Ireland Paying a High Price for Austerity

The New York Times carries a lengthy article (plus plenty of photos in a slideshow format) on the Irish situation: you can read it here.

A more accurate and comprehensive headline might have been: “Ireland paying a high price for boom-bust cycle in property sector and attendant banking crisis, amplified and abetted by procyclical fiscal policy and now requiring a sustained fiscal correction”  – but that is probably too long!

Update:  Paul Krugman adds his view in this post.

84 replies on “Ireland Paying a High Price for Austerity”

“A more accurate and comprehensive headline might have been: “Ireland paying a high price for boom-bust cycle in property sector and attendant banking crisis, amplified and abetted by procyclical fiscal policy and now requiring a sustained fiscal correction” – but that is probably too long!”
yep…subeditings loss is economics gain Philip…

Methinks the tide is turning. Try bringing in a property tax with thus commentary in the background. We’ll see what makes it onto the 9 o’clock
news though – this, or Jim Power, or “bagels chasing ducks” (as the Healy-Rae lad said on Morning Ireland this morning!).

It could have also ran the headline

“Ireland pays the price for the mismanagement of private capital by private actors”

With the sub heading: “facilitated by reckless tax incentive and public subsidies by the state”

“A more accurate and comprehensive headline might have been: “Ireland paying a high price for boom-bust cycle in property sector and attendant banking crisis, amplified and abetted by procyclical fiscal policy and now requiring a sustained fiscal correction” – but that is probably too long!”

If you gave that to a Sun subby it would be just two words and the first one would be “Ireland” …. I will leave you to figure out the rest.

Longer still I think.

“Ireland paying a high price for boom-bust cycle in property sector and attendant banking crisis, amplified and abetted by procyclical fiscal, monetary and incomes policies and now requiring a sustained fiscal correction and real exchange rate adjustment within the constraints of a common currency area”.

Or another:
Ireland is saved as economics experts prove their worth by concocting superlong subhead.
Is a point being missed? Lenihans only rebuff used to be that international opinion was on our side. Now it’s not.
This will be burried if a serious effort is not made to keep it alive. If a chippy in Sardinia so much as hinted he thought Ireland was on the road to recovery he’d be wheeled out as vindication of policy. This story didn’t even make it onto the 9oclock rte radio news.
This needs to be pushed.
For all the commentators who were pilloried for opposing government policy – this is your chance.
While they debate about hunting, the country dies – shame is theirs forever!


It’s one piece by the NYT that doesn’t contain anything new. Doesn’t even criticise Government policies to any great extent so not sure why you think it should be on the RTE news.

@ Gavin
We’ve had non-job announcements making the RTE news for the last weeks SBPost this week shed some light on a lot of these.
This government has always relied on outside approval to support its policies. Now it is faced with an unconvinced bondmarket and an increasing number of experts holding us up as an example of how not to do it
It is significant

Agree with Gavin S, besides hasn’t Krugman said in the past that Ireland have to do fiscal austerity because we have nothing else whereas Europe (read Germany) shouldn’t follow this austerity route.

Who is right in this argument between continued stimulus to avert a double dip or fiscal rectitude to reduce indebtedness?

Isnt approx 20b deficit spending pa, the greater part of it structural/current, a pretty big stimulus?
Meanwhile, we are 300bp over bund ten year and rising slowly but steadily.

As a nation we have a crippling tendency to need to hear what international voices think of us.

Think how we purr like cats when Obama gives us compliments every Paddys day.

And how we cower in front of the volcano of international opinion,
even when we are being told that 2+2 =5….

Is the point then that we wait to see what the market reaction will be to German austerity moves, as comparing Ireland with Spain isn’t comparing like with like?

The real significance of what is being said now is that undermines the governments assertions about its policies receiving unanimous international approval. Up to now this has been its mechanism for dismissing absolutely every dissenting opinion eminating from Irish experts.

When you’re ignored for so long it sometimes feels like its not worth expressing an opinion any more. Hopefully this will begin to change that.

Depending on how it is used, this apparent breakdown in international consensus can be significant. It has the potential to allow for real debate and real change of policy.

But surely in Ireland’s case we have no choice, shouldn’t the dissenting opinions and policy direction be aimed at the larger eurozone economies and using Ireland as an example of how not to do it, is invalid.


Who has ever claimed there was UNANIMOUS international approval? I have seen much more critical articles and I have seen articles that have made it seem like we have the best Government in the World.

I really don’t think we can afford more austerity.
The real downside is unemployment. Economies have cycles – human lives don’t – they’re linear and once off. And the upside is not clear any more.
I don’t think that there is one easy solution. I think the only way out of this is to actually sit down and look at every single area of economic activity in this country and see how each one can be improved. That does include some forms of austerity (e.g. reviewing minimum wage and social welfare) but also the acceptance that we cannot afford wasting 22bn on Anglo.
Unfortunately this government has stifled all debate – and that in itself is enough to make it unusable. It has promoted a culture of defensiveness and cliquishness.

Frankly, I don’t care who is in government as long as they show that they are capable of facilitating the kind of debate and work that is needed to turn things around.

@ Eureka

We cant devalue the currency, but…..
We can devalue everything in the country:
Would love to see this negogiated!!

land – done
wages – being done
rents – being done
debt – not being done!!!!!!!

“That’s why the Irish debacle is so important. All that savage austerity was supposed to bring rewards; the conventional wisdom that this would happen is so strong that one often reads news reports claiming that it has, in fact, happened, that Ireland’s resolve has impressed and reassured the financial markets. But the reality is that nothing of the sort has taken place: virtuous, suffering Ireland is gaining nothing.”

Paul Krugman-
“Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.”
As Brian Lucey says above 20bn is a pretty big stimulus

and we are still 30% more expensive – is there a way out of this mess?

