Need to Look Past Irish Austerity

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(For my earlier post on this topic click here.)

By most reckoning the Irish parliament will approve the government's austere budget, the fourth emergency budget since 2008. This may help ensure that Ireland secures the aid package it did not really want in the first place. Besides that, little else will be resolved. Oh, the country will have another year (2015) to bring its deficit to below 3%, but most investors are looking well beyond the budget.

Euro zone members pursuing austerity have not been rewarded. Peripheral countries in Europe, the only members to really engage in fiscal tightening this year have not seen the pressure in the bond or credit default swaps market ease because of their austerity.

At issue is not so much the deficit but debt. It is important to stabilize the debt/GDP ratio to begin restoring investor confidence. This cannot take place if Irish interest rates are above its growth rate. The aid package has a blended rate of 5.8%. This will prove to be a heavy burden.

Media reports suggest that the IMF and the Irish government was willing to restructure its debt and renege on guarantees for senior bond holders. Reports indicate that the EU and/or the ECB protested loudly ostensibly on grounds of systemic risks.

Keynes wrote a critique of the treaty that ended World War I. In "Economic Consequence of Peace" Keynes argued that the "bleeding of Germany" would lead to Europe's ruin. Similarly, the bleeding of Ireland cannot amount to good. Reports suggest lenders to Greece may already be profiting. The new Irish creditors will also likely to profit. This is not a moral criticism, but a political observation. The strains in Europe are growing and the Irish budget will not ease those tensions or give investors much comfort.