This post was written by John McHale
The speed of the fiscal deterioration is truly alarming—all the more so given Ireland’s fiscal history. But, observing from a distance, I am still surprised that the wisdom of discretionary fiscal contraction is not subject to more public debate. (I realise I may be missing much of the actual debate.) Ireland is now in the throes of an extreme domestic demand-deficient recession. On its face, it is tragic to pursue a contractionary discretionary fiscal policy with such a demand collapse and no monetary policy instrument. Of course, the fear of a large increase in the risk premium on Irish debt and associated explosive debt dynamics could validate such a tragic choice. But is the fiscal caution being overdone given Ireland’s modest debt and ability to borrow in its own currency? The marginal value of stimulus should be high with the economy operating well below potential. Thus the fact that debt is being piled up at an alarming rate does not necessarily mean it is bad policy. I would be grateful for any thoughts on the extent of the risk of explosive debt dynamics and the likely size of fiscal multipliers in the current depressed environment.