Is Ireland’s Fiscal Adjustment Failing?

Paul Krugman has an interesting column in Sunday’s New York Times; it is also appears in the Business section of today’s Irish Times.   There is much that I agree with in the article regarding the boarder European crisis resolution response.   But I think his comments on Ireland’s adjustment policies are off the mark.   Paul complains about Ireland being used as a misleading data point in the international debate.   I think Paul is himself guilty on this score. 

Here’s what he says about Ireland:

What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills?

One answer is that the confidence fairy doesn’t exist – that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper. Moreover, there seems to be little if any gain in return for the pain.

Consider the case of Ireland, which has been a good soldier in this crisis, imposing ever-harsher austerity in an attempt to win back the favour of the bond markets. According to the prevailing orthodoxy, this should work. In fact, the will to believe is so strong that members of Europe’s policy elite keep proclaiming that Irish austerity has indeed worked; that the Irish economy has begun to recover.

But it hasn’t. And although you’d never know it from much of the press coverage, Irish borrowing costs remain much higher than those of Spain or Italy, let alone Germany.

A number of responses:

1.   As far as I can see, those involved in the design of Ireland’s adjustment programme do not believe in the “confidence fairy”.   It has been explicitly recognised that fiscal adjustment slows the economy.   The programme has been designed in order to balance the need put Ireland on a fiscal path consistent with debt sustainability and regaining the country’s creditworthiness, while securing needed official lender support, and minimising the adverse effects on the real economy through a official-lender supported phased adjustment approach.

2.  Ireland’s growth performance has been disappointing.   But the causes of the poor performance go well beyond the effects of fiscal austerity.   The weight of impaired balance sheets in a post-bubble and a weak international environment are also major drags on growth.   Of course, Paul is far too good an economist not to realise this.  

3.  It would be true that Ireland’s adjustment effort is failing if the fiscal measures were directly self defeating in terms of improving the underlying fiscal situation.   There are a number of relevant measures: Are the fiscal adjustments leading to an improvement in the underlying primary deficit?   Are these adjustments improving the underlying path of the debt to GDP ratio and putting Ireland on a path to debt to GDP ratio stabilisation?   And are these adjustments helping to restore Ireland’s creditworthiness? 

On the underlying primary deficit, the number has come down from 9.7 percent in 2009 to 6.0 percent in 2011, with a projected further fall to 4.2 percent in 2012. 

On the debt to GDP ratio, the calculation is more complex because we have to see how adjustments affect the path of the ratio.   For plausible multipliers, it is certainly possible that the debt to GDP ratio rises in the year of adjustment due to a strong adverse effect on the denominator.    For example, using an automatic stabiliser coefficient 0.4 – a key parameter in determining the possibility of self-defeating adjustment – simulations show the debt to GDP ratio would rise this year as a result of a (permanent) additional €1 billion of adjustment with a deficit multiplier of 1.  However, this ignores the positive effect on the future debt ratio of lowering the nominal primary deficit this year, which will lower the nominal debt and thus interest payments in the future.   Simulations show that the multiplier would have to be as large as 3.8 – completely implausible for a small open economy – for the debt to GDP ratio to be actually higher in 2015, all else equal. 

On creditworthiness, the impressive recent work of Delong and Summers introduces the possibly adverse effect of “hysteresis” on creditworthiness.   (The effect here refers to the fiscal shadow cast by lower output today due to persistent effects on output.)    This is harder to get an empirical handle on due to the difficultly in observing these effects.   However, notwithstanding the fact that Ireland’s bond yields are above those in the Germany or even Spain, the improvement in Ireland’s market creditworthiness has been dramatic since last summer as Ireland’s adjustment programme has gained credibility.   (The evolution of Ireland’s 2-year bond is shown here; the 9-year yield here.)  This has occurred despite increasing evidence of the damage done to the economy by the bubble, despite the euro zone crisis remaining in flux and despite the clamour to abandon the adjustment programme and default. 

The success of Ireland’s adjustment programme is too important for it to be used as misleading fodder in a debate over appropriate fiscal policies for creditworthy countries.

71 replies on “Is Ireland’s Fiscal Adjustment Failing?”

John: Paul Krugman didn’t start this. The Austerians did: they are the ones who pointed to us as being a wonderful success story, and a model for others to follow. Is he supposed to leave their claims unchallenged?


Perhaps not, but I would expect more balance — hard I know in 800 words.

Hi John,

I wonder about your point no.1: you seem to be defending Irish decisions whereas I read Krugman as criticizing European ones. So for example, you list “securing needed official lender support” as one of the goals of adjustment, but obviously that’s an Irish goal, not one of the goals of the official lenders themselves! The fact that it might make sense for Ireland to do something in order to secure official lending doesn’t necessarily mean it makes sense for those official lenders to insist upon Ireland doing that thing.

Relatedly, you say that “those involved in the design of Ireland’s adjustment programme do not believe in the “confidence fairy” – this would either mean Jean Claude Trichet, to take one example, either was not so involved or did not believe in the confidence fairy. The latter would seem to have been implied in his public statements, but again maybe you’re thinking mainly of Irish decision-makers, whereas Krugman is mainly critiquing European ones.

The rest of your post argues that austerity while killing growth may still be helping fiscally, thus in the long run helping growth, i.e. Ireland may not be in DeLong Summers territory.

Fair enough, but I think Krugman’s main point is the anti-confidence fairy one about austerity deepening the depression. In this respect your criterion for the success/failure of Ireland’s adjustment programme seems narrow, no?! Again, maybe the difference is that you are defending “Ireland’s adjustment programme”, taking certain parameters as fixed, whereas Krugman is more concerned with “Europe’s adjustment programme”, whereing those fixed parameters are chosen?

