A demonstrator waves the national flag as people gather to protest against austerity policies in central Dublin, January 31, 2015.
Cathal McNaughton / Reuters

After three long weeks of closure, Greece’s banks are beginning to open their doors to an expectant public. Following tense bailout negotiations, Greece received a seven billion euro ($7.6 billion) bridging loan to pay down 6.8 billion euros ($7.4 million) of the debt it owed last week to its official creditors. Essentially, it’s a new loan to pay off the old one. Or more accurately, it’s paying off the old loan plus interest. But the end of the deadlock has at least returned some normalcy to Greece. Checks can now be cashed. Limited transfers are again possible. Withdrawals are no longer limited to 60 euros ($66) per person per day, although capital controls remain in place, and will for some time. For now, the maximum withdrawal is 420 euros ($460) per day, and money cannot yet leave the country without approval from the finance ministry. This comes at the cost of more fiscal discipline for the Greeks, even though on the whole the country has already endured a level of austerity seen only during times of war or depression.

In all this, Ireland, a small and open economy that completed its own bailout program only two years ago, has stood shoulder to shoulder with the creditor nations of Europe in denying Greece any debt forgiveness. That is shameful.

Ireland is now recording some of the fastest growth rates in the eurozone. But during its own crisis, it, like Greece, eventually lobbied heavily for debt relief. In late 2010, Ireland received an 85 billion euro ($94 billion) loan package in exchange for austerity, recapitalizing and restructuring the banking system, and passing structural reforms. At that time, it did not ask for debt relief, and none was offered.

Ireland's Prime Minister Enda Kenny speaks during a news conference ahead of an EU leaders meeting in Brussels, March 14, 2013.
Yves Herman / Reuters

But two years later, in June 2012, Irish Prime Minister Enda Kenny began to push for it. He announced that he had made a promise together with European leaders to “break the toxic link between bank debt and sovereign debt” through a debt restructuring that would involve a combination of decreasing the interest rates charged and lengthening the loan repayment periods on some of the debt, perhaps indefinitely, as well as compensating the Irish state for the cost of recapitalizing Ireland’s banks.  Over the following year, he continued to argue strongly and publicly that this debt restructuring “could not be reneged on.” He explained, “I’m very clear on this: We are going to get a deal on debt. The nature and scale of the deal is yet to be worked out, but the decision has been made.”

Then in early 2013, Ireland got debt relief in the form of extremely long-term bonds, which replaces the punishing high interest rate “promissory notes” that the Irish government issued in 2010 to prevent the insolvency of its two largest banks. To this day, Ireland maintains a commitment, at least on paper, to a debt restructure that will return to taxpayers the money they pumped into the banks, even though privately, many fear such an arrangement will never take place, at least not this year. There has been no stated rationale for the delay in starting these negotiations. In September 2012, the ECB established the Outright Monetary Transaction program, a bond-buying scheme to lower the costs of borrowing for debt-laden countries, without engaging in a debt relief discussion.

If Ireland’s economic openness is one factor that allowed Ireland to recover more quickly than Greece, there is another, more important reason: Greece has suffered more than double the amount of austerity imposed on Ireland.

Although Ireland will be intensively monitored by the troika of international lenders (the European Commission, the International Monetary Fund, and the European Central Bank) until at least 2018, it has at least escaped the troika’s direct control. And Ireland has done well since. Unemployment is falling below double digits, asset prices are recovering, and investment is rising again as international investors, hungry for yields in a low inflation, low interest rate environment, gobble up assets. It’s all very 2006: It is impossible to get a restaurant reservation these days and traffic jams are back in style. Even though more than 20 percent of all banks’ loans are nonperforming, they no longer have a question mark over their survival.

But Greece—and its banks—do.

Greece’s debt is around 180 percent of its GDP. (For comparison, Ireland’s was 123 percent of its GDP in 2014.) For a sense of scale, Greece owes more than 90 billion euros ($99 billion) to Germany alone. It owes around 70 billion euros ($77 billion) to France, and slightly over 61 billion euros ($67 billion) to Italy. The key reason Greece owes so much to its official creditors is that nine of every ten euros loaned to Greece in 2010 went to pay back private debt that should have been restructured at that time.

What matters most is the flow ratio of tax revenue to debt servicing. Ideally, the government should collect enough tax to pay its debts as they come due. If the debt to tax ratio is too high, the government will never be able to afford running basic services, such as health, social welfare, education, and agricultural programs. So the state falls apart, either through a continual reduction in the amount of government expenditure—cutting pensions, reducing teachers’ salaries, removing people from unemployment benefits, and so forth—or through the complete refusal of its citizens to pay taxes.

Either way, Greece faces a medium-term financing problem. As the state reduces in size, more and more austerity is required to balance the books. The result is the kind of downward spiral central banks were created to help stop. But Greece doesn’t have the U.S. Federal Reserve of the 1940s and 1950s, which stabilized the economy by taking an activist approach to monetary policy. It has the European Central Bank, a currency board with aspirations, but little substance.

In Dublin, many small shops and businesses have closed due to Europe's economic downturn, October 8, 2012.
Cathal McNaughton / Reuters

The difference in outcomes in Ireland and Greece is also thanks to structural differences in their economies. The proportion of the economy made up of internationally tradable versus non-tradable goods and services in Ireland is much higher than Greece’s. That means that Irish people can earn euros from the rest of the world, not just from each other. To a much greater extent, Greek people only earn euros from each other. So, when a large shock comes along, Ireland is better equipped to weather it than Greece.

If Ireland’s economic openness is one factor that allowed Ireland to recover more quickly than Greece, there is another, more important reason: Greece has suffered more than double the amount of austerity imposed on Ireland.

And now, Europe’s creditor countries are forcing Greece to adopt harsh “bail-in” laws, which involve seizing money from depositors who may get hammered should Greece see another credit crunch. In the best-case scenario, the European Stability Mechanism would recapitalize Greek banks—essentially by buying them. These banks would be sold off and effectively privatized, and the ESM would receive the proceeds. But Greece has not seen a best case scenario for some time now. According to the most recent data, almost half of poor households in Greece were unable to afford a meal with a staple like meat, chicken, or fish for half of 2013. This year, austerity will deal an even heavier blow to the Greek people.

And Ireland, as its fortunes rise, refuses to help. At the very least, Dublin could just say nothing negative publicly, and help work toward a better deal quietly behind the scenes. Instead, the Irish prime minister has told the international media that he would argue against any type of debt relief for Greece, while Finance Minister Michael Noonan has advocated for a promissory note–type solution for Greece.

Right now, the Greek experience has shown the world that the institutions of the European project are not yet up to the task of crisis management. In extremis, it seems, leaders would rather openly discuss kicking a country out of the currency union than provide some sort of relief for its debts. In that case, the EU is not a currency union but a series of bilateral currency pegs. And, as such, a Greek exit in the next five years could still come to pass.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now