At Project Syndicate , Mohamed El-Erian reminds us that Ireland is again an interesting case study in economic policy. When the Celtic Tiger was de-clawed (well, worse, actually) during the global economic crisis, most Irish civilians suffered, while the banks were propped up by a series of emergency measures. So it would have been rational to expect to see massive public opposition to harsh austerity measures. And yet, the reaction in Ireland has been far tamer than in fellow PIIGS countries. El-Erian notes that it is too early to tell what the long term effects of austerity will be, though it is important to keep watching: Austerity’s supporters point to the fact that Ireland is on the verge of “graduating” from the troika’s program. Growth has resumed, financial-risk premia have fallen sharply, foreign investment is picking up, and exports are booming. All of this, they argue, provides the basis for sustainable growth and declining unemployment. Ireland, they conclude, was right to stay in the eurozone, especially because small, open economies that are unanchored can be easily buffeted by a fluid global economy. “Not so fast,” says the other side. The critics of austerity point to the fact that Irish GDP has still not returned to its 2007 level. Unemployment remains far too high, with alarming levels of long-term and youth joblessness. Public debt remains too high as well, and, making matters worse, much more of it is now owed to official rather than private creditors (which would complicate debt restructuring should it become necessary). The critics reject the argument that small, open economies are necessarily better off in a monetary union, pointing to how well Switzerland is coping. And they lament that eurozone membership means that Ireland’s “internal devaluations,” which involve significant cuts in real wages, have not yet run their course. The data on the “Irish experiment” – including the lack of solid counterfactuals – are not conclusive enough for one side to declare a decisive victory. Yet there is some good analytical news. Ireland provides insights that are helpful in understanding how sociopolitical systems, including economically devastated countries like Cyprus and Greece, have coped so far with shocks that were essentially unthinkable just a few years ago. Read Ireland and the Austerity Debate here .
Filed under: monetary policy, global business, IMF, fiscal policy, debt, EU, too big to fail, EU bailout, Ireland, austerity measures, project syndicate, foreign investment, monetary union, Mohamed El-Erian, austerity programs, Ireland's banks, troika