The European Central Bank looms large over the Euro debt crisis. Photo: soumit (flickr)

As Europe attempts to thwart a broader global recession, it is facing what many economists refer to as a trilemma, and poorer countries could be the victims.

A financial trilemma is comprised of three goals that policy makers try to achieve: (1) a stable/fixed exchange rate; (2) an economy open to international flows of capital; and (3) a sound monetary policy to stabilize the economy.

Here's the catch: In reality you can only achieve two of these goals, not all three.

In 1999, the Eurozone decided to give up the third goal, independent monetary policy. In exchange, they enjoy a common currency across 17 member nations and the freedom to exchange money and goods across borders. Though the European Central Bank creates monetary and fiscal policy for the European Union, each member nation relinquishes its own control.

This becomes an issue when a country gets into financial trouble and must defer to the European Central Bank or greater European Union. This was recently evidenced with the bailout and continuing debt problems in Greece.

Potential for problems arise due to our ever globalized, interconnected world. Eurozone policies are far-reaching, extending their grasp to neighboring emerging markets dependent on foreign dollars. With austerity measures becoming the norm, lenders are avoiding risk and could cut foreign lending in favor of keeping business in their own backyard. The Economist references a speech by the Financial Stability Board head, Mark Carney, in which he warned about the damage if the European bank were to deleverage on the world economy.

Many emerging economies in Eastern Europe depend on both foreign aid and outside investment. If the Eurozone's financial well runs dry the effect will ripple throughout Eastern Europe, even the U.S. Poorer E.U. members worry that they'll emerge the victims. French president Nicolas Sarkozy rocked the political world after his comments at a University of Strasbourg debate on November 8, where he described a proposal for a two-speed Europe, presumably divided between richer and poorer nations.

What part does the European Central Bank (ECB) play in this? That’s the question everyone is asking. Similar to the U.S. Federal Reserve, the ECB has the power and leverage to swoop in and bail out E.U. members on the brink of collapse. They are hesitating, however. Germany feels the ECB should step in only as a last resort. Many policymakers in Germany believe that the current crisis is forcing reform and thus serving a purpose, as recently expressed in The New York Times.

With optimism waning on debt solutions for the U.S. and abroad, tensions mount and consensus becomes imperative. Politics need to be set aside before any sort of real dialogue can exist. Will the E.U. decide on a two-speed Europe? Will any countries abandon the Euro? The implications for emerging markets are considerable; several outcomes could result in global recession.

Managing Director of the IMF Christine Lagarde meets China's Vice Premier Wang Qishan, Beijing, China. Photo: International Monetary Fund (flickr)

The global financial crisis has shaken up the international seating chart, and China may be vying for a better spot.

Though China was one of the International Monetary Fund’s original members, that invitation to the table didn’t mean it had a voice in the conversation. But last year, the World Bank and IMF both moved the country to third place. While the move changes the pecking order for Germany, the UK and France, traditional leaders, it matches China’s increasing position in the world economy with voting power.

Now, we wait to learn whether China will use its power to ease the Eurozone crisis. The IMF, typically the lender of last resort for sovereign states, needs more capital to provide the kind of liquidity Europe needs. China has that liquidity. In loaning to the IMF to play middleman, China can keep itself out of European politics, while keeping world economies - and important European trading partners - humming.

China’s funds would go far. Just last week, the New York Times reported, the IMF offered an additional short-term credit to “bystanders” - member nations feeling the “contagion" of regional and global default. One tool is a “precautionary and liquidity” credit line that would help countries approved by the Fund as having sound economic policies to meet short-term payments. The other new tool combines emergency disaster and post-conflict relief under a new rapid-financing instrument, which can now also be used after exogenous shocks like global financial crises.

The announcement immediately reversed earlier market slides the same day, showing the move boosted investor confidence, according to the Times. But if even a few countries take up the IMF on its offer, its account will soon run dry.

If that happens, China and its ocean of cash will be waiting. The country has shown signs that it’s at least willing to play, but it remains to be seen what rules it will follow. With Western economies looking increasingly desperate, China has the opportunity to play tough. Its decision could relieve the global economy, but it could also help put a new country at the head of the table.

