What the Irish experiment proves

Posted on

Gillian Tett argues in the Ft today that:

Pity the Irish. In the past 18 months, Dublin has repeatedly unveiled commendably bold measures to fight financial crisis. First, it offered to guarantee the banks. Then it replaced its top regulator and central bank governor, and embarked on an unusually forceful effort to inject transparency into its troubled banks.

More remarkable still, it has also imposed a painful austerity plan, in a bid to reduce debt. This has hitherto been largely accepted by long-suffering voters; social cohesion still appears surprisingly high.

Yet, instead of being rewarded by the markets, Ireland is now in the crosshairs.

There is good reason for that, I suggest. The markets know what the economists don't, and that is that you cannot cut your way out of a deficit. It is impossible. Keynes showed that there is no reason why, in the absence of market intervention by government, markets should create something approximating to equilibrium (whatever that might be) AT, or even near, full employment. And yet without full employment, which means that you are utilising the assets available to you to best effect you have no prospect of raising the additional revenues that you require to clear past deficits. It is as simple as that.

So the markets are punishing Ireland  for the very obvious fact that it has adopted a policy which the markets know will be bad for the people of Ireland, bad for those who want to trade in and with Ireland, bad for the value of assets in Ireland, bad for its prospect of repaying debt and ultimately fundamentally bad for the prospects of Ireland as a whole.

The politicians of Ireland make a choice. They made the wrong choice. The politicians of the UK want to replicate Ireland's choice.That is their error. That is what the opposition politicians in the UK need to say,time and again. And now is the time for arguing we must stimulate the economy, deliver a Green New Deal, create work, and spend our way out of recession because this is the only way that we can solve the  problems we  have.

And quite remarkably, and the evidence clearly shows this, markets know that to be true.