Tuesday, 9 June 2009

A Quantum of Solace

The European Trade Union Institute published a working paper yesterday – entitled ‘A Quantum of Solace’ - examining the effect of stimulus packages implemented throughout Europe.

While Ireland does not feature in this survey, it does include a few interesting conclusions of relevance here. Overall, the paper concludes that “The fiscal packages implemented or announced by European governments are not large enough”, and goes on to argue that “at the prevailing debt and deficit levels in Europe most countries should not be constrained in running counter-cyclical policies. And where they are, the solution should lie in providing European level fiscal support so as to remove those constraints”.

In a passage of direct relevance to Ireland, the authors note that:

“Country size should not, in economic terms, be a factor for the extent of fiscal stimulus. It is easy to understand from a political-economy perspective however: the incentive for smaller countries to free-ride on the stimulus of others is greater than for big countries. On the other hand, despite this clear political-economy incentive, the quantitative importance of the effect is certainly very limited; indeed it cannot be excluded that it is just a statistical artefact”.

In view of calls by IBEC, inter alia, to cut social welfare rates (a call apparently viewed with some sympathy in Government quarters, given Health Minister Mary Harney’s reiteration of the discredited assertion that Irish social welfare rates are among the EU's highest), it is also interesting to note this point made by the authors of ‘A Quantum of Solace’:

“Other things equal, low-income (in the jargon: credit-constrained) households will spend more of any government largesse that comes their way.”

One would, of course, have thought that this insight falls into the blindingly obvious category, but it is worth reiterating in view of the likely pressure to reduce social welfare rates.

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