I take the point about Ireland’s meagre reward for austerity. But if we are 300bp above the German rate after stabilising our hitherto rising deficit, how can we believe that it would be any lower if we had borrowed to stimulate and accelerated our deficit in the upward direction? With austerity we have, what, 35 billion incomings and 55 billion outgoings (round figures). With a deficit backed stimulus we might have say 60-65 billion outgoings. It is hard to imagine anything other than an even higher permium over German rates in that scenario. True, the stimulus might have prevented some job loss, but in reality how much and for how long would it be sustainable?

Krugman is at a point where he is like a high school debater latching on to any morsel to support his case.

He can blame the limitation of a newspaper column or a blog entry for avoiding the graft of really looking beyond a foreign journalist’s report – – call on the usual rent-a-comment folk for a view and maybe have a drink with local journlaists to have the blanks filled in.

It’s blarney without consequences for the individual.

If there wasn’t an effort made to reduce the still big gulf between tax revenues and spending, we like Greece as dependent on foreign lenders for most of our borrowings, would be at a big risk.

It’s also interesting how valid arguments regarding stimulus spending can be neutered by a reluctance to take a position on rent seeking of insiders and wasteful public spending.

@ Al

I agree with your point about foreign approval.

it’s typical of poor or developing countries where favourable comment from the foreign media would get prominance in the local media.

It seems to me that Ireland is being used as an examle rather than policy in Ireland being criticised. There seems to be consensus that we cannot borrow much more if our deficits are not reduced so we are in a bind. The question is whether bigger countries with their own currencies should follow suit. I think it is to our short to medium term advantage if they don’t follow suit. However, it is difficult to see where is all ends up.


For us default is where it ends up. Only question is just banks, or government debt too? This is the typical cycle when defaulting: first pretend there is no problem, then deny there is a problem, then scream that denial loud, then collapse into default when people realize it is all impossible. Followed by anger and pariah status for defaulting…only after all that recovery. We are still screaming denial.

@Michael Hennigan


Krugman has one agenda – Obama should’ve increased the stimulus. Thus he views the whole world through this single prism. We’re just a weapon in his battle to show that deficit cutting is counter-productive. He’s not looking closely enough at our case to realise that we’re out of choices.

@ Sarah Carey

We are out of choices. We had to cut the deficit. But I think Krugmans’ point that this will be self-defeating is gathering currency. We have just dug too deep a hole, got ourselves into too big a mess and the markets are giving us a thumbs down. As Morgan Kelly said “It is no longer a question of whether Ireland will go bust, but when.”

Krugman is also making the point that the US, Germany, etc should not follow the Irish example and go for austerity now, which I think is valid.

Also we are still hoping for an export led recovery – with all this austerity in the US and EU how realistic is this?

Difficult days ahead I’m afraid.

I think Krugman is wrong on Ireland – as I commented before, the debt and deficit stats for Ireland are worse than those for Portugal, Spain and Italy so I can’t see why he is so surprised that we are paying a premium. Instead of comparing us to Spain he should compare us to Greece, who essentially can’t borrow anymore. The benefit of our austerity measures is that we are still able to borrow. Brian Lucey correctly points to the stimulus through our deficit, if we can’t pull off the austerity measures we can kiss goodbye to that stimulus.

Austerity measures in other Euro countries e.g. Germany are a very different issue. Yes, Germany could run record deficits a little longer which would obvioulsy provide stimulus not just to Germany but also the rest of Eurpoe and beyond. However, even Germany is going to have to service the debt and given the rapidly aging population the burden is saddled by fewer people all the time.

The German recovery appears to be going fairly smoothly with many firms reporting full order books, so much so that the deficit is going to be 25% lower than had originally been projected (this is still a record). In that context the German government considers the recovery to be strong enough to start saving. Time will tell if the timing is right, but almost as important is what is being cut.

Krugman has been trading insults with a few German economists about this over the last week or so. Wolfgang Franz who chairs the German Council of Economic Advisors pointed to the fact that the savings only amount to just over 1% of GDP hardly worth getting hysterical about. He also quoted calculations which suggest that at most German GDP will increase by the size of the stimulus – hardly a good return.

In fairness Krugman did say:

“But there isn’t much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.”

But I reiterate my point, why is Ireland being used as an example when we are special case and can’t be compared with heavy weights like Germany?

@ MH

If only it wasnt so submissive….
We need to learn to be intellectually self sufficient and stand over our own ideas instead of leaning on an international crutch…
Especially when we have to default…

@Brian Lucey
Yes the €20 Bn deficit spending is a big stimulus to the Public Sector which is being used to pay Salaries/Pensions without cuts and other bleeding hearts but what is being done for the rest of the economy where the lives of ordinary folk running businesses are being destroyed along with their employees. Could we have some “constructive” suggestions from Academics as to how the real economy can be revived !!!!!!!!!!

@ Sarah and Michael Finfacts

Krugman may have a single agenda but the fact remains – he is right and all those who chamiponed fiscal austerity on the basis it would improve Irelands’ credit ratings are wrong. Ireland started a series of competitive devaluations across peripheral economies of the Eurozone – and it is not working. One day after Spain introduced a €15 bn austerity package it had its credit ratings downgraded from AAA to AA+ . Financial markets reward growth not austerity.

If everyone in the Eurozone behaved like Ireland the entire region would be in a severe deflationary spiral. The Irish strategy is failing. It will not work. It is not 1987. It is 2010 and we do not have the equivalent of EU structural funds which acted as a mini stimulus in the 80’s.

All credit to Krugman. He abides by the social science rule – When the facts change, be self reflexive enough to change your mind. The alternative strategy is ideology. Ireland can still choose what political and economic strategy it wishes to pursue. More importantly, the Eurozone can still choose a Euro-coordinated strategy.

