Sunday, July 1, 2012

Eurofail: Ireland vs Arizona

The financial crisis in Europe just won't seem to go away. While the US is still struggling to get out of the recession that started in 2008, we have at least managed to stabilize our financial system.

There are surprising similarities between Ireland, one of the first European countries to be engulfed by the crisis, and the American state of Arizona. The differences in the way the crisis was handled contain a lot of lessons about what is necessary for a successful currency union.

NamePopulation   2007 GDP per capita (2010$) Homeownership rate (2004)
Arizona 6.3 million $44,200 69%
Ireland4.6 million $46,138 81%

Annual economic growth in Ireland and Arizona was very similar before the crisis
Orange: Arizona, Green: Ireland

Unemployment rates were also very similar before the crisis, but post-crisis Arizona has done much better.
Orange:Arizona, Green:Ireland

Irish house prices have lost half their value from their peak.

House prices in Phoenix have also lost a little over half their peak value. Arizona house prices fell faster, and have now stabilized.

The lesson for Europe

Arizona and Ireland had very similar housing bubbles. Yet Arizona is now on the road to recovery, while Ireland remains stuck with very high unemployment. Both are small economies which are part of much larger currency areas.  In the US, mortgage related losses were dealt with at the Federal level.  Bank failures were dealt with via FDIC. Arizona also benefited from payouts from Federal anti-poverty programs, like unemployment insurance and food stamps.

In Ireland, all these costs had to be borne by the Irish state. The Irish state is now broke.

If the Euro is to have any chance of survival, the cost of cleaning up failed banks needs to be paid at the European level.  Money for programs like unemployment insurance also needs to come from Europe. To pay for all this, some form of European tax system will be needed.

European governments should remain free to raise their own taxes and spend money as required. Arizona doesn't need budget approval from the Federal government in Washington, DC. The  US does not have anything similar to Europe's growth and stability pact.

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