The “success” so far is to save a stock of debt over and above people and the remaining bits of the rational pre 1987 fixed capital.

We at least now have the advantage of a clear non bullshit view of where European priorities lie.
And for that I and many others are truely thankfull.

While I agree with much of what you say, a balanced response to Krugman would recognise the truth of his principal assertion that the Irish economy is not in fact recovering as of yet. We are still bumping along the bottom, and should not be taken as the poster child for anything.

Or to put it more strongly … even with our government borrowing hand-over-fist to pump money into the economy, it is still bumping along the bottom.

Most foreign commentary on Ireland take misleading headline data at face value and in 2000, Antoin Murphy in a paper took Krugman to task for buying the yarn of an Irish productivity miracle.

I assume that Krugman these days doesn’t spend too much time on the Irish issue.

The export data since the crash, aided by official spinning, is also regularly misinterpreted.

As for bond yields, the reference to bund yields is odd because, no matter how the bailout program is progressing, yields of countries like Ireland are not going to replicate the trend around the time of the euro launch.

I think John makes an important point. The “austerity isn’t working” argument that appears to be everywhere at the moment is a complete misnomer. The goal of austerity is to reduce budget deficits. People who have any sense (admittedly a smaller group than I would have thought a few years ago) know that this will reduce growth, in the short-run at least, but accept this consequence for whatever reasons (usually lack of market finance). If our primary deficit, and/or debt to GDP ratio, is declining then austerity is doing what it is supposed to. Sure, this raises important questions to debate about growth, employment and equality but improving these is not the aim of austerity.

Instead of debating real issues, the “austerity isn’t working” group are just throwing around another meaningless phrase.

Further to Kevin O’Rourke’s point: not only did the austerians start this fight, it’s very much in Ireland’s interest that they are defeated. Ireland’s best hope is that growth in our export markets will pull us out of the slump. That’s not going to happen if the hairshirt crowd get there way, as they have in the Netherlands; Simon Wren-Lewis comments eloquently about that:

Is there any way Prof. Krugman (and his progressive-liberal Nobel-laureated ilk) could be encouraged to desist from sounding off about the Irish economy until they have studied the imbalances, dysfunction, inefficiencies and deadweight costs in the domestic, sheltered economy? They are simply providing comfort and support for the ‘raid, tax and spend’ brigade.


Success of Ireland’s adjustment programme you say??? Ah yes:

oh and this:

Long-term unemployment accounted for 60.3% of total
unemployment in Q4 2011 compared with 51.5% a year earlier and 33.3%
in the fourth quarter of 2009.

In Q4 2011 this negative demographic effect contributed 16,200 to the overall decline in the labour force. This negative demographic effect is almost exclusively concentrated in the 20-24 and 25-34 age groups….heading off to Oz and Canada so…..

I dont mean to offend but its a pity that those involved in the design of Ireland’s adjustment programme and sitting in the ivory towers of our illustrious institutions calculating projected falls in debt/gdp ratios do not see the real effects of Ireland’s “success stories”. I recognize that particular economists have built whole careers out of signing up to a macro viewpoint and to suddenly turn on this viewpoint (i.e. expansionary fiscal contraction) and put the hands up in front of peer and say “listen, maybe we’re wrong” would be….shall we say slightly embarrassing.

But the debacle of Ireland’s adjustment programme, which has lead to real social destruction through long-term unemployment and emigration is too important to save the face some of Ireland’s dismal science elites.

@ Kevin Donoghue

It’s the indigenous private sector that has taken brunt of austerity, and this is the sector where new value added exports would be made from. As I said elsewhere, much if the rise in MNC exports have been ‘manufactured.’

The public pay and pensions bill is above the level in 2006 – the peak year of the boom – hardly a signal of hairshirts.

Paul Krugman characterizes Ireland as a country that is imposing ‘ever harsher austerity’ on its citizens. He ignores the fact that our ‘austerity’ still allows us to run a public sector deficit of over 10 per cent of GDP and to pay public sector wages, welfare benefits and pensions that are well above the EU (or US) average.

@Paul Hunt,
Krugman has mentioned that he reads this blog, so all you have to do is persuade the management to devote more space to these topics. Have you tried nagging them incessantly in thread after thread? That might work.

@ Steve

I have asked this question several times but I have never got a satisfactory answer:

How does a country that cannot pay its day to day running costs without funding from either foreign private on public lenders, insist on no conditions?

(of course there are alternatives but hardly no consequences and who again would be in the firing line?)

As a general thing I’m sympathetic to critics of economic orthodoxy, but please be fair. No currently-active Irish economist, that I know of, is a taker for the “expansionary fiscal contraction” guff. Several of the regular posters here have explicitly repudiated it.

I’m a simple soul. By 2007 on foot of the bubble we had far too high public pay, pensions and social protection and we had far too low of a conventional tax take.

The bubble burst and we were left with a massive fiscal deficit. To me that has to be reduced and in the course of doing so we will of course, other things being equal, have a dampening effect on a GDP which was artificially bloated in the first place.

The idea that by pressing a few Keynsian multiplier buttons we can sustain and grow GDP and restore fiscal balance just seems so unreal. The proof that of that is that we found ourselves unable to fund the deficit in the open market.

Of course the real challenge is to manage the fiscal consolidation in a way that does least damage to GDP and gives most scope for other factors such as increased competitiveness, structural reforms, and international growth in demand to counter the contractionary effects of the consolidation. Morgan Kelly’s prescription of immediately balancing the books would, as Enda point out, be a lethal injection to the economy.