@Aidan R

“One day after Spain introduced a €15 bn austerity package it had its credit ratings downgraded from AAA to AA+ .”

That’s because it’s fixed/rigged. “ok, so you’re going to activate the austerity swipe, and I’ll downgrade tomorrow. ok, see u later. Let’s watch Gladiator”

“Financial markets reward growth not austerity.” Financial markets also cause the need for austerity in the first place.

“If everyone in the Eurozone behaved like Ireland the entire region would be in a severe deflationary spiral. ”

Which Ireland? Greece’s debt was very high before the crisis. Ours was low by European standards. Lower than France or Italy. It’s not Ireland, it’s just a few powerful dominant men.

“Public Sector which is being used to pay Salaries/Pensions without cuts ”
Feckit….someone must have been fiddling with my paycheck so, its gone down. maybe i got downgraded? no? did the staff office steal it? Wheres my 18% gone?

“Yes the €20 Bn deficit spending is a big stimulus to the Public Sector ”
damn those firemen. next time theres a blaze i expect my insurance company to come out personally and quench it. And as for the nurses…..well….

“Could we have some “constructive” suggestions from Academics as to how the real economy can be revived !!!!!!!!!!”
think your key got stuck there. To the question – yes. Go search this site. Im sure some ideas were mentioned somewhere.

I don’t really think its a case of ‘stimulus’ or ‘spending cuts & raise taxes’, rather it should be cut spending, lower taxes and have the state get out of the way after that, if the smart economy is anything beyond a pipedream then we need the route to market for entrepreneurs and exporters/manufacturers to be as simple as possible with minimal red tape.

If you have too much austerity it becomes doubtful whether you can repay your capital on bonds because it causes unemployment to last longer than necessary and people actively evade tax etc., nevermind coupon, if you don’t then nobody trusts you, the rational solution is therefore growth but you can’t have it when high taxes and excessive spending suck investment capital out of the economy.

@ Edgar, a few carps:

“Instead of comparing us to Spain he should compare us to Greece, who essentially can’t borrow anymore.”

Why do you consider this a more valid comparison?

“Germany could run record deficits a little longer…”

That seems like quite an understatement looking at the chart in this post:

Finally, “the [German] deficit is going to be 25% lower than had originally been projected…. In that context the German government considers the recovery to be strong enough to start saving.”

I think this is a case where, contra Keynes’ famous quote seemingly alluded to by Aidan (“when the facts change, I change my mind”), whatever the facts the policy conclusion remains the same – or do you think that if it had turned out that the German deficit was 25% higher than expected there would have been a volte face on the part of German policymakers? On the contrary, I suspect this too would have been taken as making the case for fiscal tightening even stronger.

Unfortunately Ireland is backed into a nasty corner. An attempt to run a fiscal stimulus depends, in Ireland’s case, on external funding being available. While a fiscal stimulus might be a nice idea, the risk of a hard funding stop is very high – and a hard and sustained funding stop will (almost certainly) do significantly more damage to Ireland than years of austerity – especially since Ireland still has the effective escape valve of emigration.

Meantime, as to Karl’s suggestion, no political party or movement in Ireland understands or likes free markets, let alone the idea that enterprise is a long term solution for Ireland or the only long term solution for Ireland. No political party or movement in Ireland has any interest in getting the state “out of the way”. As has been discussed on this board before, and as far back as Bastiat, political movements always need to do “something” even if that something is as dumb as a bag of hammers.

As to whether less indebted, or currency printing, countries should be pursuing stimulus programs, that’s a more complex question. I believe I saw commentary in a British paper that even the UK would not be able to print its way out of trouble without a too high risk of hyperinflation kicking off – and I leave it to better historians than I to discuss the competing merits of a debt deflation versus a hyperinflation.

@karl deeter
I don’t really think its a case of ’stimulus’ or ’spending cuts & raise taxes’, rather it should be cut spending, lower taxes and have the state get out of the way after that, if the smart economy is anything beyond a pipedream then we need the route to market for entrepreneurs and exporters/manufacturers to be as simple as possible with minimal red tape.

I like a man who doubles down at the tables. With the economy in a shambles as a result of a complete market failure due almost entirely to overly zealous belief in a bankrupt Reaganite (e.g., “get government off the backs of the people”) ideology of small government and low regulation, karl deeter has decided the remedy is more of the same.

Re: Karl Deeter

If you think the state needs to step out of the way to encourage private investment and allow a market led response to the crisis, what do you make of this report by Davy Stockbrokers:

This report concludes that from 2000 the productive use of capital by the private sector was ‘pitiful’. It then goes on to argue that most of the productive use of capital during this period was driven by the state and semi-state sectors.

So, whilst the idea of private enterprise driving recovery in Ireland might seem plausible on paper there is simply no evidence to support it.

Why do we always go for the big concepts and the big ideas – pro austerity, pro stimulus etc. Fact is that this situation is not going to be improved by applying a fix-all. It will require tweaking everything.
Austerity in areas where money is wasted (and that includes Anglo), stimulus in areas where we money can be generated (that includes tourism, agriculture and education). Things like working out a scheme whereby being on the dole means having to work (not in state jobs necessarily but work nonetheless), ideas like reducing the minimum wage without creating a welfare trap, ideas like giving small business direct access to government and representation of their interests on trade missions etc. In every sector some real hard work has to be done. This is not about solving a problem (few problems are really ever solved) it’s about taking the many small steps that will make all our lives better in small ways.
Small practical solutions are never as sexy as big ideological arguments but they are the only way forward.

