The good news: Ireland got some much-needed relief in the cost of borrowing. The bad news: between the banking debt and our real sovereign debt, our total national debt is on its way towards ?200bn -- about ?140,000 per household.
The relief is welcome, but it won't solve the fundamental problem: our total level of debt is simply too big.
The European response to this problem, to date, has been to try to solve a problem of too much debt with more debt. It's like a bad joke: A man walks into a bank. "I can't pay my mortgage," he says. "No problem," says the bank, "we'll lend you the money to pay it."
This response has been roundly criticised, including by an increasingly vocal IMF.
We know that Ireland, Greece, Portugal and Spain are in serious trouble. But the total eurozone debt, at about 85 per cent of GDP is also far too high. And it's rising. Anything over 80 per cent is considered dangerous: the total debt is estimated to reach 88.3 per cent of GDP in 2012.
So why are things getting worse?
There are two types of debt crisis going on in tandem. Greece and Portugal face sovereign debts crises -- they have been borrowing far too much, for far too long, to pay for their public services. Ireland and Spain are mired in banking crises -- our idiot banks borrowed vast sums of money from home and abroad and poured much of it into property bubbles which they largely created.
Europe's response to both types of crisis has been broadly the same. First, to protect the banks by insisting that the banks that lent to the countries are paid in full despite the loans trading at huge discounts on the open market. (In other words, force the citizens to pay more than the market value of their debts.) Second, protect the banks that invested in the banks. This means insisting that all senior bondholders get repaid in full. Third, make billions of euro in profit by lending the citizens the money at high interest rates, supposedly to make an example of us.
The other elements of the European response are fiscal (how much money we spend, and on what) and monetary (how much inflation there is). In both, there have been missed opportunities.
On the fiscal side, the approach has been to insist on massive spending cuts with little or no stimulus to balance them. We are only beginning to see the awful social costs of this policy. In Ireland we do need to take difficult corrective action, or we really could become like Greece. But there is a strong case for a larger stimulus targeted at repair and maintenance of public utilities, such as schools and hospitals, or at active labour market policies.
On the monetary side, the European approach has been: "Crisis? What crisis?" At a time when we need money in the economy and we could do with some inflation,
the ECB is instead raising interest rates in order to lower inflation.
So what's the alternative? Europe is faced with a stark choice: reduce the total value of the debt, create a fiscal union or risk the collapse of the euro.
A fiscal union would be bad news for Ireland. We would cease to exist as an independent nation. We would quickly see "tax harmonisation," or the end of our corporation tax regime. Investment would falter, wages would fall, society would suffer.
The collapse of the euro would also be bad news for Ireland, as well as for Europe and its trading partners. The euro has substantially increased trade between eurozone countries, lowered costs, and increased political and social ties.
So the best option is to reduce the total value of the debt. How do we do that? One key option is what's known as 'quantitative easing'. Essentially, the central bank prints cash and makes it available to the Government and to the banking sector, resulting in more money in the economy.
In a crisis, this has many benefits. The Government has new money with which to pay its bills and invest, so it doesn't need to borrow as much. The value of the currency falls, which makes it easier for the country to export. Inflation increases, and the real value of debts -- sovereign, banking, commercial, mortgage and personal -- drops. The interest rates being paid on those debts also fall, as the 'cost' of money falls due to the increase in supply. And people start to spend money, as their savings, sitting in the bank, begin to lose value.
There is another benefit: printing money is essentially a tax on those who have the existing money, as the money they hold becomes less valuable.
But there are very real dangers, too. As inflation rises, real wages fall, because prices usually increase faster than people's wages during periods of high inflation. This hits low-income families hardest -- and they don't tend to experience the other benefits of inflation, because they may not have loans. The solution to this is to index-link social welfare payments (and, possibly, the minimum wage), so that their real value stays the same, and to use targeted tax reductions.
Quantitative easing has been used effectively in response to the current crisis in the UK and US. One result of this has been the devaluation of sterling against the euro: British businesses have become about 30 per cent more competitive on price than those of Ireland and the eurozone since 2007 based on devaluation alone.
In the eurozone, though, not only has quantitative easing not been used, the policy has actually been the opposite: the ECB has operated a tight monetary policy, increasing interest rates. We see the results in Ireland, as families struggle with rising mortgage interest rates and viable businesses are threatened by lack of access to capital.
The result is that a crisis which should have been brought under control long ago instead now threatens the very existence of the eurozone.
Last week saw some tentative moves in the right direction, but we are rapidly running out of time. The European political institutions need to relax the conditions on the ECB so that it can print several hundred billion euro. It won't solve the problem on its own, but it will help -- a lot.
Stephen Donnelly is an independent TD for Wicklow
Originally published in 
Source: http://www.independent.ie/opinion/analysis/europes-solution-to-debt-is-more-debt-2829833.html
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