Ireland's economic woes have now become a "sovereign debt crisis". At least that is what many bankers and analysts say on the continent of Europe. They are right, but only to a point.
The Irish borrowed too much. Banks lent too easily and its government didn't see the crisis coming. Despite the austerity measures that Dublin enacted last year, it won't be able to pay its bills in six months without some kind of rescue. The country is likely to ask for "tens of billions of euros" from the European Union and the International Monetary Fund, as the governor of Ireland's central bank said yesterday.
But Ireland is not Europe's only suffering sovereign state. Six months ago Greece required a rescue. Six months from now, so may Portugal or Spain. While each of these countries and their banks have a unique set of problems, they have many of the same creditors.
Ireland's banks owe their German counterparts €173 billion (Dh866 billion). Financial institutions in Portugal, Greece, Italy and Spain owe German banks another €340 billion. Banks in France are owed billions more by the same nations. Indeed, many of the continent's biggest banks at its centre have much to gain from an EU-engineered bailout of countries on Europe's edge.
But the financial crisis could not have begun without excesses in the banking industry and cavalier lending. And while the balance sheets of many governments in Europe are still suffering, the same cannot be said for some of Europe's biggest lenders. Both Deutsche Bank and Commerz Bank in Germany have emerged from the financial crisis in fine health. Societe Generale of France doubled its net profits in the third quarter of this year.
Having the biggest banks write off more of their debt - and allowing some of the weakest banks to fail - is not only a matter of apportioning responsibility. Europe might look to Tokyo to see why. After Japan's property bubble went bust, its government appeared to prioritise the health of its banks above all else. The country borrowed billions to keep them afloat. Most Japanese saw little benefit from this since neither banks nor the government had much left over to invest in development or innovation. Two decades of economic stagnation have been the result.
EU leaders are keen to save Ireland and its banks from default because the alternative is too tough to bear. But a solution to Ireland's current woes is only a sticking plaster. Europe needs major reform. And as Angela Merkel, the chancellor of Germany, said this week: "We in the government are absolutely convinced it is necessary ... that creditors also must take a share in the costs."
Bankers and the private sector did not like to hear this, but if the euro is to have a future and the European economy to become vibrant again, the taxpayers can't be asked to pay the entire bill.