Apologies for the belated response to Paul Krugman’s post on Ireland (linked to here by Stephen last week). Paul focuses on Ireland’s poor post-crisis growth performance, noting that real GDP is still well below its peak at the end of the property/credit bubble. There is no disagreement that the growth performance – and especially the performance domestic demand – has been weak. This reflects a combination of harsh austerity measures, distressed balance sheets and the weak performance of Ireland’s trading partners.
This graph extends the real GDP series further back in time. In judging the continuing shortfall from the peak in 2008, we should not forget the unsustainability of the bubble-driven growth that took place from 2002 onwards. It is also worth noting that the recent flatness of the GDP graph hides a marked slowdown in net export growth (mainly due to the weak performance of the UK and euro zone economies) combined with tentative signs of a stabilisation in domestic demand (see here).
But any assessment of Ireland’s progress is incomplete without also looking at this picture. From early 2010 to mid 2011 Ireland steadily lost its capacity to borrow from financial markets. It is noteworthy that creditworthiness continued to erode in the months after entering into the Troika programme. This reflected bad news on fundamentals – notably the size of banking-related losses – but also bad signals about the emerging nature of the euro zone’s lender of last resort in terms of the potential for forced debt restructurings and the seniority of official creditors. The interaction of better news on the a LOLR (most recently the announcement of the ECB’s OMT programme) and the demonstration that Ireland could meet conditions for official assistance has led to a dramatic fall in borrowing costs.
Given where we were in mid 2011 – particularly the danger of a default that would have added another vicious twist to the adverse feedback loops that laid the economy low – I can’t see how a fair assessment can leave the creditworthiness developments out.