Source: The Diane Rehm Show

The enormous expansion of credit in Ireland and the sheer size of its building boom, which was accompanied by a very large loss of competitiveness, are at the center of the country's crisis today, explained Uri Dadush on NPR’s The Diane Rehm Show.

Irish officials are currently resistant to the idea of a bailout because they fear the conditions that will accompany the financial assistance. Dadush said that these conditions may include raising Ireland’s corporate tax rate, which is about half that of most European economies that compete with Ireland for foreign investment.

However, it is very difficult to see how Ireland can get out of the debt trap. Even if it manages to balance the budget, interest rates remain high and public debt is rising at a very rapid rate, Dadush said.

Dadush pointed out that the far greater worry is the risk of contagion to other large, vulnerable Euro area economies, such as Spain and possibly Italy. European authorities are aware of this risk, making the bailout inevitable. The bailout will likely take the form of direct loans to the Irish government, a significant part of which will go to recapitalizing the banking system.  Even if the current crisis is managed, Dadush concluded, a whole new institutional mechanism will have to be put in place to avoid a repeat of the crisis.