Remember the EU’s financial crisis which threatened to bring down the Eurozone a few months ago?

No.

Anyway, according to Baseline Scenario it is still waiting to pounce, this time on Ireland which is often held up as the right way to deal with Eurozone member states’ debt problems:

The ultimate result of Ireland’s bank bailout exercise is obvious: one way or another, the government will have converted the liabilities of private banks into debts of the sovereign (that is, Irish taxpayers), yet the nation probably cannot afford these debts.

According to the Royal Bank of Scotland, Irish banks have debt worth 26 billion euros, or one-fifth of Ireland’s national income, coming due in the month of September alone … In total, the debts of Irish banks could easily result in a charge to government debt equal to one-third of G.N.P.

Which means? This:

Ireland, simply put, appears insolvent under plausible scenarios with current policies. The idea that Ireland, Greece or Portugal can cut spending and grow out of overvalued exchange rates with still large budget deficits, while servicing all their debts and building more debt, is proving – not surprisingly – wrong.

Such policies leave nations burdened with large debt overhangs that effectively tax businesses and borrowers – because interest rates must stay high to reflect risk…

Under the current program, we estimate each Irish family of four will be liable for 200,000 euros in public debt by 2015. There are only 73,000 children born into the country each year, and these children will be paying off debts for decades to come – as well as needing to accept much greater austerity than has already been implemented.

Back in the FCO in 2007 at the annual Ambassadors gathering I heard a presentation about Globalisation. It argued that one of the greatest events in human history had just occurred, namely the abrupt doubling of the global workforce as hundreds of millions of Chinese and Indian people had left subsistence living and started to work in the modern worldwide economy.

The obvious result of this (it was argued) was that the Western world had reached the high-point of wages for the foreseeable future. Why should rewards for working go up in the UK and other Western economies when there were so many people out there willing to for less money and able to be engaged one way or the other via new technology?

This also meant (it was argued) ghastly pressure on public services which had been set up on the assumption of growing wealth – taxes would have to rise heavily as a result to keep the modern social democrat show on the road.

It was at this point that I stuck up my hand and said that in fact the opposite was likely to happen – voters would refuse to pay for an ever-growing state and the balance between ‘individual ‘and ‘collective’ would be looked at once again from first principles.

That battle is now being joined. See this short piece at Samizdata and the Bloomberg link there which describe how policies seemingly aimed at cutting government spending in the UK are winning us wider market credibility.

And indeed the polling numbers in the USA where Republicans are walloping Democrats, not because of their wise policies but because grassroots ‘Tea Party’ demands for reducing government are driving public opinion in an unprecedented way.

As for those unfathomably large Western banking and public debts, they are just too large to be paid off over time by ‘increased growth’. So sooner or later various governments must default, one way or the other.

Clunk.