Austerity? Is it austerity or profligacy when your government is borrowing with 5 and 10 year government bonds to pay for current expenditures including the salaries of all government workers needing to paid the end of the month? And the chorus from the sidelines as they refuse to buy our bonds is “nobody does austerity like the Irish”. What was it Lenihan said “if I did this in France their would be riots in the streets”.

This debt along with NAMA, together with the stupid and dangerous mono investment strategy imposed on the NPRF to fund banks are just some of the reasons the government refuse to do stimulus. The NPRF should have been ring fenced, protected from being grabbed in a crisis and also its investment strategy should be international not domestic and crisis driven as it is.

If you agree Croke Park and freeze public sector pay cuts then your austerity must come form slashing the capital program still further and financing the “cuts’ from indirect taxation which reduces aggregate demand still further causing even more unemployment and from the governments perspective hopefully more emigration. Deflation, optimistically referred to also as a jobless recovery. A jobless recovery is another way of saying we have managed to batten down the hatches and preserve our own jobs for the moment even as the country slides into a more national bankruptcy.

Another measure responsible for our “austerity” was and is, the primitive government guarantee of 2008. If it is austerity then it is austerity by default! Because there is no more money to indulge the unemployed ordinary private citizen who has become the sacrificial lamb in all of this. The level of hypocrisy is getting a little stifling. People know what needs to be done but they are too educated to point out the woods from the trees. It seems most of the educated economists are hoping for a miracle.

Krugman has a Kensyan agenda and, like all idealogues, he is prepared to see black as white rather than question the ideology. His last piece effectively said that we are facing a “long depression” as in the 1873 panic, but he also said that it is all the fault of bad government policy.

He has never ever addresses the debt problem. He imlies that debt is irrelevant and all we need is another bout of confidence to leverage up from 350% of Debt to GDP in the US to what 600%? He is quick to point to 1934 md 1947 as periods when both the keynsian policies worked and when the US carried a similar fiscal deficit to today. However, he never deals with the differences between today and those periods. In 1934 Roosevelt’s Keynsian policies kicked in after the debt was already wiped out with defaults etc. In 1947 deficits after the world war II were sustainable because almost all of the productive capacity of every one of the US’s competitors was obliterated. Neither of those conditions exist today. Krugman is like the looney right wing conservative that hates bush, protect the ideology at all costs.

@Aidan R

Ireland can still choose what political and economic strategy it wishes to pursue.

There are always plenty choices….

As to having real independence, with foreign lenders providing 70% of public debt; foreign firms responsible for 90% of tradable exports — about 20 pharma/medical device firms responsible for half of merchandise exports – – we haven’t too many options.

It is arguable that the only way that real positive change can be achieved is to have an IMF team running the show from Merrion Street.

The Irish strategy is failing. It will not work.

There is no strategy but emergency measures akin to a failing company seeking a cash lifeline in return for cutbacks.

Those who argue for the status quo are generally protectors of privilege and inflated living standards built on a bubble.

There has been no reform with the exception of the Central Bank and a large number in both the public and the protected private sector are dependent on a public well that is running dry. Wealthy consultants operating from the Blackrock Clinic, may like to believe that they mainly depend on private income but insurance premiums could be viewed as just another tax.

So what are you proposing? Wait for a bond lenders strike or force Germany to gift us money to create 100,000 jobs in State-funded work?

Read the recent OECD report on Finland and wonder what a country that is
not in the grip of rent-seeking vested interests could aspire to.

We do have choices; we can of course leave the euro and aspire to be another Albania.

At a time of significant stimulus through deficits and interest rates at record lows — a 1694 low for the Bank of England – – it is foolish to ignore a reality that household and business decisions are impacted by uncertainty about stability and future taxes.

The impact is hard to measure but in the US, the change in the outlook in recent times, reflects such uncertainty according to the chief economist of Morgan Stanley:

US Economy: Facing a wobble, a double-dip recession or fragile long painful process of recovery?

It is a intellectually shabby conceit of the academic economist class to imagine that it was an obvious and self-evident truth that the 2002-2007 government ran a pro-cyclical fiscal policy.

It wasn’t. Contemporaneous measures pointed strongly in the other direction.

The EU Commission, concluded in March 2008 in “Ireland: Macro Fiscal Assessment – An Analysis of the December 2007 Update of the Stability Programme”:

“Despite the weakening in the budgetary position in 2007, the medium-term objective, which is a balanced position in structural terms, was reached by a large margin.”

If sceientific endeavour is to advance, it must be on the basis of a factual foundation rather than on self-serving, all-knowing axioms that are, in fact, false.

Is Krugman correct that Ireland is not benefitting? Are increased consumer confidence, increased retail sales, increased competitiveness, a reduced public sector wage bill without industrial unrest and a forecasted return to growth this year not benefits?

Also, are Krugman et al using Ireland as a speaking aid rather than really considering the Irish position? Krugman does not focus in any way on the constraints which face Ireland in deciding on its fiscal policy.

I heard David Begg on Morning Ireland this morning quoting Reinhart & Rogoff. I myself had previously noted the passage he quoted which states that recovery through export led growth is near impossible in a global recession (as opposed to in a national or regional recession). However, I take from this that we need Europe the USA and other countries to pursue a more expansionist policy while we remain shackled to deficit reduction. I did not see the truth of Reinhart & Rogoff as enabling us to maintain spending in Ireland.

David Begg said we could oush out our target date for deficit reduction. It seems we are not going to achieve that target date in any event. Maybe I am missing some aspect of David Begg’s argument whereby he explains how we will have the capacity for more spending and borrowing. Does he think the markets will endorse a changed policy?

In the meantime, our real problem appears to be that Eurozone deficit reduction is now seen as the necessary temporary solution to the latent design flaws in the Eurozone which have recently been manifested themselves. If the rest of the Eurozone decides deficit reduction is necessary then this could spell serious trouble for Ireland.

