Diagnosis of the eurozone problem has been complicated and confused because of the locus and
sequence of the symptoms.
The Greek problem had its origins in serious fiscal policy weaknesses and in misleading
manipulation of fiscal data in relation to qualification for participation in the single currency.
Revelations as to the extent of the fiscal problem and the gravity of the underlying structural
problems in expenditure and taxation programmes led to a loss of market confidence in the
Greek sovereign borrower, which then led to a corresponding loss of confidence in the banking
In Ireland, the problem was not overtly fiscal, since the Maastricht criteria had been respected.
The fundamental problem lay in:
(a) excessively heavy reliance by the banking system on wholesale borrowing on
international markets to support a very rapid expansion of balance sheets in support of a
(b) the resultant inflated importance of property-based tax revenues (VAT and transaction
taxes) in total tax revenue, allied (ironically) to the pro-cyclical and revenue-reducing
effects of wide-ranging tax reliefs on income from property development and ownership;
(c) the allocation of boom-created (and therefore essentially temporary) revenue gains to
public expenditure programmes which are difficult to reverse (social protection, health,
education, public sector employment).
The inevitable deflation of the property boom was both hastened and triggered by the credit
crunch which followed the Lehman collapse in the US. The funding base of the Irish banking
system was virtually wiped out and deposits quickly flowed out of the system. In addition to its
effects on the banking system, the property market collapse seriously weakened an important
part of the tax base. In the Irish case, a banking problem precipitated a fiscal problem.