Wednesday, 22 September 2010

Irish laments

Sinéad Pentony: Today’s editorial in The Guardian highlights the dangers for the UK in pursuing Ireland’s policy of austerity measures. As we head into what is being clearly flagged as our fourth austerity budget, the contraction in the economy caused by the financial and economic crises, and exacerbated by Government policy, has succeed in shrinking the economy to the point where there are growing concerns about the capacity of the economy to sustain the costs associated with bailing out the banks. This was reflected in the cost of borrowing reaching a new (and unsustainable) high in the bond auction earlier this week. When you couple this with the latest unemployment figures, acceleration in migration and a lifeless domestic economy - the impact of government policy, which is protecting the banks and the bondholders at the expense of the country and the economy’s capacity to recover, is painfully clear.

1 comment:

Rory O'Farrell said...

From the article: "The private sector did not immediately rush to fill the gap left by the public"

Unfortunately, in many economists minds the governments banking policy and fiscal policy are seen as separate, and the interactions ignored.

Because the government is basically taking money from the economy and sending it abroad (to bank share/bondholders) there is no scope for the private sector to take up any of the slack. As share/bondholders are not taking the losses that they should, there is less money available in the economy to recapitalise the banks. There is no possibility of offsetting 'expansionary fiscal contraction' effects because any spare money is going into paying off the dead wood of bond/shareholders rather than into new investment (public or private).

Similarly the cuts negatively affect the banks as unemployed people can't pay their mortgages.

These two policies on their own would be bad, but their combination means that, 2 years on, we are no closer to getting out of the hole we dug, and are just digging deeper.

And despite 2 years of failure, some people think Brian Lenihan could be a good person to take over from Brian Cowen.