Is more orderly default amongst large financial institutions in the EU and the USA an important part of the solution for a lot of these problems?

@ Michael Hennigan

I don’t think you have addressed Krugman’s central point: austerity won’t save Ireland (even if we have no alternative) and Europe should not go for austerity now.

Is it possible for the PIGS to deflate their way out of the crisis? It looks like the finanical markets think not.

Krugman mainly directs his criticism towards EU and US policymakers who he feels are not doing enough to counteract the recession. He concedes they responded appropriately in the initial stages with low interest rates and stimilus packages but that since then they have gone in the wrong direction obsessively worried about inflation when deflation and record unemployment are the real threats. Austerity in the US and Europe will lead to a japanese style “lost decade”.

“So what are you proposing? Wait for a bond lenders strike or force Germany to gift us money to create 100,000 jobs in State-funded work?”

Well I do think it is time to start talking seriously about worst case scenarios and possible alternative strategies. The way we are going we will have to get a bailout from Europe anyway.

“Those who argue for the status quo are generally protectors of privilege and inflated living standards built on a bubble.”

Who are you refering to here? Unions? I have read many of your articles on Finfacts and they are very informative and well researched. But I am a bit concerned about the idea that the govt should completely ignore vested interests. Do we end up with a sort of engineered society like Singapore? This would suit the employers union, IBEC, very nicely. And even if unions are crushed and everyones pay and conditions are brought down, this still forms part of an austerity/deflationary strategy which, according to Krugman, Martin Wolf, and others, will not work.

@James Conran – on the comparison, I have expained it before. If you take data on debt and deficits and compare it across EU countries you will find that our debt and deficit numbers are considerably worse than those of Portugal, Spain and Italy and only better than Greece due to a lower debt level, which however is fast disimproving (our deficit is larger than that of Greece and they do not have a banking sector sucking vast amounts of money into a black hole).

The issue around German debt is not one of not being able to pay the interest but the fact that if there is no deficit moderation now (or the very near future) then the issue of saddling an ever declinging group of workers with a growing debt that will become an intractable problem down the road. The debt to GDP ratio is now over 70% – you cant’t keep on adding to this indefinitely. The other issue is that the kind of defictis that are being run are unconstitutional if they continue. In that context fiscal tightening was always on the cards. The recovery of the economy suggests that less stimulus is needed and hence cuts do no or less harm.

@ zhou_enlai

The point Constantin Gurdgiev was making before an angry David Begg shouted him down, turning the studio into a hornets nest, was that Irelands borrowing has everything to do with bloated salaries of government workers from nurses to garda. The state simply does not have the money to pay them without the assistance of other countries. These countries have their own problems. David’s point was, “that is done and dusted”. He repeated the phrase twice for effect, before saying that “the reason I get so angry” is that the ideologues don’t listen to me. He can spot them.

It is great to be the Union Czar, to be able to come out with such bombastic pronouncements “done and dusted” in the face of double dip recessions, carnage in equity markets, sovereign debt crises, UK one of our biggest markets on the verge of a collapse in its housing market not to mention the imminent loss of another one million jobs as Cameron tries to repair the country after Labour. In the US another 2 million jobs going by year end as state programs are cut across the board, but in Ireland things are done and dusted!

If Mr Begg was prepared to come out of denial for just a minute he would realize that the whole Croke agreement is predicated on the finances of our economy not deteriorating further. How likely is that?

Maybe a more orderly default of countries like Ireland and Greece is what is required? A vista too appalling to be considered?

It may be shabby of academic economists to claim that they knew the govt was running a pro-cyclical policy in 2002-2007. However, it would scare me if claims that they saw the housing crisis coming, and its fallout, were also intellectually shabby. Whatever about Irish academic economists, many people DID see the crisis coming…or even better, described the housing boom itself as a crisis while other people called it a boom.

I was in another country that had a housing boom, am not an economist, and make no claims to be particularly far sighted in these things but many people I knew in Ireland and elsewhere were loudly saying, in 2004 and 2005, that Ireland was already well down a road that would have a very very nasty outcome unless something truly miraculous happened to save the country. The economist magazine, if nothing else, was loud on the topic and the domestic Irish scepticism to the promised “soft landing” indicate that many people considered the situation to have been bad for a long time. David McW was shouting from the rooftops.

People who were outside the country may not have been able to predict exactly what “nasty” would look like for Ireland but there’s little excuse for people who were in Ireland and who were looking at the Irish economy not to have been calling the crisis a crisis in 2004 or maybe 2005 at the very latest.

It was OBVIOUS that there was a huge problem and that there would likely be huge fallout. The positive feedback loop of “people building houses for the people who are coming here to build houses” had been described early, as had the fact that people were taking out mortgages to pay much of the country’s taxes. Neither was sustainable. The end of either was going to be painful. Both were always likely to end at the same time. The implications for the economy and for Ireland’s fiscal situation were obvious too.

As for our current situation, the Irish state doesn’t have the money to buy its way out of trouble, and can’t print it or borrow it. While other countries may have those options, and perhaps we should hope they take those options rather than the austerity road, Ireland doesn’t currently have the ability to decide for anything other than austerity. The problem for the Irish government is that they are doing nothing to encourage private investment to fill in the empty space. The opportunity is there…especially if other countries don’t encourage investment. Even a little diversion from Germany or the UK or the US would transform Ireland’s prospects. Like Aidan and Ernie, I suspect that most owners of capital in Ireland have insufficient imagination to be of any use in rebuilding our future, so perhaps we’d better continue to bet on FDI rather than domestic.

@ Edgar,

It seems that when you are comparing Ireland with others you are looking at private + public debt (since Italy’s public debt/GDP ratio (though not deficit) is still worse than ours, having already been more than 100% pre-crisis.

