In Ireland, a Picture of the High Cost of Austerity

[Beet]

DUBLIN — As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.

Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

Now, the Irish are being warned of more pain to come...

http://finance.yahoo.com/news/In-Ireland-a-Picture-of-the-nytimes-1867734845.html?x=0&sec=topStories&pos=5&asset=&ccode=

[Јas]

And yet today the Wall Street Journal paints a more positive picture based on the same situation.

[Beet]

And yet today the Wall Street Journal paints a more positive picture based on the same situation.

Not really, the WSJ article doesn't talk about austerity at all. Instead, that article talks about how the devaluation of the euro will help Irish exports. Not the same thing. And not even relevant to other European countries facing austerity face export markets that are also in the euro-zone, unlike Ireland.

Even Ireland may not be able to escape with export. Note that if the world economy goes go back into recession, which is looking more and more likely, then a devalued euro won't help Ireland all that much because the final demand just won't be there. A devalued euro only helps if you assume that there isn't going to be another financial crisis.

[Beet]

And yet today the Wall Street Journal paints a more positive picture based on the same situation.

Not really, the WSJ article doesn't talk about austerity at all. Instead, that article talks about how the devaluation of the euro will help Irish exports. Not the same thing. And not even relevant to other European countries facing austerity face export markets that are also in the euro-zone, unlike Ireland.

I'd contend that it deals with austerity more than the article you posted above...at any rate however, my own view is that Philip Lane is right, attributing Ireland's problems to state austerity is simply misguided.

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Even Ireland may not be able to escape with export. Note that if the world economy goes go back into recession, which is looking more and more likely, then a devalued euro won't help Ireland all that much because the final demand just won't be there. A devalued euro only helps if you assume that there isn't going to be another financial crisis.

Agreed.

The WSJ article simply says,

" The weakening euro may help the Germans sell cars, the French sell pharmaceuticals and the Greeks sell island vacations. But Ireland, above all others, will be the biggest beneficiary of the euro's recent fall.

The Emerald Isle has high unemployment and one of Europe's deepest budget deficits, and is taking some of Europe's harshest austerity medicine. Economists, however, are starting to feel less dismal about Ireland's prospects because of the unique nature of its export economy.

Exports account for more than 50% of Ireland's gross domestic product, ahead of even Germany. And while many euro-zone countries' exports go to their ..."

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If there is a further point about austerity, you'll have to make it yourself.

Ideally, I'd like it to address some specific counterpoints to the core facts brought up in the NY Times article.

Attributing Ireland's problems to the boom bust cycle is non-controversial. However the question arises as to whether austerity programs overall have made things better or not. So far, there is little to no evidence that austerity has helped Ireland's economic performance or deficit figures.

[Sam Spade]

Austerity now or collapse later?

Of course, it's not really like Ireland is being frugal in the larger sense.

[Beet]

Austerity now or collapse later?

Of course, it's not really like Ireland is being frugal in the larger sense.

Well, there's the matter of one in eight not even working.

[opebo]

Austerity now or collapse later?

Of course, it's not really like Ireland is being frugal in the larger sense.

No, the choice is between economy-growing public policy or permanent penury and mounting social problems.  The austerity that you espouse leads only to a downwards spiral of deflation and little or no growth.

[k-onmmunist]

Ireland need to abandon the euro.

[Јas]

Ireland need to abandon the euro.

Notwithstanding your fortune-cookie wisdom - why should Ireland abandon the euro? What do you imagine the consequences would be?

[Beet]

Article is below.
As to whether austerity makes things better or not, it doesn't matter much on a practical level here. The markets would simply not tolerate an increase in Irish borrowing that would have been necessary to support the previous (or higher) spending levels. Austerity was/is the only game in town.

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Well, it's two sides of the same coin then. There are a lot of projections in this article and of course, projections depend on the world recovery being on track.

I do agree that Ireland had no choice but austerity, and neither does Greece or Spain. But all 3 countries were running big current account deficits and eurozone members to boot. Had Ireland been able to stimulate, it clearly would have been better off doing so. If pro-cyclical fiscal policy was part of the problem, counter-cyclical fiscal policy, if possible, must be part of the solution.

Countries like Germany who don't need austerity going into austerity are just delivering themselves needless pain. That is the danger of glamorizing austerity, and why we need to be reminded of its costs, as the NY Times article does-- yes, some countries have no choice, but it is still a condition to avoid if at all possible.

[opebo]

But Beet, why couldn't the EU just inflate its way out of the so-called 'deficits'? Inflate and depreciate the Euro - eliminates the deficit and as a side benefit boosts the economy up wonderfully.

[Јas]

Well, it's two sides of the same coin then. There are a lot of projections in this article and of course, projections depend on the world recovery being on track.

Indeed

I do agree that Ireland had no choice but austerity, and neither does Greece or Spain. But all 3 countries were running big current account deficits and eurozone members to boot. Had Ireland been able to stimulate, it clearly would have been better off doing so. If pro-cyclical fiscal policy was part of the problem, counter-cyclical fiscal policy, if possible, must be part of the solution.

I'd need to check to be sure, but until economic catastrophe hit, Ireland wasn't (I think) in the practice of running deficits (a la Greece and Spain) and had one of the (if not the) lowest debt/GDP ratio sin the EU.

The Government's argument against stimulus (apart from not being able to fund it), it seems  is based on the very open nature of the economy - given the high level of imports, a stimulus would largely leak out of the country.

[Beet]

But Beet, why couldn't the EU just inflate its way out of the so-called 'deficits'? Inflate and depreciate the Euro - eliminates the deficit and as a side benefit boosts the economy up wonderfully.

You know what I think.

But unless the names of the Leaders of Greece, Spain, and Ireland are Wolfgang Schlaeuble, Axel Weber and Olli Rehn, then it's up not up to them much more than it is up to me.

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Jas- Ireland was a deficit country until very recently, see my other thread on this.

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That's a legitimate argument.

[Ban my account ffs!]

I think EU nations should be able to take on debt if that debt is used for economic stimulus.

The state should be borrowing for stimulus and building infrastructure during economic downturns.  It is cheaper to build during these times because of depressed labor markets and lower prices for equipment/goods.

The debt should then be paid back during expansion periods with excess revenue brought in through raised taxes (again, raised during expansion)

[Obnoxiously Slutty Girly Girl]

I think EU nations should be able to take on debt if that debt is used for economic stimulus.

The state should be borrowing for stimulus and building infrastructure during economic downturns.  It is cheaper to build during these times because of depressed labor markets and lower prices for equipment/goods.

The debt should then be paid back during expansion periods with excess revenue brought in through raised taxes (again, raised during expansion)

Yeah, that's classic Keynesian mythology, but it's not how things work in the real world.

[opebo]

The state should be borrowing for stimulus and building infrastructure during economic downturns.  It is cheaper to build during these times because of depressed labor markets and lower prices for equipment/goods.

The debt should then be paid back during expansion periods with excess revenue brought in through raised taxes (again, raised during expansion)

Yeah, that's classic Keynesian mythology, but it's not how things work in the real world.

Actually that's a rather poor bastardization of Keynes.  I'm sure he'd prefer that all the money go directly into the hands of poors who would spend it immediately.  The silly argument about infrastructure is just to sell it politically - it has no economic value.

Remember, the ultimate Keynesian policy is bales of cash dropped from helicopters into the ghetto.  Anything less redistributive is a bit, well, of a bastardization.