Borepatch: How Germany caused the Euro crisis
I have dual citizenship with Ireland, and lived in Ireland during the euro transition, and then for the next three years.
It was obvious to us in Ireland at the time, that our economy was going to be sacrificed to Germany, because they needed to keep the euro relatively weak to maintain their exports.
Ireland was EXPLODING with growth at the time, and our exchange rate to the euro was set and fixed several years before the euro transition, when our economy was considerably smaller, and growing considerably less. We got hosed on our initial exchange rate (based on our GDP and currency at the time of the changeover, between 25 and 40 percent depending on who's numbers you believe), and we couldn't have natural variation in our currency volume or valuation to reflect the true value of our economy, so we got hosed again.
We ended up in one of the weirdest cases of currency arbitrage in history; as the true value of our economic production GREATLY exceeded the balance sheet value of our currency.
Ireland also has one of the lowest corporate tax rates in the world, a relatively well educated english speaking populace, and a considerably lower average wage and cost of employment than the rest of the developed world.
This made Ireland one of the cheapest places in the world to employ skilled workers.
This led of course to a great deal MORE international investment in Ireland and in theory even more prosperity...
But Ireland was in an inflationary trap at that point; because more and more money, at relatively low value (cheap money), was pumping into the country, with a relatively fixed trading and consumer goods volume (small population, small land area, half the countries population lives and works within 20 miles of one city, 80% of the population lives within 20 miles of four cities).
Lots of money, not a lot of things to spend it on, what happens?
This is additionally complicated by the Irish cultural significance of home ownership. The Irish have among the highest rate of home ownership in the developed world (a legacy of their history as poor tenants to foreign landlords), and a very strong internal cultural drive to it.
This led directly to the massive credit bubble in Ireland, as housing inflation took off; at the same time as Ireland was being flooded by capital looking for growth opportunities.
This of course was totally artificial, and totally unsustainable; particularly given that the money coming into the country was almost entirely service based, as salaries to irish workers from U.S. and European multinationals, and services and goods purchased by those same workers (the building trades, consumer goods etc...).
When costs in Ireland climbed, or economies in the home countries of the multi-nationals had downturns (both of which happened in 2001, 2006, and 2008), the services money dried up; leaving Ireland with no real employment base of its own.
Whoops, is that the sound of a bubble I hear popping?