Tom McDonnell: Following on from Citigroup analysis of the Euro debt crisis earlier this week, here is an excellent analysis by Paul Krugman.
Krugman runs through the four possible scenarios for Ireland. He predicts that Ireland will ultimately have to restructure its debts. The four scenarios are:
1) Toughing it out – the current plan. Very harsh fiscal austerity to achieve internal devaluation and restore competitiveness, with accompanying depression level hits to output and employment.
2) Debt restructuring. Krugman sees debt restructuring, in conjunction with toughing it out, as being the likely scenario for Ireland.
3) Full Argentina – the nearest European equivalent being Iceland. The default and devalue combination.
4) Revived Europeanism – going down the transfer union path. The E-bond proposal would be the first step in this direction.
Krugman sees the internal devaluation strategy as a recipe for years of depression. According to Krugman the European currency union project is doomed to failure unless it also becomes a full transfer union.