Sunday, February 27, 2011

Ireland Elections

The bank-bailout regime is over in Ireland. It is hard to explain how big a political change the election represents. The political party that had led the government in Ireland almost continuously for 80 years, Fianna Fáil, lost 3/4 of its seats. It may be able to make a comeback in a few years, but this is a party where no one knows how to do that — it is in rebuilding mode for the first time in a lifetime, with most of its leaders voted out of office. For Fianna Fáil’s coalition partner, the Greens, the news was worse — they won no seats at all in the election.

The electoral changes are the direct result of the bank bailouts in Ireland and the subsequent European Union bailout package and austerity budget. Ireland is in dire financial shape after the bank bailouts. It is on the hook for possibly as much as €200 billion after an escalating series of attempts to keep all the major banks standing, a policy that failed in the end anyway. That is a lot of money for a country the size of Ireland, equal to almost 1 year of GDP.

If the combination of bank bailouts and draconian budget cuts was politically toxic in Ireland, it is not going over well in the United Kingdom either, and this pattern is something politicians in other countries will have to notice. It may be enough to dissuade politicians in the United States from attempting another round of major bank bailouts later this year if some of the largest banks continue to weaken.