Eurosceptics blame the euro for the Irish crisis

Article published on Nov. 24, 2010
community published
Article published on Nov. 24, 2010
Eurosceptics hate the euro per se and with the Irish crisis, they found another opportunity to blame it. This time it is accused of being the cause of the current Irish woes. Here is the argument put against the euro: the low interest rates of the Eurozone fostered the housing bubble which is at the root of the Irish crisis.
Without the euro, Ireland could have had higher interest rates and prevented the crisis.

Where to find such statements:

Evening Standard Daily Telegraph Guardian

This is pretty interesting stuff. As often, this kind of eurosceptic argument starts with one once of truth which is twisted so much that the final statement is blatantly wrong.

The housing bubble in Ireland is not due to the euro per se. It has occurred in several countries, the US and the UK included. In these countries, as in Ireland, the bubble was primarily driven by a fall in the standard of lending practices from banks and mortgage brokers. With the continuous rise in house prices lenders became more and more sloppy, accepting loan applicants with higher risks of default. In the US higher risk households were given loans thanks to the now famous “subprime” system. In the UK, lenders became very lenient with the rules to grant loans and often found hidden ways to bypass them. Household accumulated large debts (often more than 5 times their income) and an increasing proportion of these households were presenting a significant risk of default.

As long as house prices kept growing, these higher risks looked innocuous, but when house prices started decreasing, banks found themselves with a large amount of households unable to repay their loan. As a consequence, several banks ended up in a difficult situation, like Northern Rock in the UK.

Interest rates play a role in a housing bubble, the lower they are the more households can borrow and therefore buy. Being in the Eurozone, Ireland benefited from low interest rates. A low interest rate is generally good for the economy as it fosters investment and growth. But in the case of Ireland, with a dysfunctional borrowing and housing market, it certainly made the bubble worse. However, in Ireland as in other countries, the problem lied primarily in the borrowing market, not in the euro.

With an official interest rate of 0.5% and newly revamped drastic conditions imposed to households to get a mortgage, the UK shows that an economy can benefit from a low interest rate when it manages properly its borrowing market.