Default and devaluation

News today that Ireland could default on its national debt. The country's economy is in serious trouble. Once the powerhouse of the EU, the so called 'Celtic Tiger' it is now dubbed by Dublin pub wits as 'the sick pussy'. With the lowest corporate tax in the EU, which has led many UK firms to relocate there, and an economy which was put very much at the disposal of property developers and speculators, the bottom has well and truly fallen out of the economy. The government has just announced a 10% levy on the pensions of those in the public sector and savage rates in other state expenditure is being considered.

Being in the Eurozone, Ireland cannot use interest rates or currency devaluation to help its situation. This is the problem with the 'one size fits all' of the regulations introduced by the European Central Bank and means that economies like those of Ireland and Spain, which have very different economic circumstances to those of Germany or France, are unable to respond vigorously enough. Ireland may be the first of the Eurozone states to default on its debt. Only recently having nationalised Anglo Irish Bank which was full of toxic debts and whose leading executives are now under investigation, the government was warned by a prominent Irish economist that doing so could endanger the whole economy because of the level of international debt which the bank held. The Irish Minister for Finance has recently admitted that he did not read some of the most significant documents before making a decision on taking the bank on board.

Meanwhile in the Baltic states, where there have already been riots and the resignation of the Agriculture Minister in Latvia because of anger about the economy, there is the real prospect of a 50% devaluation of their currencies against the Euro.Latvia’s economy shrank 10.5 percent in the fourth quarter, the steepest drop in the European Union and the country’s biggest since quarterly annual records began in 1995, according to preliminary data. The nation has to fund a 92.5 million lati ($168 million) current-account deficit while credit markets around the world remain frozen. As a result, analysts and experts around the world are dedicating an unprecedented volume of column inches, charts, graphs, analysis and predictions to the tiny Baltic state with a population of just 2.3 million.
Even Nobel economics laureate Paul Krugman commented on Latvia in December 2008, describing it as "the new Argentina" in an online discussion about the effects of currency devaluation.
There is now the real danger of some of the economic situations which we have only witnessed before affecting Latin American or African countries now hitting Europe. What impact this will have politically will be hugely significant. It could well lead to civil unrest and an upset in the European elections, which are now less than four months away.