Thursday, November 18, 2010

The Irish Problems & Fiscal Austerity

Recently, there has been a self-fulfilling panic about Ireland and its ability to borrow. I'll return soon within the coming days for a more in depth analysis of the Irish situation, but for now I'll focus on whether the problems prove that fiscal austerity was a failure.

The answer to that question depends on what you mean by failure. If you're talking about whether or not its previous austerity measures have calmed the erratic bond markets, then clearly it has been a failure, an issue which I again will return to.

But if we turn to the question of whether the problems prove that the Keynesian theory that fiscal austerity will necessarily lower growth, then now, it proves no such thing.

Indeed, by some measures Ireland is actually recovering faster than the EU average. Industrial production in Ireland rose by an average of 11.5% in the third quarter compared to a year earlier, compared to an EU average of 6.9%.

Other indicators like unemployment are somewhat less rosy, but even unemployment has started to drop in recent months

So while the recovery hasn't been quite as strong as in other Northern European countries with austerity programs, like the Baltic states, the underlying economy is certainly a lot stronger than in Greece, where strikes by Marxist unions have lowered output.

Thus, the Irish problems isn't as some Keynesians would claim, that austerity has weakened its economy, but instead results from a combination of the previous inflationary boom, incompentently handled bank bailouts and a self-fulfilling panic.