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Thank God for the rugby
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Simon Johnson (ex-Chief Economist, IMF, now at MIT) and Peter Boone (LSE researcher, also investment fund affilitation) in the Wall Street Journal (possibly $ req’d) –
Even following Thursday’s EU summit, an orderly resolution of these problems seems unlikely. The Germans will push for draconian cuts to Greece’s government spending and public sector wages but they won’t budge on relatively tight monetary policy and the overly strong euro—and they definitely won’t agree to loosen their own (German) fiscal policy.
Ireland is already cutting hard. Such fiscal austerity leads to double-digit declines in GDP, and risks massive political revolts. Ireland’s banks are today probably insolvent. Who can afford to repay their mortgages when wages are falling and unemployment rising? Irish house prices continue to speed downward. This is not an example of a “careful” solution—it is a nation in a financial death spiral.
Are you watching the rugby a chara?
God seems to have it in for us.
I was trying to be optimistic. Events proved otherwise.
At last someone on the outside has noticed the double-edged sword of our fiscal approach. There’s been too much short-sighted praise for the cut everything approach. You need big cuts, but they need to be strategic, and you need to do something to stimulate the economy at the same time or it’s just, as they say, a ‘death spiral’.
How do you effectively stimulate a Small Open Economy like Ireland’s ?
As I understand it, the article authors are proposing a joint IMF-EU approach in which high deficit countries like Ireland and Greece would get a lot of access to borrowing now in exchange for firmer but less radical cuts than are happening in Ireland. In addition, the ECB would ease Eurozone monetary policy to help the region as a whole expand demand. See also the discussion at Irish Economy today. But I think the part of the solution that is not specific enough to Ireland is what to do with home mortgages. Which NAMA doesn’t address at all.