@Peter & Dan
You ignore that defecits for public pay ,dole etc provide what little medium of exchange is available for domestic commerce , domestic debt repayment etc.

This is a simple money as a medium of exchange argument that is not very complicated.
Irelands futile efforts are not to save the economy or any such nonsense , it is to save a pet project , indeed the core project of the monied elite – the market state nightmare.

You don’t crush domestic demand like this to save a economy ? – how absurd ……
This is not austerity with respect to increasing the input / output or debt to GDP ratio or anything like it.
Debts must always grow in a debt based economy….. otherwise the debt cannot be repaid.
If the bank credit debt was / is a waste you destroy or monetize it in some fashion.
End of story

Interesting article. Paul Krugman had some exchanges with Professor Steve Keen recently regarding the money creation process and how every unit of currency has a corresponding debt etc.

Perhaps Krugman is slowly coming the opinion that a source of debt-free digital money is required to replace the role of cash in other recessions.


I, along with many people have asked this question several times, but we have never got a satisfactory answer?

How does a country the size of Ireland that has seen its debt/GDP ratio quadruple in the space of 3 years pay back this debt in a satisfactory manner without breaking the social fabric of a society? Simple answer: it cant, you/me/the dog on the street knows it. More importantly, private lending institutions know it – hence our bond yields.

If the whole purpose of our programme is to get us back to credibility and lending from the markets then its failed. Our bonds have come down but pointing out that they decreased doesn’t take away from the fact that the primary purpose of the programme has failed. Apparently we still need a second bailout in a couple of months. You wont hear Ferguson arguing on Saturday that his purpose in the league is to end up on the same points as City but with less of a goal difference. He will have failed – simple as and he will admit it.

Meanwhile our successful programme is breaking Irish social cohesion,i.e. mortgage wars, long-term unemployment, emigration etc.

Getting back to answering your question, as Krugam points out the answer is in a simple bit of German enlightenment concerning Eurozone imbalances. I have no problem with balancing books, but now is not the right time. I have previously noted on this blog that I am complete Europhile. If there was a vote in the morning to put the DoF in Brussels resulting in the centralisation of European debt I would be out campaigning for a Yes Vote. The answer is deep European integration, a centralisation of European fiscal and budgetary policy/debt, a growth strategy in education, health and sciences, ECB policies to push up inflation of the core and bank debt cancellation/longterm extension.

@Kevin Donoghue,

Thanks for the suggestion. I hand’t thought of that. Do you think it might work?

You are fan of distant Spires then ?
Never been to Rome – have you ……

Why is a co-efficient of 0.4 is being used? The DoF’s own estimate is 0.6

‘But the causes of the poor performance go well beyond the effects of fiscal austerity. The weight of impaired balance sheets in a post-bubble and a weak international environment are also major drags on growth. Of course, Paul is far too good an economist not to realise this.’

Of course he is, so why mention it? Perhaps Krugman, like many other critics, had already taken account of this when arguing that ‘austerity’ would lead to contraction. Both advocatesand critics of ‘austerity’ knew about the severe impairment of balance sheets at the time. Fiscal contraction led, as all its critics said it would, to contraction.

Re Krugman ” One answer – an answer that makes more sense than almost anyone in Europe is willing to admit – would be to break up the euro.

Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its Irish pound, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation. ”

Simply the strategy of bailing out the financial services and banking industry across the EMU has not worked. Why would it work? The European banking system was the engine of disparities between the core and the periphery and fixing it fixed a relationship that should have been broken up, not restored.

The ‘Compact’ institutionalises these inherent disparities rendering them more severe than before

What should have been fixed, was not. Euro bonds, fiscal transfers, German inflation spurs, low rate EFSF/ESM bonds used to monetize and crucially wipe out odious debt, have been rejected. Germany knows any of these methods can begin a game of ‘pass the debt can’ with Germany holding the can. There are also deep political and economic structural differences the members of the EMU that cannot be provided for in a one suit fits all approach.

This has not stopped the ECB and the EU trying a one suit fits all approach based on austerity. When this approach is examined carefully and meticulously, its found that Emperor ECB FC has no clothes on. The emperor is wielding a big stick and wants powers that are undemocratic. Other delusionary thinking and magic statements re ‘growth’ are found wanting.

The ECB emperor wants to play in the game of financial services, world currency and local currency manipulation. Already in the business of purchasing Spanish, Italian and perhaps Irish bonds, it wants to control the world of finance and economics and have the euro play a large role.

In order to do so, it has resorted to copying the magic of central banks eg BOJ below. BOJ fresh from purchasing indirectly through its banking system, sovereign debt, now openly operate in the purchase of ETF Exchange Traded Funds and other equity products.

Re “evolution of Ireland’s 2-year bond” …that would have nothing to do with the current bailout morphing into bailout 2 or intervention in markets by ECB banks?

The European financial system is poorly designed. The ‘Compact’ is a disastrous response to its problems that bring its demise closer.

The trouble with it is that the worst excesses of loose credit and a deregulated global banking system now openly manipulating financial products is being allowed to extend its tentacles into the manipulation of real markets. The global debt bubble fed by the ECB and other central banks under floating currency exchange rates threatens to consume all into its magical spell of smoke and mirrors.

In Ireland, NAMA and upward only rent reviews on Grafton Street are suffocating business to provide finance for usorious debt based economics, to give one example.

A virtual world built on debt and debt issuance extortion is no longer serving the needs of people. Instead, its become a means to profiteering led by a small banking cartel holding the European Union and countries like Ireland to ransom under threat of blackmail.

