Austerity Hysteria, Wild Irish Rose Edition

Ireland's experiments with austerity measures are going very, very badly.

Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession. 

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent. 

Now, the Irish are being warned of more pain to come.

“The facts are that there is no easy way to cut deficits,” Prime Minister Brian Cowen said in an interview. “Those who claim there’s an easier way or a soft option — that’s not the real world.” 

Austerity measures have done nothing to help the Celtic Tiger.  The country is now trapped in a deep deflationary spiral, and there's end in sight to the pain.  Ireland's bond market is all but a ghost town, as the rapidly shrinking economy is nothing that outside investors want to throw money at.  Those investors are currently pouring into the US Treasuries.  Yesterday bonds rose and the yield is down to 3.02%.  If anything, US debt is among the safest bet out there right now.

The problem is in avoiding turning us into Greece, we're going to end up like Ireland.

Wage cuts were easier to impose here because people remembered that leaders moved too slowly to overcome Ireland’s last recession. This time, Mr. Cowen struck accords swiftly with labor unions, which agreed that protests like those in Greece would only delay a recovery.

But pay cuts have spooked consumers into saving, weighing on the prospects for job creation and economic recovery. And after a decade-long boom that encouraged many from the previous years of diaspora to return, the country is facing a new threat: business leaders say thousands of skilled young Irish are now moving out, raising fears of a brain drain. 

In other words, Ireland now is everything the deficit hawks want for America...and Ireland as a result is falling apart.  Even worse, the coming austerity measures for Germany and Britain, Ireland's major trading partners, mean that there won't be anyone to buy Irish exports.  That will wreck Ireland's economy even more.

In seeking not to make the mistakes Greece did, we also cannot make the mistakes Ireland has, either.  Ireland is where we would be now without the stimulus package enacted last year.  And without something else soon...that danger still exists.