But when it comes to Germany you look only at public debt. Since Germany has a current account surplus it’s public deficit must correspond to private surpluses, no?

“The recovery of the economy suggests that less stimulus is needed and hence cuts do no or less harm.”

I guess that depends on what economy you’re thinking of. Certainly the German economy looks OK at the moment (though not sure about the banks after reading Wolfgang Munchau yesterday), but the European one emphatically does not. Certainly thinking only about the national economy is not a uniquely German flaw but is it really viable (or wise) to think this way while also vigorously resisting fiscal federalism and more aggressive monetary policy and introducing unilateral fiscal and financial rules, all this within the context of the monetary union?

“which however is fast disimproving”

This really gets my goat! Why can’t professional economists use perfectly good ordinary English words that exist to explain a simple concept instead of silly jargon. “Disimproving!” For god’s sake! What is wrong with “getting worse”? Or deteriorating?

Ditto other nonsensical jargon such as “upside risks”!

@James Conran – if you look at the projections in AMICO which appear to assume that no further money is going to be sunk into the banking black hole and compare 2009 with 2011, you will find that our debt/GDP is projected to disimprove the most while our deficit is projected to be by far the worst in the EU. We might have lot of track left but that is no good if this is a runaway train. The markets will want to see that the breaks have been applied for a while before they ease up on us.

@Garo – I can’t see anything wrong with disimprove, nor do I think it is economics jargon. Sure I could use deteriorate but what is the difference? I prefer to worry about real issues.

@ Garo

Every social group, has its own jargon. Some jargon is fashionable. Professionals use professional terms, mostly for good and necessary reasons, but not always.
Check out the Plain English Campaign for curiosity.

Edgar, you are free to use what you want but the word “disimprove” is jargon and reinforces a Kartik Athreya-esque sense of cliquishness. Deteriorate or worsen are much more widely used alternatives. “Disimprove” on the other hand is almost never used outside the economics profession. I think it is poor English. You know, you could prefer to concentrate on real issues and submit journal papers full of spelling and punctuation errors. But I doubt a good referee will let it through.

BTW, I am a professional too and I deal with and use plenty of jargon but try my best to restrict it to when absolutely necessary. I believe that the unnecessary use of jargon is a crude attempt – intentional or otherwise – to mark out territory and discourage outside scrutiny by making their work less accessible to outsiders. If you want to reach out to the wider community – rather than self-identifying as a card-carrying member of the inner temple – using less jargon would help.

@hugh sheehy

It was obvious to an outsider visiting occasionally that the housing market was going to crash but what wasn’t obvious was that this would coincide with the greatest global crash since the 1930s with the credit markets just seizing up one day in September 2008. Ireland got hit by one of these low frequency high intensity phenomena (a la the Deepwater Horizon) that just washed away whatever protection there was (regulatory capture having done a lot of damage already) and that left the country so exposed to what subsequently transpired. Even in 2008 there was the assumption that things should work themselves over say 2 years. I am not sure there were many who predicted what actually happened. And who has a clue now about what is going to happen ?

“Edgar, you are free to use what you want but the word “disimprove” is jargon and reinforces a Kartik Athreya-esque sense of cliquishness. Deteriorate or worsen are much more widely used alternatives. “Disimprove” on the other hand is almost never used outside the economics profession.”


@ George Orwell

With the exception of the embattled PIGS and the UK, there isn’t what is termed austerity underway in other EU countries.

In the context of ageing populations, France planning to raise the retirement age from 60 to 62 isn’t revolutionary given the big deficit in its pension budget.

The IMF under former French Socialist FM, which led the way in pushing for stimulus spending, now says that getting public finances in order would add to global growth.

As regards vested interests, in my opinion, the professional cartel unions are a much bigger threat to the economy than conventional trade unions.

IBEC represents diverse vested interests, which makes it a eunuch when it comes to reforms and modernisation.

I do regard benchmarking as an actual fraud but its the people who sanctioned payments rather than trade unions should be blamed.

Trade unions have a role in particular in large organisations and given the prevalence of bullying in public education and heath, according to ESRI studies, their role should be acknowledged.

It is unfortunate that despite the illusion of access provided by clientism, it is only collective power that matters in the political process.

So the majority of private sector workers have no pension; most of those who do will be paid peanuts as returns will be low over the next decade or more.

It is a very unjust society, however, in a world where billions of others are aspiring to a similar standard of living, we have to reform or languish.

Today’s Q1 2010 national accounts which show that we can assume we had significant growth in the period by counting in high profits of multinationals. However, these profits have been generated at 1998 job levels while the workforce has increase by more than 400,000 in the interval.

@ seafoid

Ahern, Harney and McCreevy had become national politicians in 1977 when the other period of reckless mismanagement brought misery to many.

Like the Bourbons, they had short memories of that period.

To suggest that a black swan pooed on their parade, is absolute nonsense.

There’s good and bad in the current approach. So many things are outside of our control now. How do we fix the things we can?

@michael hennigan

Did you ever read NCB’s 2020 vision document? Population growth was to drive Ireland’s future and keep everything swimming along nicely. All of the financial players seem to have bought the theory. There was no mention of the fact that the tax base was too narrow , that too much of the tax take was transactional, that the banks were no longer dependent on deposits to fund their loans or that much of the money that propped up the property market was foreign.

Out of all of the current mess could there not at least be some improvement made in the quality of information made public about Ireland’s banks and other financial players including government regarding the sources of profit/income/funding and changes in the same over time. Too much of the cutting edge analysis – eg Ann Pettifor on the global debt crisis- was sidelined. If the data had been more widely available perhaps some of the disaster could have been avoided.

