Sunday, October 2, 2011

Ireland is now ammo for rival economists

Sometimes a local issue can become ammunition for pundits as part of a wider global debate. Ireland's economy has recently taken on that role, argued over by right and left-wing commentators and economists pushing their own agendas.

The issue is that Ireland's government has taken the advice of the IMF and European Union in pushing through severe budget cuts. These 'austerity' budgets were unpopular here and the Fianna Fáil party who introduced them were devastated in the last general election. They were replaced, however, by a Fine Gael-majority government who are also dedicated to austerity budgets and aggressive budget cuts. Recent opinion polls show reasonable support for Fine Gael, suggesting that most voters are content to continue with the painful cuts. There have been some protests, but nothing like the scale of opposition shown in, say, Greece.

The contention lies on the argument by some left-leaning economists that austerity budgets during a recession can only create a downward spiral of deflation, unemployment and falling investment. One of the most famous critics of austerity is American economist Paul Krugman:
Strange to say, however, confidence is not improving. On the contrary: investors have noticed that all those austerity measures are depressing the Irish economy — and are fleeing Irish debt because of that economic weakness.... But Ireland is now in its third year of austerity, and confidence just keeps draining away.
Or, more recently:
Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.

What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.
Right-wing commentators who advocate budget cuts, however, see Ireland as a positive example, one to follow. So when Ireland posted decent economic growth in the second quarter of 2011 and our 10-year bond yield dramatically declined, the international right sprang into action to give Ireland's government their support. From The Wall Street Journal:
Austerity works—or at least, it is working in Ireland. The country's bonds now yield less than when Dublin received a €85 billion ($115.57 billion) bailout in November 2010, despite the escalation in the euro-zone debt crisis since the summer. That offers a flicker of hope. If the economy continues to perform, fears of a Greek-style debt restructuring will continue to recede, ultimately allowing Ireland to start issuing bonds again.
Or from the libertarian Adam Smith Institute:
The basic point here is that Ireland has done surprisingly well out of austerity – far better than anybody hoped.... British growth is sluggish, but so is that of "stimulated" America. It looks like the key to growth is not government spending, but ease of doing business.
So those who want governments to cut spending - mostly on the right - want Ireland to recover quickly to prove their point. While those who want governments to stimulate the economy with big spending programmes - mostly on the left - need Ireland to stagnate to prove the foolishness of austerity programmes.

And that is how this little peripheral state has become the ammunition of opposing economic and political sides around the world. At stake is not just Ireland's economic future, but arguments that might be won or lost on its destiny.

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