By Peter Boone and Simon Johnson
As Greece acts in an intransigent manner, refusing to act decisively despite deep fiscal difficulties, the financial markets look on Ireland all the more favorably. Ireland is seen as the poster child for prudent fiscal adjustment among the weaker eurozone countries.
The Irish economy is in serious trouble. Irish GDP declined 7.3% as of third quarter 2009 compared with third quarter 2008. Exports were down 9% year-on-year in December. House prices continue to fall. While stuck in the eurozone, Ireland’s exchange rate cannot move relative to its major trading partners – it thus cannot improve competitiveness without drastic private sector wage cuts. Yet investors are so pleased with the country that its bond yields imply just a one percent greater annual chance of default than Germany over the next five years.
Ireland’s perceived “success” is partly due to its draconian fiscal cuts. The government has cut take home pay of public sector workers by roughly 20% since 2008 through lower wages, higher taxes, and increased pension payments. As the head of the National Treasury Management Agency John Corrigan proudly advised the Greeks (and everyone else): “You have to talk the talk and walk the walk”.
So is Ireland truly a model for Greece and other potential problems in Europe and elsewhere? Definitely not – but it does provide a cautionary tale regarding what could go wrong for all of us. Continue reading “Could The US Become Another Ireland?”