We need a better designed and fairer global monetary system serving people rather than the profit of a small number of unelected and private banking interests. Unfortunately, the EU has been manipulated and is held to ransom by this global banking cartel. Hopefully Hollande can resist compliance and say No.

For some reason all I can picture is Prof Krugman dressed as Dr McCoy from Star Trek announcing exasperatedly that he is an economist, not an accountant.

There is nothing even remotely controversial in this column, Krugman does not even mention the role of the bank bailout in Ireland. Nothing to see here.

The column is more of interest to Ireland because the position that Paul is attacking (austerity inevitably leads to investor confidence inevitably leads to economic recovery) is the one used to justify the policies enforced on the periphery when other metrics (unemployment, GNP, emigration, suicide rates….) seem to indicate that despite all the cuts made and the gallant fighting of the ECB against inflation the war against debt has developed not necessarily to Europes’s advantage. Paul Krugman is on our side.

@Brian Woods II

The idea that by pressing a few Keynsian multiplier buttons we can sustain and grow GDP and restore fiscal balance just seems so unreal. The proof that of that is that we found ourselves unable to fund the deficit in the open market.

Why that idea is absurd, which is why nobody said it – particularly not Paul Krugman.

@James Conran

+1 Lovely post.

@Paul Hunt,
Snark aside, Krugman has frequently responded to people who invoke “imbalances, dysfunction, inefficiencies and deadweight costs” as explanations for economic downturns. Basically his reply is, if the economy is such a crock, how come it was lauded to the skies just a few years ago? He made this point about the Asian crisis in the 1990s and it applies equally well to Ireland today. You can’t explain a cyclical slump by pointing to long-standing problems of crony capitalism or whatever. To explain variation you need variables, not constants.

If US and EU aggregate demand had been maintained at a decent level over the last few years, Portugal, Ireland and Spain wouldn’t be in anything like the mess they are now. If you have a prescription for curing imbalances, dysfunction etc., by all means do so, but don’t blame Keynesians for the fact that they are concerned with a different malady.


I think you misunderstand what economists do. And Paul Krugman is one of the best. If he was just a columist, I could imagine him responding tha that he is a columist and not an economist. But not so.

@James Conran

Yes, indeed, thank you for the thoughtful post. I hope I made it clear that I agree with a great deal of Paul’s analysis of the broader European dimension, both in terms of the aggregate fiscal stance — Kevin O’Donoghue makes a good point above on the excessively tight Dutch programme — and also on the need for a more stimulative monetary policy. What I object to is the misrepresentation of the Irish case, even if it has also been misrepresented in a different direction by others.

I may be misintrepreting you, but I do not agree that the parameters laid down by the official funders on the Irish adjustment are wrong. Given the fragility of our debt sustainability and challenges in restoring market creditworthiness, I don’t see that we had scope for a much slower adjustment, unless we wished to be a long-term (vulnerable) ward of the international community.

Give up with the Keynesian fetishes please.
This is a Fisher like debt deflation.
Because of the strange monetarist / Samuelson Keynesian world we have has the displeasure to live through – natural resourses are shot to hell and the real world enginners needed to counter this are mostly retired or dead.

As for Krugman, did he not call for a credit housing boom once upon a time.
Why did he not call for a simple wage rise back then ?

This is sad propoganda.
1950s UK for example was in a much better position then it is now.
Its people could split atoms and the North Seabed remained untouched apart from some Cod scrappers.

We have very few Boffins to get us out of this mess – the IMF hit men retired the lot.

@ All

I think that John McHale is to be complimented for his efforts to put a stop to Krugman’s gallop as far as Ireland is concerned (whatever about the latter’s views on wider European issues which, in my view, are no less inaccurate).

However, the debate seems curiously divorced from reaity. High noon is looming with Greece. On the other hand, Van Rompuy, as might have been anticipated, has announced a special meeting of the European Council for 23 May (on Twitter!).

Given the timing of the Irish referendum and the French legislative elections, one may safely assume that a “growth compact” will duly emerge. This will be helpful especially to Ireland as “bumping along the bottom” is quite an achievement compared to the situation of Spain, Portugal and, of course, Greece.

@ All

On the subject of the “growth pact”, the various bits and pieces that it will include as regards spending from EU funds will be of little significance compared to the “structural measures” that are necessary. The key country that needs to change is, of course, France. The likelihood that this will happen in the short term remains remote. Hugn Carnegy of the FT has the details.

Philip Stephens of the same paper has the appropriate advice for Cameron.

Did I hear this right.?

It was reported on RTE the European authorties want to use collective european money to bail out insolvent banks.
At least they have the honesty to make this a official policey but ……
It goes against Central Bank precedent does it not ?

Ok article 123 was broken already…. the part dealing with not lending to Insolvent banks although of course not with the part dealing with mere money production without interest…… pounds of flesh come to mind.

Where is the division between the treasury and the banks if we all use the same money ?
This is much worse then the 19th centruy free banks as at least they did not use the coin of the realm.

There is a real danger that the bankers will use this crisis for a further centralisation of their power base – its hard to imagine I know …..but at least if we had a finance minister with balls he could have stopped the worst of the Anglo debacle.
Now even this money power will be taken from our hands it seems.

They will not even need our permission………..
Truly extraordinary.

I have said this for some time now – but the aim of the European project is for the bankers to gain control of the printing press itself – this was always a exchequers role.

@Michael Hennigan

“It’s the indigenous private sector that has taken brunt of austerity”

I couldn’t agree more.

@ JMc

“And Paul Krugman is one of the best. If he was just a columist, I could imagine him responding tha that he is a columist and not an economist.”

