Last year during a cab ride in Dublin, I asked my driver how things were going in Ireland.
He told me that life wasn’t so bad because, even though growth had slowed, things were so much better than they were before Ireland joined the euro.
That resonated with me on Monday, when the Irish government unveiled its austerity package of 6 billion euros ($8 billion) of cuts in welfare benefits, public pensions and capital projects. Ireland is even going to tax Internet betting.
But Ireland, which accepted an 85 billion-euro bailout last month, is in better shape to withstand a squeeze than the other euro-area peripheral countries such as Portugal, Greece, Spain and even Italy. Ireland is a good deal wealthier than these countries, and it has seen income rise more from euro membership. Even after the cuts the odds of people taking to the streets in large numbers are lower than in the other countries.
The Irish Finance Minister Brian Lenihan, whom the Financial Times recently voted the worst in the European Union, optimistically is forecasting that the spending cuts and tax increases aren’t going to affect growth much at all. The forecast now calls for gross domestic product growth of 0.3 percent this year, rising to 3 percent in 2013.
On the same day, in contrast with Ireland, the Republicans and President Barack Obama agreed to a welcome deal in the U.S. to reduce payroll taxes and renew the Bush tax cuts for two years to raise growth and lower unemployment. So we have an interesting economic experiment on our hands. My bet is that cutting taxes rather than raising them is better for growth. I am with Obama.
Growth in Europe is going to slow, especially in the peripheral countries, which will certainly not reassure the bond markets. International Monetary Fund Managing Director Dominique Strauss-Kahn, visiting Greece this week, said that “the problem is growth, growth, growth. No one would be talking about a debt crisis in Europe if there was high growth in Europe.” Isn’t that the truth.
Little Ireland with its 4 million inhabitants has done well from its euro membership. The worry is that others on the periphery haven’t and have less of a margin for cutting back.
As the table below shows, between 1990 and 2010 GDP per capita in Ireland rose by 107 percent, which was faster than Greece (53 percent), Italy (14 percent), Portugal (32 percent) or Spain (38 percent). By 2010 Ireland had higher per-capita income than any of the euro-area peripheral countries.
Data from a Eurobarometer survey, conducted by the European Commission across all member states between August and September 2009, suggests that the Irish are markedly happier -- scored on a scale where 1 means very dissatisfied and 10 means very satisfied -- than residents of these other countries. Whether this continues in the future is an open question, as austerity bites.
Country GDP per capita Population Happiness 1990 2010 (million) Ireland $18,694 $38,768 4.3 7.41 Greece $18,735 $28,608 11.3 6.38 Italy $26,307 $30,080 59.0 6.48 Portugal $17,418 $23,019 10.6 5.59 Spain $22,039 $30,475 44.7 6.94
Sources: European Commission, International Monetary Fund
The other peripherals are poorer and less happy than the Irish, and haven’t benefited as much, especially in terms of income growth, from membership in the euro. This may well imply greater domestic opposition to any externally imposed austerity program. In the future, social unrest is likely to be a bigger issue in these countries.
The International Monetary Fund has even urged the EU to pump more resources into its bailout program, and also to buy up more government debt. Otherwise, the IMF warned, the crisis could escalate, threatening the stability of the euro.
German Chancellor Angela Merkel’s interventions have given the crisis some legs. She ruled out the possibility of euro-wide bonds and a bigger bailout fund. This, combined with her earlier suggestion that bondholders should take larger haircuts, doesn’t help the countries that are struggling to soothe the markets.
There are obvious reasons for Merkel’s stand. The Germans benefit from having a lower exchange rate than they would have outside the euro, making their exports less expensive. Any euro- bond would mean their costs of borrowing would rise.
German banks have major investments in the peripheral countries so it is hard to understand why they are being left to flounder. Unless the Germans are prepared to pitch in with lots of bailout money, the Irish and the Greeks will have to restructure or even default on their debt. The bond vigilantes would then have a field day.
It is difficult to see how forcing an expensive loan onto an over-indebted country like Ireland is supposed to contain the European debt crisis. Maintaining the low corporate tax rate there will obviously help. Living standards will inevitably be hit hard there for years to come. My cabbie was probably right. My worry is that a number of these other peripheral countries aren’t so well placed. I fear worse is to come.
(David G. Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, is a professor of economics at Dartmouth College and the University of Stirling. The opinions expressed are his own.)
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