Monday, 9 August 2010

Medicine killing the patient

"The key question is … has the medicine worked? Has what the government said would happen happened in terms of reviving economic growth?The resounding answer is: Absolutely not. This medicine isn't working,it's actually killing the patient." PE bloggers Michael Burke and Stephen Kinsella were among those interviewed recently by the Los Angeles Times for an article which asked: "As Ireland slashes spending, is it model or cautionary tale?" You can read the full article here.


Paul Hunt said...

What I think is interesting is John FitzGerald evoking the spectre of the "Greek situation". But what most people seem to fail to grasp is that there is not an enormous difference difference between Ireland's situation as a protectorate of the EU and Greece's situation as a colony of the EU/IMF with the Greek Government ensuring the enactment of EU/IMF dictates.

One subtle, but, politically, important difference is that Ireland can pretend to retain a measure of sovereignty while Greece has lost its sovereignty. Ireland no longer has sovereignty over the total extent of fiscal contraction required or the need for state balance sheet 'deleveraging' or reform of the sheltered sectors. But, unlike Greece, it does retain some sovereignty over the composition of this fiscal contraction and the nature of the deleveraging and sectoral reform that will take place.

The other key difference, but one that has drastic implications, is that maintaining this optical of a measure of Irish sovereignty means that the extent and duration of the economic pain is being drawn out. Part of the reason is that the full resolution of the Irish banking crisis will require banks and investors in the bigger EU member-states to share some of the pain - and it takes time to establish the necessary procedures and political agreement since they will have to have EU-wide application - even if the initial focus will be on the PIGS.

Under EU/IMF direction, Greece is taking the pain of fiscal contraction and restructuring, state balance sheet deleveraging and reform of the sheltered sctors much more rapidly - and should return to growth and prosperity more rapidly. Ireland, unfortunately, due to (1) the desire to maintain this optical illusion of sovereignty, (2)the extent of the failure of its domestic banking system and (3) likely ineffectual attempts to deleverage the state balance sheet and to reform the sheltered sectors will experience economic pain for far longer and recover much more slowly.

It is a brutal, tragic outcome, but appears to be unavoidable while we continue to delude ourselves about the extent of the reform required.

Michael Burke said...

The forecast that Greece will return to growth more rapidly because it is 'taking the pain more rapidly' is false on both counts.

Quantitatively, Greek and Irish fiscal contraction measures are approximately the same, at around 9% of GDP. If €3bn in cuts are again made this year, of course that will rise to beyond Greek levels.

And the idea that Greece is recovering is belied by the lastest GDP data. The economic decline is deepening.