Posted by: Dirk | June 30, 2010


The NY Times reports on Ireland:

As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.
Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

I spent a week in April in Dublin, and I agree with the article. On my way to the island, I read some papers proposing an Irish Fiscal Council. The idea is, more or less, old school counter-cyclical government spending. It’s old wine in new bottles, basically. The thing that I really can’t get is how it will help Ireland when it needs help most – today!

OK, counter-cyclical spending and all that, but what you need to do, I’d say, is get out of the running mess first, and then think about avoiding potential future messes. The short-run, the medium-run and the long-run are all morphed into one right now. If you cannot return to a growth path in the near future, government debt to GDP will never stabilize. And, in the Irish case, the bigger problem is household debt, which stand at a staggering 190% of disposable income. Without growth and jobs these debts will turn sour to a larger extent, and even now the banks are almost all bankrupt, if it weren’t for the government-sponsored bad bank called NAMA (National Asset Management Agency).

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