Guest post by Michael Burke: Why is the rest of the world out of step with Ireland?

Michael Burke05/11/2009

Michael Burke: Ever have one of those moments when you just know everyone else has got it wrong and you’ve got it right? When you say, I don’t care what the fashion is, showing off your brand of boxer shorts in public is plain daft? Well, have some sympathy then for those faced with the tricky task of formulating Ireland’s economic policy. Everyone else may be going round recklessly attempting to reflate their economies, but you won’t catch the leaders of Ireland’s current economic direction doing that. Oh, no.

The arguments against reflation are that we are in a crisis (so is just about everyone else); we can’t afford it, our deficit is ballooning (ditto), we are in the Euro (along with 15 other economies), we are an extremely open economy and stimulus will just stoke imports (so is Belgium) our debt is headed to 100% of GDP (ditto, along with others), and our pay rates rose during the boom (as they did generally, so that Ireland is a middling Euro Area economy as far as relative pay rates are concerned).

Now, when outside observers don’t chime with the Irish consensus, like Stiglitz they are labelled mavericks (unlike Roubini, who hadn’t read the NAMA proposals) or David Blanchflower, who according to Philip Lane is offering prescriptions that might work elsewhere but do not apply to the Irish conditions.

The latest observer to fall into this trap seems to be veteran commentator Martin Wolf. Writing in the FT on November 3, on Ireland and others, he noted that “the deterioration in the fiscal position is a result of the cutback in the private sector’s spending, not a cause of it. Not surprisingly, the fiscal deterioration is also biggest where the private sector has cut back most: in the post-bubble economies”.

And, “Of course, governments could have tried to tighten fiscal positions in the teeth of the crisis. All that would have done is turn the recession into a depression. As a result, they would also have transformed part of the structural fiscal deficit into a cyclical one. This might well have lowered the private sector surplus, but only by destroying private income even faster than spending. This would have been a monstrous blunder. In a world in which the private sector is driven towards austerity, as now, governments must offset this behaviour, not reinforce it.”

This commentary is not mere rhetoric. Governments across the globe are taking and continue to take measures to reflate their economies. The latest one is the new Rightist government in Germany with a rolling programme of tax cuts equivalent to 1% of GDP, which follows previous measures equivalent to 3.3% of GDP. Another government of the Right in France had announced at the end of September a “Grand Loan’ scheme to finance huge infrastructure projects amounting to €35bn over 2years. This will probably prove more effective than the German measures, as they tend to raise trend productivity and lower real wages. But both have said they will not attempt to bring the budget deficit below 3% of GDP before 2014.

Against this it is argued that Ireland must meet the deficit target in 2013, or it will face the wrath of the European Commission. But, how to justify picking on Ireland, when the leading economies have no intention of meeting the target by then? Alright, but the bond market will definitely take fright with deficits ballooning. Yet benchmark yields were unchanged after both the French and German announcements.

Even so, Ireland is not France or Germany. We are a small very open economy (our import bill is over 80% of GDP), more easily pushed around by the Commission, with a public debt level spiralling towards 100% of GDP. Well, so is Belgium. And it did come under pressure from the Commission for fiscal consolidation. Probably now regretting its own acquiescence in the light of the French and German announcements the (Right-leaning coalition) government in Belgium responded with an increase in taxes on those that had been supported by rescue packages or those that are doing well during the recession banks and insurers in the first case, energy producers in the second.

In not a single case is the policy of competitive wage cuts being adopted, even though, in every case the size of the public sector is relatively greater in the rest of the Euro Area than in Ireland. And there is a reason for that.

As Martin Wolf says, that would have been a monstrous blunder.
Michael Burke has worked as an economist for nealy 20 years in a variety of institutions, including 5 years as senior international economist with Citibank in London. He is currently preparing a book on the crisis in Ireland.

Posted in: EconomicsFiscal policy

Tagged with: stimulusDeflation



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