Editorial
November 17, 2010
Europe's finance ministers are in Brussels, trying to convince Ireland to accept a bailout from the stabilization fund established in the wake of last spring's crisis in Greece. The conventional wisdom, repeated everywhere in Europe this week, is that this is necessary to "stabilize the markets" and prevent "contagion."
But the euro zone's main problem is not "contagion." It's solvency. Bailing out Ireland does not make it more likely that Portugal or Spain or even France will be more likely to pay their bills going forward. And bailing out Dublin's bondholders does nothing to improve the solvency of any other European capital. On the margin it could make their problems worse, since each would have to contribute to the cost of the bailout.
The vital question with respect to Ireland is whether in the long run Dublin's commitment to recapitalizing its banks will overwhelm the government's capacity to repay its debts as they come due. Getting a loan from Brussels does nothing to address that question. It will merely put off the asking of it until some future date when the moment arrives for Dublin to pay its debts to Brussels. Nor will it reveal anything about whether Lisbon's fiscal path is sustainable.
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