Friday 22 June 2018

We should heed masters of the dismal science who urge benefits of prudence

The likelihood of a downturn from a starting point of excessive debt should still be stressed, writes Colm McCarthy

STEADY GOES: Philip Lane (above) and Seamus Coffey of the Fiscal Advisory Council are voices for economic caution. Both in their different ways advocate the need for prudence. Photo: RollingNews.ie
STEADY GOES: Philip Lane (above) and Seamus Coffey of the Fiscal Advisory Council are voices for economic caution. Both in their different ways advocate the need for prudence. Photo: RollingNews.ie
Colm McCarthy

Colm McCarthy

Small countries exposed to the vagaries of external events have only a handful of effective instruments to moderate economic fluctuations. These used to include commercial policy (the setting of tariffs and quotas for foreign trade) and independent discretion over the conduct of monetary and exchange rate policy. These policy instruments are no longer available in Ireland, given membership of the EU's internal market and the common currency area.

Where volatility is inevitable there is a bounty to be harvested from policy prudence, the latitude to avoid untimely austerity in a downturn. Prudence means making sure that the public credit is maintained and that the banks are solvent. If commercial policy has been abandoned and the independent currency abolished, there can be no reliance on the adjustment of tariffs or the exchange rate when trouble strikes. The only policy instrument left is caution.

Small countries in the European Union cannot manipulate the terms of international commerce and if they are also in the Eurozone they cannot adjust exchange or interest rates, nor are they free to create liquidity to fund government or rescue banks. Ignoring the prudent path is costly when prudence is the only available instrument.

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