WHEN Nobel economics laureate Paul Krugman wrote about the Irish economy this week, his New York Timescolumn carried the arresting headline "Erin Go Broke". The column itself was, if anything, even blunter – identifying Ireland's fate as the embodiment of the worst-case scenario for the global economy.
"The Irish government now predicts that this year GDP will fall more than 10 per cent from its peak, crossing the line that is sometimes used to distinguish between a recession and a depression," he wrote.
"But there's more to it than that: to satisfy nervous lenders, Ireland is being forced to raise taxes and slash government spending in the face of an economic slump — policies that will further deepen the slump."
Krugman has reservations about the Government's plan to buy up toxic assets from the banks but he acknowledges that it has no option but to cut spending and raise taxes. Along the way to his gloomy conclusion that the Government has been forced to punish the economy in order to save the banks, he pauses to consider how Ireland found itself in its current bind.
"By being just like us, only more so. Like its near-namesake Iceland, Ireland jumped with both feet into the brave new world of unsupervised global markets. Last year the Heritage Foundation declared Ireland the third freest economy in the world, behind only Hong Kong and Singapore," he wrote.
"One part of the Irish economy that became especially free was the banking sector, which used its freedom to finance a monstrous housing bubble. Ireland became in effect a cool, snake-free version of coastal Florida. Then the bubble burst."
Writing in the
Wall Street Journal, Matthew Curtin backed the establishment of NAMA but warned that we will need "the luck of the Irish" if a global recovery is to compensate for domestic austerity measures.
"(The) emergency budget and new bank-bailout plan has created some room to maneuver its economy and banking system to safer ground. But it is unlikely to be enough to spare Ireland from a debt crisis if the world economy doesn't start to pull out of its slump early next year," he wrote.
"The price will be key. Ireland plans to take on the loans at "fair value." Too low a price could mean big cash injections to fill the holes left in bank capital. Too high a price could saddle taxpayers with the potential for big losses on the loans down the road."