Mr Brazel has a dedicated following on this platform. But even Mr Bond would deny that he is a columist. And Krugman is probably no more than a lurker.

Sovereign bond markets look at financial system dumping on the Irish Citizenry and shudder ….

Kiel Insitute for World Econonmy recently noted that IReland needs a write-down of >€50 billion in order to achieve some realistic and pragmatic hope of debt sustainability.

Fiscal we can manage – the equivalent of €1.5 Trillion for Germany we cannot. Simple enough …

Suppose the EU does agree to a growth fest. How will that apply to bailout countries? Won’t the troika collectively have to agree, and that might entail shifts in repayment schedules. Ireland could still end up outside the blanket, along with Greece and Portugal.

@ MH

Just something I noticed about the finfacts site
the offer is for ” a period time of 12 months”
I would just say “a period of 12 months” or “one full year” or something like that
25 “for 12 month period”
I think it would be better to say “for 12 months ”

Keep up the good work.



A myth is a myth – no matter how often it is repeated and whomever repeats it – this socialised European/US et. al. financial sector debt is fiscally unsustainable by the Irish Domestic Economy (GNP).

@ Brian Woods 4.54pm

If you had said GNP rather than GDP you might have made more sense to me – as an Ordinary Man. 😉

@ John McHale

Fair play to you for your openness.

‘However, notwithstanding the fact that Ireland’s bond yields are above those in the Germany or even Spain, the improvement in Ireland’s market creditworthiness has been dramatic since last summer as Ireland’s adjustment programme has gained credibility’

One could equally say that even LTRO didn’t succeed in getting Irish yields down to a sustainable level. Capital still flowing out, reforms are not happening, and the private sector has to deleverage, so how can PS spending cuts lead to anything except debt deflation and emigration ?

@John McHale

I cannot agree with your confident assertion that Ireland’s adjustment program is a success. There may be some figures on the pages that are working out as the document prescribed but success is not a word I would be comfortable with.

The reality is that the adjustment program, in its objectives and design, has decided who the winners and losers would be.

The international financiers, the Croke Park beneficiaries, bank staff, politicians and wider PS have been studiously protected.
Private sector employees, particularly building sector employees, small business owners and other have been thrown to the wolves.

Seen from where I work in the economy, no ‘success’ is visible.
The deficit could have been closed much more rapidly with much less of a negative effect on the economy. I suspect that all decision makers know this. A different route to ‘success’ was chosen.

There is huge difference between the success or failure of the programme for fiscal adjustment and the longer-term success of the economy.

In answering the simple and narrow question
“Is Ireland’s Fiscal Adjustment Failing?”
I would have to say Yes, the adjustment is at least partially working in that cheap loans from the EFSF are enabling a gradual reduction in the deficit.

However, will the fiscal adjustment deliver any of the following:
– sovereign creditworthiness
– a real reduction in the indebtedness of households
– the repair of the banking system
– a meaningful return to growth in the domestic real economy
– an increase in structural employment

The answer to this has to be No.

Regarding creditworthiness and the remarks of John McHale, the Irish sovereign debt market is basically dysfunctional with an absence of liquidity so I’m not sure that we can read anything into bond yields. However, it is impossible to believe that our bond yields will approach sustainable levels at auction, when, even after the a successful adjustment programme, we will have higher government debt to GNP and way higher household debt to GNP than Italy or Spain.

The only way to achieve creditworthiness is by a reduction in goverment debt to GNP. The most painless route would be a large write-down in the NPV of the promissory notes (ca. 50%). In addition, we will need growth and inflation in the core economies fully supported by the ECB.

If we do not get movement along these lines then we will have to leave the Euro – its as simple as that. Pretending that we can get our debt down to 60% of GDP by relying on fantasy growth of about 4.5% starting in 2015 is just mindless.

I meant “restructuring of” instead of “reduction in” in
“The only way to achieve creditworthiness is by a reduction in goverment debt”

(Warning!!! more than a hint of what has laterly termed “abuse” in that discussion)


“Davy chief economist, Rossa White, comments: Irish Budget 2010: strong Budget tackles public spending and limits structural deficit – – “The Irish government introduced a €4bn fiscal consolidation for 2010. It will reduce the deficit from 13.5% of GDP, if no action had been taken, to 11.6% in 2010, based on the government’s estimates. We expect the deficit to come in lower than that ultimately as the economy stabilises. The estimated deficit for 2009 is 11.7% of GDP. The plan consists of difficult spending cuts of €4bn; taxes were not raised. The decisive and brave action taken is likely to be well received by overseas observers.

Expenditure reductions focused on the public pay bill, social welfare and other non-pay cost reductions in government programmes. Excluding the tax loss from spending cuts, the net consolidation is €3.2bn or 2% of GDP. Capital spending was also reduced by almost €1bn, or 0.6% of GDP, but that had been flagged in April 2009. Falling tender prices mean that government investment will not drop in real terms and Ireland’s spending on infrastructure remains above the European average.

Net tax increases amount to €17m, or as close to zero as makes no difference. Crucially, income tax was left unchanged. That is vital, as rising marginal rates of tax in previous Budgets threatened investment in Ireland. Moreover, the government reiterated its commitment to retaining the 12.5% corporation tax rate indefinitely. Absent tax hikes, this may turn out to be an expansionary fiscal consolidation as consumer saving begins to ease (the Ricardian effects may override the initial deflationary impulse of spending cuts).

Note that the government has slashed its unemployment forecast to 13.2% on average in 2010; it is now in line with ours which has been well below consensus in recent months.”

