Slí Eile: So wrote Martin Wolf in the Financial Times last week. The context was as follows:
This leaves peripheral countries in a trap: they cannot readily generate an external surplus; they cannot easily restart private sector borrowing; and they cannot easily sustain present fiscal deficits. Mass emigration would be a possibility, but surely not a recommendation. Mass immigration of wealthy foreigners, to live in now-cheap properties, would be far better. Yet, at worst, a lengthy slump might be needed to grind out a reduction in nominal prices and wages. Ireland seems to have accepted such a future. Spain and Greece have not. Moreover, the affected country would also suffer debt deflation: with falling nominal prices and wages, the real burden of debt denominated in euros will rise. A wave of defaults - private and even public - threaten.
Wolf has been writing a lot about the interaction between trade deficits, private sector deficits and public sector deficits - especially in regard to countries such as Ireland, Spain and Greece. In the case of sick Tiger, Ireland has gone from a high level of private spending and borrowing to high savings coupled with high debt overhang (as % of GDP). The implosion in private spending has crippled fiscal revenue flow (but mainly because of the skewed nature of the revenue base, here). In the absence of currency devaluation the only other adjustments possible - according to the Consensus view is:
'price' reductions all round via wage and non-wage income cuts
'volume' adjustments through lower employment and outward migration.
Alas, As the spin machine moves into full swing – Government finances are beginning to stabilize line… CITI bank Chief Economist Willem Buiter is quoted in today’s Irish Times as praising the Government’s "necessarily tough and well-structured" budget package which managed to find political support while convincing international markets "that Ireland was for real".
However, he warned that the ‘crisis is so big, and the hole in Ireland's public finances so deep, that these efforts will have to be sustained for several years, perhaps a decade, before the economy is restored ‘to where you thought you were’”
O the price that has to be paid for the folly of the few. Never before was so much owed by so many to so few for such little return