Austerity is not working

Paul Sweeney07/09/2011

Paul Sweeney: As Michael Burke says in his post yesterday, the ESRI’s forecast is based on some outstanding optimism. It seems that the Institute has turned into a surprisingly optimistic body. The fragrant air it is breathing is not in Ireland. Those exports will have to do a lot more “heavy lifting” to compensate for the 21% collapse in domestic demand over the past three years.

There is more realism abroad. Here is an interview with the FT’s Martin Wolf on Austerity vs Stimulus. It is part of that paper’s debate on the subject. Unlike most of the Irish media, the FT gives two sides. Wolf in an article says Britain is in the worst depression since the Great Depression of the 1930s. I’m sure the figures are similar for Ireland. The 1950s were bad, but were they as bad as now on the length and especially the depth of the Depression? I suspect so, but don’t have the data.

He is quite critical of policy and thinks “the forecasts are hopelessly rosy”. He says we are heading for “a historic disaster.”

Also, Wolfgang Munchau of the same paper, the FT, had a piece on Monday 5th September which argued that the worst of the crisis is yet to come. Why? Because “all countries are deflating simultaneously.”

And even small Ireland contributes to this downward spiral. There is a growing nationalism in the Irish business and economic establishment which is developing further in response to the crisis. It is a “beggar thy neighbour” attitude on our exports doing the “heavy lifting.” This Green Jersey line is similar to the establishment’s autarkic view of our low corporation tax.

Munchau argues that “The very least one should expect is for the eurozone to abandon all austerity programmes with immediate effect and to return to a fiscally neutral stance, allowing the automatic stabilisers to kick in fully.”

He continues: “At present, such a shift is not even on the agenda. As is so typical in the eurozone, each country behaves like a small open economy at the edge of the world. Each assumes its actions have no impact on the others.”

On the opposite side, we have German Finance Minister Wolfgang Schauble of Germany arguing for Austerity. Here we have John Fitzgerald, Philip Lane and most Irish academics arguing for more Austerity. Interestingly, however, on the ground, groups like Congress and IBEC are argueing for less austerity in the forthcoming Budget. If we go for a package of as high as €4bn, there will be no growth (GNP) again next year, the fifth year of our Depression!

Munchau concludes by saying that, when the downturn hits the eurozone, the crisis will “turn ugly.”

Ugly? Looking out the window I see “real ugly” already. If our soothsayers have their way, Ireland’s Five Year Depression will become like Japan’s – A Ten Year Depression!

What is really surprising is that the penny has not dropped yet on the ineffectiveness of the Irish Austerity Programme. It will have taken a staggering €20.6bn out of the economy by year end. All indicators show it is much too severe and is killing off domestic demand. To take a further €4bn our in the next Budget, as the Macho Economists demand, will be real folly.

It should be far less and must include a real “Jobs Programme.” It will cost money, but we have some left in our Pension Fund.

Posted in: InequalityEconomicsFiscal policy

Tagged with: austerityesrieconomicgrowth

Paul Sweeney     @paulsweeneyman


Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions.  He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.



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