Davy Budget Report”

Jeffrey Sachs & some politician

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The financial models underpinning the two camps differ. Self-described Keynesians, including Paul Krugman, and Lords Layard and Skidelsky, see the financial markets as benignly ready to finance budget deficits, pointing to low market interest rates. By contrast, we believe financial markets are perfectly capable of getting spooked about the prospects of debt financing in the medium term. The dire market reactions to Greece may have a touch of panic to them, but are nonetheless having severe effects on the Greek economy.

The general notion that delay is beneficial in the short term because it provokes more spending today – irrespective of future debt burdens – is also wrong, in theory and in practice. If the starting position is a large structural deficit, further fiscal “stimulus” can darken consumer and business confidence by creating fears about future debt burdens. These fears may be translated directly into higher borrowing costs today for government and the private economy. There are many well-studied examples of “negative fiscal multipliers”, in which credible fiscal retrenchments in fact stimulated the economy, via greater consumer and investor outlays, by reducing borrowing costs and spurring confidence.”

“The underlying cash surplus will be A$1.54 billion ($1.56 billion) in the 12 months to June 30, 2013, Treasurer Wayne Swan said in Canberra yesterday. Expenditures are forecast to fall to A$364.2 billion next year, the first drop in figures dating back to 1971. The A$44.4 billion deficit this year is the third- largest on record and 3 percent of gross domestic product.

“The surplus years are here,” Swan said in a speech to parliament after he scrapped a planned corporate tax cut.

…The 2013 surplus, if achieved, will amount to 0.1 percent of GDP, the budget showed.”

How’s that budget surplus during booms tactic working out in practice?

Twas not the confidence fairies that did us in it was dem malicious Leprechauns on Kildare street. The day the finally failed gov’t backstopped the banks and developers without limits our goose was cooked. The concept of shared responsibility totally escaped the residents of the candy store who for decades had been kow towing to all and sundry. There have been many bank and sovereign debt collapses in the world. It was customary to determine responsibility which usually meant a three way 33 1/3% give or take split between banks, sovereign and the lenders to the banks and sovereign. In some cases the sovereign made a take it or leave it offer to the foreigners involved e. g. Argentina. In other cases the the British Gov’t sent in the gunboats and threatened to shell the parliament in Tunis unless they agreed to cough up 100%.

In any case we are now crying over spilt milk as we have roped ourselves into one of the worst deals in the past couple of hundred years.

Our only hope now is to support Francois Hollande as he reasons with Angela Merkel to allow stimulus. It should be noted that there are signs that the vaunted German manufacturing/export engine has started to sputter. There are many reasons for this one being the parlous state of the PIIGS plus France, Netherlands and Belgium.

All our Gov’t has to do is listen to tune being whistled by France and join the parade. They could also resolve to stay away from frivolities like water meters and any other fantasies that do not add value until the economy is on the mend.

If the outcome of the referendum is NO the Gov’t should resign immediately.

An interesting read is A Bubble That Broke the World by Garet Garrett (published 1932). Dated admittedly but still has some relevance.

Lagarde says austerity vs growth is a false choice; Daniel Gros says Europe swings from austerity to growth but never gets around to addressing the factors that hinder growth – – it maybe boring for some of you folks here but this is reality and like it or not, it’s only Germany’s trade with emerging markets that has made European data look somewhat respectable in recent years.

In the mid 1990s, in Spain, the unemployment rate then was as high as it is now, and in Italy, it was higher in 1996 than it is today. France’s world export market share fell 20% and its Eurozone market share fell 9% between 2005-2010.

In the UK, Nick Clegg said yesterday that both Coalition parties’ local election setbacks in Scotland, Wales and northern England owed much to the absence of government subsidies, which were no longer possible to deliver. “For the past 10, 15, 20 years they have been reliant on subsidies from governments in Whitehall pumping money up the M1 farmed by explosive growth in the City of London,” he said.

As for the auld sod, European welfare has supported farm income for forty years and in recent years it has been 94% (not a typo) of average farm income. Besides, price supports also were European subsidies.

American firms are responsible for 90% of headline tradeable exports but would it be a shock if half the value of exports was smoke?

We shouldn’t be a poster child as we fooled outsiders during the bubble as to how good things were and we’re doing the same today with dodgy data.

There appears to be a lot of alienation in the country, including no doubt among people who are an easy market for outrage now but were immutable to reason during the bubble.

Most commentators in the mainstream media play to the belated outrage while radicalism is hard to detect in academe.

If the politicians are not willing to junk spin, then some credible group should provide realistic scenarios of the decade ahead.

People legitimately make the point that debt isn’t sustainable while forecasts of growth a few years out are not credible.

Where is the growth engine? Spend more on the failed ‘smart economy’ project? If the MNC sector can raise industrial production over 70% since 2000 and produce no jobs, it is easy to be fooled.

At best, the unemployment rate will remain at a high single digit level for many years.

The bubble standard of living cannot be maintained; what should tax and spending be in an economy without any windfalls?

Pre-2008 is not coming back and despite the odd positive smoke signal from the Croke Park implementation conclave, anyone who believes that this is the way to introduce reform in a large organisation, is to put it kindly, a fool.

@ seafóid

Thanks for the feedback.

@ Alchemist

Your query prompts me to attempt the following answer.

The issues are inter-linked and can be broken down into four main categories (i) the [NEW] one,following from the crisis, of assistance by way of loan subject to conditionality; bilateral loans, EFSM, EFSF now morphing into the permanent ESM (ii) economic and social cohesion spending via the budget of the EU; CAP, regional and research spending etc (iii) creation of common economic conditions (level playing field) through ongoing – and failing – efforts to complete single market and (iv) necessary EU coordination of actions in the areas of social and economic policy that governments insist – mistakenly – remain a national prerogative.