The EU-IMF team's arrival in Dublin was watched by both local news and civilian protestors. Photo: William Murphy (flickr)

As of November Ireland joined the ranks of Greece and Portugal as the latest European country to accept a bailout. The country’s economic crisis of 2008 led individuals and companies to begin pulling their funds from Irish banks, with net result of 70 billion euros withdrawn in 2010.

The proposed $113 billion IMF loan prompted protests in Dublin, says The Guardian. Not unexpectedly, some are viewing Ireland's economic situation as part of one homogenous crisis.

But is it really logical to group Ireland troubles with Greece, Spain and Portugal? Given the domino effect occurring in Europe concerning bailouts, the parallels seem unavoidable, however The Financial Times finds the comparison illogical.

Ireland is nothing like Greece. Back in 2007, Ireland’s net public debt was just 12 percent of gross domestic product. This compares with 50 percent in Germany and 80 percent in Greece. Spain, too, had net public debt in 2007 at just 27 percent of GDP."

Ireland in reality is unlike the other European nations that have accepted bailouts. As The New Yorker explains, Ireland’s economy went sour for different reasons than Greece and Portugal. A combination of the property market’s collapse and bailing out the banks sent Ireland into this economic pit.

It’s more realistic to compare Ireland with Iceland, argues a recent article from The Economist. The article suggests the government of Ireland would do well to learn from the more conservative approach taken by Iceland's government in repairing their economy. Iceland didn’t elect to bail out its banks and saw a 15-percent drop in GDP, compared with Ireland's 14-precent drop in GDP despite bailing out their banks. Iceland, however, not being a member-country of the European Union was spared the political pressure the government of Ireland felt to accept an IMF bailout.

Ireland's economic issues, according to The New Yorker, have shown that their membership to the EU may very well be their plight. And in reality the advice streaming from Germany, France and the United Kingdom has been of little help. Cutting government spending and raising taxes reduces demand in the economy, which makes recessions worse, explains The New Yorker.

Ireland doesn't have an economy that will yield positive results from the advice dispensed by their European counterparts according to. NPR notes that when a nation as small as Ireland — with a population 4 million — has an unemployment rate of 14 percent, it makes a noticeable dent in the workforce [discuss]. According to The New Yorker, the country is in dire need of both foreign and government investment to create jobs and combat unemployment. Unfortunately neither are possible given Ireland's shaky economic condition and the government's consistent inability to stabilize the crisis.

Yesterday, the The Financial Times wrote about plans to sell Ireland's debt in the form of euro zone bonds. But will this really stem the crisis? The Financial Times argues that instead of improving the situation, this will put other euro zone members attempting to sell their bonds at a disadvantage.

An unexpected side effect of the increasingly open borders in the European Union: language confusion.

The BBC reports that Irish police recently cracked the mysterious case of Prawo Jazdy, a driver who was alleged to have racked up dozens of speeding and parking tickets throughout the nation.

It turns out that "Prawo Jazdy is actually Polish for driving license and not the first and surname on the license," Irish police determined. Searching the file, Guardians of the Peace of Ireland determined that traffic officers had cited "Mr. Prawo Jazdy" over 50 times.

Poles are the largest ethnic minority in Ireland, according to the 2006 Irish census. The majority of them are recent arrivals who immigrated to Ireland seeking work after Poland joined the EU in 2004.

"If nothing else is learnt from this driving-related debacle," the BBC writes, "Irish police officers should now know at least two words of Polish."

Photo: Danny McL (flickr)

A town on Ireland's eastern coast is experimenting with running entirely on its own power. Dundalk is fueling a 1.5-square-mile "Sustainable Energy Zone" — including a school, a hospital and an industrial park — with a woodchip-fired heating system, a wind turbine and self-powered streetlights, according to Sustainable Energy Ireland.

The citywide experiment, funded by the European Union, is expected to make a significant impact on energy sources. Sustainable Energy Ireland says by 2010, renewable energy will produce at least 20 percent of the heat and electricity used in the Sustainable Energy Zone.

If the experiment is successful, replicating it elsewhere could be a boon to energy-starved nations. Stay tuned.