Paul Krugman is back banging a familiar drum: austerity is not a good idea. Anywhere. As always, Ireland is one of his favourite examples:
[V]irtuous Ireland never did better than malingering Spain. And now, Ireland’s risk premium has exploded, here; Spain’s not so much, here.
Of course, it’s not at all a clean experiment; Ireland’s banks were arguably second only to Iceland’s in their irresponsibility, and the Irish government’s blanket guarantee has exposed it to huge losses. But bear in mind that when Ireland seemed, briefly, to have regained the trust of the markets, this was touted as proof that austerity will be rewarded. Funny about that.
As always, I’m not sure what Krugman’s alternative is. He’s a brilliant economist and I’m not but, in the end, Ireland’s problem has been that it ran out of money. This year Ireland is borrowing nearly €20bn to cover the gap between revenues and expenditure. That’s unsustainable and a reminder that Ireland’s woes are gravely exacerbated by but not confined to the fiasco at Anglo Irish. (And the other, smaller fiascos elsewhere in the financial sector.) No wonder the governor of the Central Bank is calling for further spendings reductions of €3bn this year.
And, again, Krugman ignores the fact that the Irish have been here before. The 1987 crisis was in some ways as bleak as Dubin’s present predicament. Perhaps an updated Tallaght Strategy won’t be enough this time, but the memory of Haughey’s reforming 1987 government remains powerful: austerity then helped create some of the conditions for future growth.
Perhaps Krugman is right that austerity is often a bad idea but it’s not been a bad idea for Ireland in the past and, anyway, given the peculiarities of Ireland’s current parlous situation it’s not clear that, for once, there was any compelling let alone palatable alternative.
This hardly means one need place any confidence in the men at the Ministry for Finance and their ability to dig the country out of the hole it’s in. But using Ireland as a pawn in some greater “Austerity Doesn’t Work” game doesn’t work either. Ireland might well be screwed regardless of what branch of painful thereapy it chose.
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