The Troika only has an involvement in (i) and is to fade away when the ESM becomes operational.

That there is continuing confusion with regard to the issue of who is responsible for what is a reflection of the near total failure of the Commission to assert its role – having, as it does, a role in all four categories – a failure that can only be corrected by a reduction in its size. This reduction seems bound to emerge as the one likely institutional change in the effort to restore trust and confidence between the member states of the EU (a phenomenon at the heart of the crisis which the Governor of the ICB deals with in a recent speech but rather curiously never actually mentions).

The economic community in Ireland, I regret to say, seems to live in near blissful ignorance, despite the best efforts of some contributors to this blog, of categories (ii),(iii) and (iv) and deal almost exclusively with (i) which is a symptom of failure in the other areas, not a cause.

@ The Alchemist

To make the above somewhat clearer, I repeat your query;

“Suppose the EU does agree to a growth fest. How will that apply to bailout countries? Won’t the troika collectively have to agree, and that might entail shifts in repayment schedules. Ireland could still end up outside the blanket, along with Greece and Portugal”.

The “growth fest” will draw on categories (ii), (iii) and (iv) exclusively and thecategories will be identifiable in the relevant declaration or whatever other format the official document takes. The really significant issues will, however, be found in what it does not contain, notably in respect of the fourth and final category in respect of the difficult decisions that have to be taken nationally, those to be taken in France being pivotal.


Broadly matching your categories above, the UK Guardian reports on a briefing memo sent by Hollande’s economic team to their counterparts in Berlin:

For me the following is significant:
‘”It’s absolutely essential to generate growth, but this can only be done through supply-side measures and no longer through state spending programmes,” the Hollande team told the German diplomats.’

If the Government (and its camp-followers in Official Ireland) thinks that its deliberate watering down of the Troika’s initial programme of structural reform fits the bill, then it is living in a fool’s paradise. A wonderful opportunity to alter the economic landscape and to begin to counteract the impact of fiscal adjustment was been wantonly and wilfully cast aside. They may find they will have to re-visit these issues. ‘Events, dear boy. Events’.

One additional possible upside (in the Irish context) of Hollande’s apparent stance is that it should take a bit of wind out of the sails of the ‘raid, tax and spend’ brigade.

“It’s absolutely essential to generate growth”

A few months ago I did start an occassional posting covering meaningless statements about growth made by elected and non-elected European politicians. I don’t think much has changed but I do wonder what sins will be committed by them under the name of ‘growth’ in the next year or so.

@ Paul Hunt

The difficulty lies in the attempt by Hollande to ignore category (iv) Hollande cf.

It is not so much that he has given electoral hostages to fortune but that some elements are hard-wired into Socialist dogma. If he chooses Aubry as PM, France’s goose, and probaly that of the euro, is cooked.

Parallel political pressures are at play in other countries (as we know to our cost).

@ Paul Hunt

I should add that, as the Taoiseach has already remarked, the issue of corporation tax will arise. This has been a classic diversionary tactic of the Socialists for decades in the context of avoiding reality in category (iv). The irony, of course, is that it is a case of the pot calling the kettle black as most countries are adept at adopting parallel tactics. As I have noted often, this gravely weakens the negotiating position of countries unable to keep up competitively vis-a-vis Germany.


They all still struggle to take Sean Lemass’s advice that all promises made during an election campaign should be buried on the night of the election. Hollande has to be seen to hold the left-wing line until he has secured a majority in the Chamber of Deputies next month. After that some pragmatism might rule. It’s just that events could pile up between now and then that will put him under pressure.

There is an excellent opportunity for the Commission to move in to the foreground and to re-balance its position viz-a-viz the HoS&G. But will they take it?

Ireland seems to be fixated on gazing out of the windows of the treatment room and pleading with the fitter players to do something to get it out – while studiously avoiding key elements of the regime prescribed to get it fit.

Is Ireland’s Fiscal Adjustment Failing?

Obviously Ireland’s Fiscal Adjustment is not failing if you work in the banking sector or are embedded in the European establishment. If you are a German conservative it is not failing, if you are a currency hawk it is not failing. If you plan a career in a European think thank it is not failing. If your fortunes are linked to those of the EPP it is not failing.

If you are one if the increasing ranks of the unemployed, someone struggling to meet a mortgage or anyone who sees hope for a progressive Europe with a social democratic character then its failing.

In fact, as mentioned by David O’Donnell many times, the policies now required by Europe’s dominant powers and institutions “work” if you are rich, right wing or embedded in the Eurorocracy and they fail otherwise.

@ Shay

how much of Ireland’s economic malaise, in terms of GDP, the deficit and unemployment, is down to austerity or the fiscal adjustment itself, and how much is a cyclical or structural problem brought to a head by the credit bubble collapse (globally as well as locally)?

@Bond. Eoin Bond…

@ Shay

how much of Ireland’s economic malaise, in terms of GDP, the deficit and unemployment, is down to austerity or the fiscal adjustment itself, and how much is a cyclical or structural problem brought to a head by the credit bubble collapse (globally as well as locally)?

Its 53/24 for austerity/financial crisis with a further 23 parts being Mayan calendar related.

I think Constantin G. made a stab at a comparison of the differences in outcomes in sister banking crisis sufferer Iceland versus Ireland early last year on the basis of differing fiscal policies.

As far as I can see Ireland’s position has deteriorated versus Iceland’s since then. I know Iceland is not Ireland but Ireland is a lot more “not Germany” than “not Iceland”.

