

A few links on Ireland. One from Niam Hardiman does a great job of explaining what’s actually happening. Here Barry Eichengreen loses his cool. Tyler Cowen is pithy: “Fiscal union was, is, and will remain a fantasy. The best the eurozone could have done was to abolish national banking systems and have a truly European banking market. It’s too late for even that, though.”

Speaking of the last point, it was observed to me yesterday that in a curious way the creation of the Euro didn’t abolish the Eurozone national central banks. Normally, a country’s “lender of last resort” and a country’s “monetary authority” are the same institution—the central bank. But that’s not the case for Europe. The lender of last resort for Ireland is the Central Bank of Ireland, but the Central Bank can’t print money. Consequently, the Eurozone national central banks (In Ireland, Portugal, Spain, etc.) can actually be subject to runs and liquidity crunches. Which is just to say that Europe doesn’t even have monetary integration in the way we would normally understand it.

Last point would be that as best I can tell public statements from German politicians and commentary in the German press seems to be creating a bit of a dream world in which “irresponsible” Irish business activity is to be contrasted with “prudent” German business activity, and Germans are properly resentful in a nationalistic way about being asked to “bail-out” said Irish. In reality, the Irish government is in crisis because Ireland’s banks are in crisis. Ireland’s banks are in crisis because they invested too much money in property ventures that have gone bust—that’s irresponsible. But the nature of the crisis is that Irish banks owe a lot of money to various creditors, a great many of whom are French and German banks. Which is just to say that French and German banks made, through the intermediary of the Irish banking system, a bunch of irresponsible investments in Irish real state. That’s the exact same thing as what the Irish banks did.

Can Ireland pay what it owes under any policy regime? One reason to doubt it is that as Simon Johnson argues, a lot of Ireland’s GDP is basically tax evasion rather than production:

At least 20 percent of Ireland’s G.D.P. is from “ghost corporations” that have little or no real activity in Ireland. Corporate taxes are set at 12.5 percent, but leading global corporations are able to construct complicated schemes involving other offshore tax havens that reduce their effective tax rates to the low single digits.

The Irish insist that raising the corporate tax rate would not generate additional revenue – effectively acknowledging the point that this part of the economy cannot be taxed as part of the anti-crisis policy mix. You will know that reality has finally set in when all the relevant numbers are presented relative to G.N.P., not G.D.P.

When EU authorities try to press Ireland to raise the corporation tax as part of the terms of a bailout deal, this isn’t really about increasing Irish government revenue. It’s just that the Irish government has, for years, been annoying its OECD peers by operating as a tax haven. Now that Ireland’s in a weak position, people want it to act like a better global citizen. But if Ireland actually can’t pay its debts, the country is arguably better off acknowledging that sooner rather than later. The alternative is to go through a period of EU-sponsored “extend and pretend” in which policy concessions are extracted and then Ireland defaults anyway.

I’m going to agree with Henry Farrell against James Vreeland and say that whatever problems you may have with the IMF’s “conditionality” vis-à-vis an Ireland bailout, their prescriptions are going to be a good deal less austere than what the European Central Bank would prescribe. IMF professional staffers are quite aware of the theory that they pushed austerity too hard in the 1990s and believe they’ve turned over a new leaf*; the conventional wisdom in Frankfurt by contrast seems to be that the problem with the Stability and Growth Pact is that it wasn’t severe enough.** There’s also just the matter of Germans. As Farrell says:

Jim is right to point to the differences between the Strauss-Kahn/Blanchard crowd and the IMF’s Executive Board. And it may be that the dynamics he points to are going to come into play during the monitoring process. But if the IMF is going up mano a mano against the ECB in a fight to see who can out-austere the other, I’d put my money on the ECB. The IMF may be indirectly responsible to Germany, the United Kingdom and France, but the US – which has been quietly expressing its displeasure with the EU’s hairshirts-for-everyone approach to fiscal retrenchment will have some say too, even if it is going to be reluctant to wade too obviously into intra-European fights. And the ECB, whatever the nominal voting system might suggest, is in practice beholden only to Germany, Germany and Germany.

Specifically, though the IMF has a very complicated governance structure the biggest says go to the United States and Japan, neither of which are super-invested in the idea of budget austerity. Germany (and the politically similar Belgian-, Dutch-, and Danish-led voting blocs) still has a lot of influence at the IMF but it’s less than they have at the ECB. Managing Director Dominique Strauss-Kahn (putting the international financial system under the authority of a French Jewish Socialist is like a hilarious joke by the way) also gets a vote on the board.

But this all seems irrelevant in many ways. Ireland doesn’t have enough output to pay off the bad debts of Irish banks and no conceivable budget will change that. Either they need to default, or else there has to be a real bailout where non-Irish actually pay off the debts instead of just loaning money to the Irish government. You can’t make the sums add up.

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