Is Ireland the next Iceland? That question might have seemed preposterous six months ago. Today it’s hard not to answer it in the affirmative.

The country’s banks are teetering on the edge of nationalization as they continue to hoard rather than lend money the government has injected into them. Unemployment is forecast to rise as high as 14% this year with the possibility of hitting 20% in 2010. Irish government bonds are trading at a spread of 2.18% to the benchmark German issues. The economy may shrink by up to 8% this year.

Into this disaster, the government now intends to introduce measures to begin bringing down the deficit to the EU mandated maximum level of 3% of national income. Currently it’s running at about four times that level. How they intend to squeeze that sort of revenue out of their economy is anybody’s guess. Why they would introduce such policies is a question that shouldn’t even have to be asked.

On display again is the inability of the EU to deal with a crisis of this magnitude. Rigidly adhering to arbitrary deficit ceilings at a time when just the opposite strategy is called for is straight out of the 1930’s policy blunder book. It is hard to imagine Irish society tolerating this sort of pain for long. If the EU does not soon see the light of day, the damage to the Euro could be deep and lasting. 

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