If we can not say exactly what the differing contributions to Ireland’s current sad state are of a world recovering from a financial crisis and a small state suffering from bad fiscal policy in a poorly designed currency union we can say that those not using our (well, Angela’s, Freidrich’s and Josef’s) policy set appear to be doing better financially and much better socially and politically than Ireland.

We have taken the wrong path, and if we sign the Fiscal Compact we will promise never to keep to it.

@ Bond . Eoin

I would suggest that the credit bubble has not collapsed. Extend and pretend, under no circumstances downgrade collateral to reflect reality. This is as true internationally as it is in Ireland.

NAMA with its guarantees in a transparently desperate attempt to prop up property values is but one small symptom.

@Shay Begorrah can not type

We have taken the wrong path, and if we sign the Fiscal Compact we promise never to keep to it.

The inclusion of the word never would have reversed the sense of my sentence had it not made it meaningless. Phew.

@ Paul Hunt

The Commission is being forced centre stage by events. The real lesson is that being learned by France i.e. reducing it deliberately to the status of a secretariat was a thoroughly bad idea. The burial of Merkozy confirms this.

The newspaper of the famous Mittelstand has a very interesting report on the preliminary deal being negotiated i.e. acceptance by Germany of “project bonds” in return for endorsement by Hollande of the TSCG.

The Irish referendum is not the only date in play. The Bundestag is due to consider matters on 26 May and it does not take its duties lightly.

Growth vs austerity in the eurozone May 09, 2012 – 4:20 pm
The growth vs austerity debate has been a focal point of eurozone politics over the past weeks. With voters in France and Greece appearing to reject austerity in this weekend’s elections, are we beginning to see a shift in policy from austerity towards spurring growth? Ralph Atkins, Hugh Carnegy, Chris Giles and Ben Hall join Shawn Donnan to discuss.


“The Bundestag is due to consider matters on 26 May and it does not take its duties lightly.”

Announced today they are ‘putting it back’

I posted a link on another thread (more recent one I think)

@ PR Guy

I saw this. It is not a surprise, given the Taoiseach’s remarks, the stance of the SPD and Hollande’s difficulty if he is seen as giving up too much ground before the legislative elections.

What surprises me is that no commentator has picked up the obvious conclusion as far as Ireland is concerned viz we are on our own. There will be no attempt to woo us on this occasion. Any ‘sweetener’ that might emerge will be the result of pressure on Merkel and Hollande not to carry their spat too far and have nothing to do with the Irish situation.

However, I would be suprised if the dinner meeting of the European Council produces just a holding outcome. We will see!

@ PR Guy

In fact, Brendan Keenan does have a comment underlining the irrelevancy and lack of understanding of the wider context of much of the referendum debate.

This comment in particular;

“The trouble with having voted No so often when it did not matter, is that we may not recognise the moment when it does”.

Why we have had to vote so often is attributable to a comedy of errors and failures of government since the Crotty judgement. (Anyone who doubts this need only read the ad hoc series of amendments to the Constitution which is now getting even longer).

We may be heading for a tragi-comic denouement!

@ PR Guy

While I am at it, there is another angle not drawing much comment and that is the question; are we seeing the birth of a European or, at least, a Franco-German, demos? The SPD is, effectively, acting in alliance with the French Socialists.

Roubini and a co-writer in the FT on the situation in Spain would indicate that there is no time left for such political manoeuvres.


Yes saw that Roubini article (the co-writer was Megan Greene). Spain is toast.

So is Greece for that matter. I see the EZ decided last night only to release €4.2bn of the €5.2bn (and had been signed off) that was due to be disbursed today. I believe the €4.2bn is for debt repayment and the outstanding €1bn is for Greece’s public spending e.g. pensions, salaries, etc.

If that is the case, “coercion” is not a strong enough word.

Maybe we’re all toast in Europe now?

It looks like the lady’s not for turning:

Angela Merkel emphasises that austerity and structural reform are two sides of the same coin:

Ironically, in the Irish context, significant, beneficial structural reforms would be far easier to achieve than in the larger, more schlerotic EU economies – where the focus will have to be on the labour market and on both tradable and non-tradable services. Ireland’s more modern and flexible tradable sectors have improved their international competitiveness significantly – though not without experiencing pain. Structural reforms, particularly in the semi-states, and behavioural reforms in the private professional sectors, could be secured quite rapdily – but if only the Government had the guts and gumption.

But neither is evident – and those economists who might have some knoweldge and competence to make the case seem to have little of use to say. There are, of course, all sorts of reasons for this – both good and bad, but a significant one seems to be the extent to which they are trapped in a narrow neoclassical microeconomic mindset.

I’ve been dropping in on these posts every now and then, and I stand by what I said back at the height of the crisis (the seeds of which were sewn long before).

Ireland was in an excellent position to make much more dramatic cuts than it did in 2008. People lauded the 3bn. cuts which were paltry given the size of the public sector. 6 – 9bn was on the cards through intelligent restructuring of spending on foreign goods that the government should never have allowed to bubble in the first place. In a land where health and university..were more or less free, Irish greed ensured that the natural and relatively easy approach to recovery was avoided in favor of a long, drawn-out corruption laden approach designed to slowly implode the real economy, and pave the way for me and many others to no longer recognize Ireland sovereignty. Ireland is corrupt – very corrupt. But will the enslaved people will vote for further auto-corrupt austerity and the stability pact? It looks likely.

Nice knowin’ u Ireland. I’ll always love u as you were, but romantic Ireland’s dead and gone, it’s with …

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