Ashoka Mody, former IMF chief of Mission to Ireland, has admitted that austerity alone as a way of solving the country’s economic crisis was a mistake and is counter-productive.
Better late than never, to admit you got it wrong, but the damage has already been done. One didn’t have to be a genius, or even a humble economist, to figure out that endless austerity was not going to generate economic growth, and create the much needed jobs to tackle the huge problem of unemployment, not just in Ireland, but in the Eurozone as a whole.
One just has to look at the current unemployment rates for Euroland’s high debtors (26.4pc in Greece; 26.3pc in Spain; 17.5pc in Portugal and 14pc in Ireland).
However, in Ireland’s case the unemployment rate is not lower because of enhanced/superior economic policies than elsewhere, but rather because of the huge level of emigration.
Mody says that burning bondholders, which could have saved billions of euro, was not considered because of a mindset, which remains, that felt it would cause financial market uncertainty. He said there was a perception that doing so would have had catastrophic results, which, he believes, is not the case.
While I agree with him that hitting bondholders should have been considered, I wouldn’t be as relaxed about the potential consequences of such an action.
Quite simply, there is no way of knowing, and the question that had to be considered was whether the risk was worth taking. It’s all very well citing previous sovereign defaults, but there was never one before in a huge monetary union like the euro. Ireland may have escaped relatively unscathed but then again it could have suffered interminable damage.
Still, this option was never really examined closely, which was another error.
As European finance ministers meet in Dublin this weekend to discuss “troika” recommendations to give Ireland and Portugal seven more years to pay back their EU loans, the question remains as to whether that will be enough to bring stability back to their respective economies.
In Ireland’s case I’ve always felt that doing less rather than more as regards fiscal austerity was the right approach, and now firmly believe that the Government should give itself some leeway as to the amount of proposed austerity over the next two years following the renegotiated Anglo Irish Bank promissory note deal. It’s all about generating confidence among consumers, and easing up slightly at this juncture may in fact generate more economic growth, and in turn boost the tax receipts of the Exchequer, and get the budget deficit down sooner.
The problem of course with all of this is that the IMF has consistently been seen as the “good cop” in the whole EU/IMF bailout process. It is not the likes of Mr Mody that need convincing. It is the political heavyweights in Germany and the influential policymakers in the ECB, whose attitude needs to change. And despite the worsening of conditions in the Eurozone economy and the awful unemployment figures, I just don’t see that happening any time soon. Indeed, if anything, the trade-off for an extra seven years to pay off debt might be an Irish promise of speeded up austerity. And one can only imagine what further damage that would to the domestic economy and public morale in the short-term.
Alan McQuaid is chief economist at Merrion Stockbrokers