The Irish problem

It isn’t spending cuts

Those arguing against spending cuts have recently adopted a one-word argument: Ireland. The case it stands for is as simple as it is bogus. Ireland had a deficit, now even worse than Britain’s. It adopted an agenda of sharp public spending cuts, on the same logic used by the British government. The result? A double-dip recession and a fresh round of misery. The lesson from Ireland is that cuts don’t work — and that George Osborne is leading Britain into the swamp.

The argument is seductive, but only if one is ignorant about what has just happened in Ireland. It is true that after bouncing back in the first quarter, the economy shrunk again in the second quarter, but such variability is to be expected in any country exiting a slump as severe as Ireland’s. But the real meteor that has just crashed into the government has nothing to do with the cuts, without which the Republic would almost certainly now be bust. It stems from Ireland’s hasty promise to guarantee 100 per cent of all bank deposits, and a subsequent failure to fix many of its most important banks. The decision to bail out Allied Irish Banks added some €50 billion to the national debt. Rather than disguise this by fiddling the accounts (as Gordon Brown did in Britain) the Irish have taken it on the chin. They have published a worst-case scenario: a one-off increase in its deficit to 32 per cent of economic output, assuming (unlike Britain) that the bank money has gone for ever. The markets were impressed, slightly lowering the interest charged on Irish government debt.

There is a crucial aspect of the Irish crisis that everybody appears to have forgotten, which goes a long way towards explaining Ireland’s problems: its membership of the dysfunctional single currency, an institution it should never have joined.