How do you try to convince markets that an economy is going to grow even in the face of serious budget cuts, at a time of already high unemployment? You produce some supply side structural reforms from a hat, et voila! This is how the IMF envisages getting growth in Greece, for example, and it is now being suggested that structural reforms will be a means of getting growth in Ireland as well:
Together with the structural reforms that will be announced in the strategy, this budgetary adjustment should allow Ireland to return to a strong and sustainable growth path while safeguarding the economic and social position of its citizens.
I am a little confused by this. After all, it just a couple of months since Morgan Stanley provided a completely contrary reason for being bullish about Ireland:
Clearly, Ireland is facing major challenges in the quarters and years ahead. But, if there is one economy in the euro area that could meet such challenges, it is probably the Irish economy, in our view. Mind you, these strong preconditions are not a guarantee that Ireland will be able to overcome the challenges that lie ahead easily. But we believe that Ireland is fundamentally different from the other peripheral countries in that it is a fully deregulated, fully liberalised market economy. Hence, it should be able to adjust to the new environment and work its way out of the current situation more quickly.
The reason for my confusion is that if we are indeed fully deregulated and fully liberalised, it is hard to see where the Irish supply side rabbits are going to come from.
So: are you optimistic because Ireland is a lean green market machine, which will adjust flexibly and push our (practically vertical) aggregate supply curve out to the right at a rate of knots? Or, on the contrary, are you optimistic because we are a eurosclerotic mess, whose rigidities imply a fruitful pro-growth structural reform agenda?