A fantastic programme by NPR’s This American Life about the fiscal crisis in New York state and efforts to combat it. Required context for anyone thinking about the enormous fiscal adjustment that will be happening in the developed world over the next decade. It also includes a fascinating vignette on Barbados’ unique approach to structural adjustment in the 1990s:

@ seafoid

If the data had been more widely available perhaps some of the disaster could have been avoided.


As for the demography dupes, they should have been shipped to the Congo, which celebrated its 50th anniversary of independence/misery today, to field test their fantasies.

It did of course bring comfort to Bertie and one of the cargo cultists was appointed to the board of the Central Bank by Brian Cowen.

I realise that the specific events of late summer and autumn 2008 could not have been predicted in detail. However, the fact remains that there were people who were looking at Ireland, and the Irish banks, and were saying years in advance that the “goings on” were going to end very badly. Also, the collapse in Ireland had started before the credit market seizure started in the rest of the world. Lehman’s & co were only the international straw that broke the camel’s back, not the back-breaking load that was already in place due to domestic lunacy.

As for things like the Deepwater Horizon, one thing you can be sure of is that there’ll be problems in a deepwater offshore well somewhere eventually. If you have no back up plan in place you’ll have problems.

Ireland got itself into very deep water all by itself. There was no back up plan. In this case, what’s obvious with hindsight was also fairly obvious during. Ireland and Spain, in Europe at least, were long tagged as dangerous.

We are where we are. This constant rumination on the past is futile. (honestly it is!). We are making a grave mistake now too by not exploiting the opportunity in the current situation.

I disagree entirely.

Looking at experience is a really good way of learning. What’s the old phrase..”We learn from our mistakes”?

The problem in this context is the difficulty of forcing people to look at what happened, and who did what, and who’s to blame. Without looking there can be no learning and no memory, and many people in Ireland are uncomfortable looking at the recent past.

More practically, the solutions to the problems we face may only be implementable if we confront and learn from the reality of what went on.

Meantime, we’re still on a small wet island in the middle of the Atlantic whose main natural assets are rain, grass, wind, waves and people. Our economic solutions have to deal with the facts of physical geography too. Ireland’s opportunity is to address reality. “The facts are our friends”. If we deal with reality faster and quicker than other countries we have an opportunity. It may well still be a few painful years, but ignoring reality has a nasty habit of quickly becoming even more painful for even longer.

@Hugh Sheehy

“However, the fact remains that there were people who were looking at Ireland, and the Irish banks, and were saying years in advance that the “goings on” were going to end very badly.”

I don’t recall hearing anybody say that their advisers or brokers in Davys or Bloxhams or Goodbody warned them of the problem. I don’t recall anybody saying their mortgage and pension advisers had warned them either.

There is a massive problem with the principal-agent relationship which people understood a year ago but which people are beginning to forget as they get back to their favourite pass-time of attacking politicians.

We would do well to remember the complexities involved in this. I think we should consider having a Minister for European Finance considering how important it is to us that the EU takes the right approach at this time.

My initial analysis of our position two years ago was that our first priority was to tread water until the global position stabilised and thereafter improved. Unfortunately that has not happened. National debate needs to broaden its focus and start looking at things on an EU and global level.

I don’t know what Davy’s or Bloxham or Goodbody were saying. I wasn’t talking to brokers or finance people in Ireland, but people in London and New York and others….and no, it wasn’t consensus that the Irish banks and economy were going down but it was certainly a non uncommon opinion. Perhaps Bloxham/Goodbody/Davy were too close to the Irish scene to take a proper view. I’ve never paid attention to them so I can’t say.

In any case I did some work in early 2006, ultimately for a major European finance house, about a potential investment in a European country that’s facing similar problems to Ireland. The property and banking related risks to the economy and to their target investment area featured in the intro. By that stage it was fairly obvious that the banks were up to the hilt, that the economy and both local and national finances were hugely dependent on construction, that financial companies were extending as much credit as humanly possible, and that any disturbance to financial stability would cause huge problems.

The disturbance that seemed more likely then was a rise in general interest rates causing the credit dependency of the economy to become unsustainable (Euribor was cranking upwards at the time), but the risk was seen as very real and the economy seen as vulnerable.

What happened by late ’08 was an increasing difficulty in getting credit at any interest rate and the crisis was fully realized.

Now if I’d had any cop on I’d have been figuring out how to short Irish banks and construction companies (Spanish too, potentially some others), and been retired by now, but I didn’t. We talked about it but didn’t do it. More fool me.

@ Hugh
Sometimes I don’t know what I mean. I guess the end point has to be improving our futures. I think we have identified the problems. Now we must remove them.
That means being shrewd more than angry. Think the ward union rather than the miners union.

The perceived merits of the austerity course of action should always be tested against the dangers identified by Keynes in his description of Ricardian economics:

“The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.”


I don’t buy this narrative of a coterie of brahmins who knew that the economy was a doomsday machine and said and did nothing while the rest of the herd was oblivious. It’s similar to the case now. Ireland runs the risk of default but looking at bond yields it is not a certainty. Who can say with certainty what will happen ?

“As for things like the Deepwater Horizon, one thing you can be sure of is that there’ll be problems in a deepwater offshore well somewhere eventually. If you have no back up plan in place you’ll have problems.”

This from the university of hindsight. BP made no provision for a remote shutdown system in case of an accident- obligatory in Norway but optional in light touch regulated US. BP also didn’t bother drilling a relief well at the time of drilling the first well. In April the great Obama himself said “oil rigs today don’t cause spills. they are technologically very advanced”.

How do you quantify the risk of a deepwater disaster or a banking collapse ? Just wait for the brahmins to opine ?

