Ireland, Greece and Portugal will never recover locked in the single-currency straitjacket

The Irish Government will, despite its initial reluctance, be bailed out by the EU and the IMF. But rather than solving Ireland's economic problems, this rescue package merely defers them.

Ireland is in a mess. Its economy shrank by more than 10 per cent last year, after a fall of 3.5 per cent in 2008. Bad debts have rocketed, property prices, on some estimates, are down by half and unemployment is approaching 14 per cent. In September last year the Irish Government announced that guaranteeing its banks could cost €50 billion, a third of GDP. These estimates pushed the deficit-to-GDP ratio to 32 per cent, undermining the solvency of the State.

Ireland needs growth to get out of this, but being part of the euro makes that difficult. Although the country is highly unlikely to leave the eurozone in the immediate future, the need to be free of its straitjacket will prove hard to resist if the economy fails to recover. Leaving may be necessary if Ireland is to maintain fiscal sovereignty, improve competitiveness and stimulate growth.

Recovery will also be difficult if France and Germany insist that, as a condition of the bailout, Ireland must increase its competitively low 12.5 per cent corporation tax rate. Such a move would undermine its attractiveness to overseas investors and foreign multinationals - the one aspect of the Irish economy that has proved successful in recent years.
The bailout was designed to reassure the sovereign bond markets that financial "contagion" would not spread from Ireland to

Portugal and Spain, which also have huge debts.

David Fuller's view My guess is that the ECB and IMF-led plan will once again paper over the problem - for a while - and that those currently shorting Irish and Southern European government bonds will soon be treated to a bear squeeze.

The more intractable problem concerns how these countries can earn their way out of their self-inflicted debt burdens.

(See also our earlier comments on this subject.)