Ireland Crisis Illuminates Euro Myth

The Irish banking crisis illustrates the euro makes little sense, because the European Union lacks taxing, spending and regulatory authority critical to managing a modern economy.

When a bank approaches insolvency, the Federal Deposit Insurance Corp. zeros out the shareholders and merges the troubled entity into a healthy institution. The latter receives an FDIC payment to cover the gap between the failed bank's assets and liabilities. In the wake of the recent crisis, 300 regional banks failed, testing the resources of the FDIC, but the FDIC is backed up by the U.S. Treasury and the Federal Reserve. Citigroup(C) and Bank of America (BAC) were too big for the FDIC to handle, and the Treasury and Fed stepped in with equity investments and loans, which would not have been possible without Washington's ability to sell bonds and print money. Ireland, not the EU, regulates and ensures the solvency of Irish banks. Dublin's treasury does not have the ready cash or borrowing capacity to adequately recapitalize troubled Irish banks, without pushing interest rates on its sovereign debt so high as to make its national budget woes wholly unmanageable. Without an EU rescue, Ireland's banks default, its government defaults, or its citizens face cuts in government services likely too draconian to be possible. If Ireland still had its own currency, it could print money to recapitalize its banks -- that is exactly what the Treasury and Fed can do for the FDIC, Citigroup, Bank of America, and other financial institutions. Printing money would push down the Irish pound against the dollar and other European currencies, result in some inflation and lower Irish living standards, as bank losses were spread over the entire economy. Over several years, however, Ireland's trade balance would improve, and absent other Celtic missteps, the Emerald Isle would work out of its mess. Lacking the power to print money, Dublin must accept aid from the European Central Bank and stronger EU governments. This creates much political embarrassment for Irish politicians and leaders in donor capitals, resulting in theatrics and arduous negotiations. 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