PAUL KRUGMAN, the influential American economist, has identified Ireland as one of two developed economies that could follow Iceland into default because of the scale of their economic problems.
Prof Krugman, who was awarded the Nobel Prize in economics in 2008, made his remarks during a question and answer session with foreign journalists in New York on Tuesday.
He was asked by an Austrian journalist about the possibility of Austria being bankrupted by its banking system’s exposure to eastern Europe.
“We’ve seen one advanced country essentially go bankrupt. Now it’s a tiny one, it’s Iceland, but that just shows that it can happen, even to advanced countries.
“Ireland looks pretty bad because of large financial exposure. And Austria would probably be my third candidate in those leads,” he replied.
European Central Bank (ECB)council member and Austrian Central Bank governor Ewald Nowotny responded yesterday, saying the creditworthiness of Austria and of the Austrian banking sector was beyond any doubt.
“There are no risks which we would not be able to absorb with the measures we have taken,” he said in a statement.
A spokesman for the Department of Finance said that the Government was very concerned about the level of misinformation about the Irish economy and a number of measures to counter it – including a tour of European financial centres by the Minister for Finance – were being implemented. He added that the president of the ECB, Jean-Claude Trichet had dismissed the possibility of an Irish default.
Prof Krugman also said on Tuesday that the expansion of the International Monetary Fund lending facility agreed at the recent G20 meeting might provide a buffer against these threats.
The economist drew attention to the fault lines developing in the euro zone because of the difference in creditworthiness among its members.
“A Greek euro-denominated bond is clearly not as safe an asset, not a perfect substitute for a German bond. Even a Spanish bond, certainly an Irish bond is not equivalent.
“And so the euro zone has turned out to be a fragmented player in a way that the dollar zone is not,” he said.
A full transcript can be accessed at http://fpc.state.gov/121662.htm
See also http://www.irishtimes.com/blogs/business