Is history about to repeat itself? NAMA seems have shifted its initial optimistic forecasts to something decidedly more negative according to the Emmet Oliver in the
Irish Independent
. If the new NAMA business plan is as reported, what are the consequences for austerity measures, growth and indeed national insolvency? I know anecdotal evidence doesn’t count for much in academic debate, but I travel quite a bit in ‘old’ Europe and based on business connections, the situation in Ireland seems particularly dire for SMEs.

A simple yes or no question.
Who thinks the current government approach is working?

true – but you know what I mean
I’d answer no (to the question I meant to ask)

Your original question is too general and could – correctly – get a “Yes and No” answer at the moment. That hardly helps you. Perhaps, while you reformulate your question, I could use a mathematical term to describe the government’s approach at the moment. “Necessary, but not sufficient”.

As for seafoid’s “coterie of brahmins” who said nothing, I never mentioned any such thing and that terminology seems unnecessarily emotive. The folks I knew were not in charge of anything, not banks or countries. They were just people investing money, or deciding whether or not to invest money, and who looked at economies and companies with fear and greed and everything in between – but they looked and they paid attention to what they saw and they talked about it openly. They talked, but perhaps not too many people listened.

On the BP case, I’m afraid it doesn’t require hindsight – or rather there was already plenty of available hindsight – to know that deepwater drilling is difficult, or that there are significant risks, or that it’ll be a godawful mess if something does go wrong.

Although it’s a specific case, the Lapindo case shows that onland drilling can go badly wrong too and Youtube has several blowout videos. However, you mention the practice of drilling a relief well in parallel to a first deepwater well. That sounds like an odd plan. Can you tell me where they do that?

oh…here’s a lovely couple of examples of the kind of thing that Irish newspapers were still printing in ’07 and ’08….times when the battle cry from the holy grail was probably more appropriate.

“Bottoming out – so it’s time to spend” – March ’08 ––so-its-time–to-spend-1332198.html

“Property market’s no house of cards” – December ’07-’s the battle cry quote..i realise that the reference might not be obvious.

As someone who has just finished their undergrad I wish to contribute the following to the debate. Forgive me if I have made any egregious errors.

It seems that past Irish governments (in the 1980s) have had mixed records when adopting expansionary fiscal contractions. The success of the expansionary fiscal contraction in the late 1980s can perhaps be partly attributed to falling interest rates and rising house prices. I do not doubt the effectiveness of expansionary fiscal contractions, in fact, I think that they are suitable policies in certain situations but I am slightly worried about the austerity measures which the Irish people have reacted to rather stoically.

I think I may be right in saying that the success of the current policies in Ireland – cutting spending and raising taxes – shall be governed by confidence & expectations. Remember the point about the late 1980s: house prices were on the rise. This time around, the situation is not only different but very different! The extent of the recent decline in house prices has been immense. The problem here – I believe – is that this negative wealth effect could have profound effects on peoples behaviour, not only in terms of consumption & investment but also their expectations about how they will have to behave in the future. Surely they will be more cautious.

Perhaps the best way to explain this is idea is to compare the behaviour of home-owners (and those who invested in real estate/construction etc) in Ireland today to the behaviour of traders following the 1987 crash. I’m basically talking about the volatility smile/skew.

Ireland has been heralded for being the first to impose austerity measures but if counter-cyclical policies had been implemented with the same quickness maybe Ireland would have been given the same credibility for that too. i.e. did the markets ‘reward’ (if you can say that) Ireland for being the first mover or was it for adopting what are thought to be the best policies? Who is more informed, policy-makers or market participants? This really reminds me of what Roosevelt said in 1937: “I know nothing of economics and nobody else does either!”. It is like Ireland was the first sheep to jump the fence and the markets gave reward just for that. Of course, if Ireland (and other EU countries) had adopted expansionary policies (like the U.S.) and the rigidity of the Maastricht treaty 3%/60% rules had been questioned multilaterally and deemed too strict, time could have been bought to run a deficit in the short run. In the meantime, governments could have pledged to committing to adjusting their fiscal balances over the long run. (Didn’t Rogoff mention a 90% threshold anyway?)

It is probably important to note that, if the policy-makers react to pleasing market participants then effectively market participants are the policy-makers, right? If so, has there been a failure somewhere along the line? Can this really persist?

I’ll wrap this up. The decline in house prices should have long lasting effects on peoples behaviour – like the volatility smile – therefore the expansionary fiscal contraction (which weighs heavily on expectations & confidence) will be less effective than a stimulus involving increased spending & decreased taxes and direct job creation (something like the public works proposed by Keynes in the 1930s).

Lets recall what Keynes said in 1933. He warned about trying to balance the budget at the bottom of a slump stating that: “You will never balance the Budget through measures which reduce national income… look after the unemployment, and the Budget will look after itself”.

Although I can only wonder whether the Wikipedia data is accurate,it shows that the US debt in 1933 was “only” 40% of GDP. Today it’s a lot higher, with a forecast of hitting 100% of GDP in 2012. The peak was immediately after WWII, at ~120%.

Ability to finance a stimulus – particularly at the massive scale potentially required today – is limited by today’s already bad cumulative fiscal situation. Unless the US manages to welch on one set of debt while almost certainly needing to issue another set there may not be too many alternatives to austerity. It’s awkward and Keynes might be saying different things if he was alive today.

Probably one of the worst things we can probably do is to be uncertain either way. If we pursue austerity then we need to do it properly and actually convince the remaining money that the decline is over and that there are investment and spending monies out there. If we are to pursue inflation then we need to do it fast and nasty and get it over with. If you pursue inflation you screw the prudent and may have longer term bad effects than if you pursue austerity and screw both the imprudent and the merely unlucky.

Either way you need to move the loss of wealth into the past as quickly as possible so that people can work on the future. If we prevaricate then the loss of wealth just continues for longer and has worse effects no matter which way you go.

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