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Post-bailout Ireland as the
Poster Child for Austerity
ble to reduce fiscal expenditure in a small open economy openly courting foreign direct investment with
friendly taxation rates, when the rest of the world is
growing, and one is receiving transfers from other
states, whilst reducing costly unemployment through
emigration and devaluing one’s currency.
Stephen Kinsella1
But if Ireland is not the poster child for austerity, then
what explains Ireland’s remarkable performance from
2010 to 2014 in terms of fiscal consolidation, structural reform, and relative normalisation of a bloated
banking system? This article attempts to answer this
question.
Surely Ireland in 2014 is the poster child for austerity?
This article is an update to Kinsella (2012), which argued Ireland was not the poster child for austerity because of the remarkable degree of openness of its
economy. For the avoidance of confusion, let us follow Blyth (2013) in defining austerity as a policy of,
cutting the state’s budget to stabilise public finances,
restore competitiveness through wage cuts, and create
better investment expectations by lowering future tax
burdens.
Figure 1 traces out the details of the recent boom and
bust cycle in levels for GDP, unemployment, and debt
to GDP. What is remarkable are the sheer increases in
the levels of debt to GDP and unemployment, but
also the drop in the level of GDP to 2005 levels in
2013 and 2014, and the fall in unemployment after
2011, driven mostly, it seems, by emigration.
Kinsella (2012) argued policies that would work in
Ireland could not be transplanted to other economies
with any confidence in their success given Ireland’s inWith unemployment dropping since 2011 from a high
stitutional specificities. Ireland’s previous experience
of 15.1 percent to 12.1 percent in February 2014, a reof austerity in the 1980s took place in the context of a
turn to a positive primary balance in the government
confluence of positive and growth-enhancing internal
finances is on the cards. Combined with a net debt poand external factors like real wage increases, an insition of 99 percent of GDP once cash balances and
come tax amnesty, the opening up of the single marother holdings have been taken into account, and a seket, and a currency devaluation in 1986 detailed by
ries of successful bond auctions completed, Ireland’s
Lee (1989), and Honohan and
Figure 1
Walsh (2002). Rather than presenting Ireland as a case study for
Unemployment, GDP and Debt to GDP for Ireland
expansionary fiscal contraction
Quarterly levels
Q1, 2007 = 100
as Alesina and Ardagna (2013)
350
and others have argued, a close
GDP
300
Unemployment rate
reading of Ireland’s economic
Debt/GDP
his­
tory reads in a rather Key­
250
nesian light today.
200
Unhelpfully for today’s policy
makers, the experience of the
1980s in Ireland shows it is possiUniversity of Limerick, Ireland. The author thanks Antoine Godin and Mark
Blyth for helpful discussions. This research
is funded by a grant from the Institute for
New Economic Thinking.
150
100
1
CESifo Forum 2/2014 (June)
50
2002
2003
2004
Source: Central Statistics Office.
20
2005
2006
2007
2008
2009
2010
2011
2012
2013
Focus
fiscal sustainability seems assured. Modest growth in domestic demand, as well as in overall
GDP, is forecast for the next two
years by all major institutions.
Figure 2
Sectoral balances for Ireland
Seasonally adjusted
15 000
10 000
billion euros
Private
Public
Rest of world
In the present day, Ireland is pre5 000
sented as a success story based on
a number of outstanding achieve0
ments. The first is a remarkable
degree of fiscal consolidation
-5 000
over a short space of time. Ireland
has consolidated almost 20 per-10 000
cent of its GDP over an 8 year pe2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
riod, with no significant industriSource: Central Bank of Ireland.
al or social upheaval. With a
‘clean’ exit from the EU/IMF
In the Irish case in 2014, we might say equation (3)
bail­out programme, recent quarterly increases in dorepresents the identity of the private sector surplus
equalling Ireland’s deficit spending plus our current
mestic demand and employment, as well as the favouraccount surplus. In particular for Ireland it is imporable borrowing costs mentioned above, Ireland aims
ding achievements. The first is a remarkable degree of fiscal consolidatant to note the private sector surplus is a net position,
to give the impression is on its way to resuming busia short space of time. Ireland has consolidated almost 20% of its GDP
made
up of the change in foreign ownership of doness
usual
from first
a macroeconomic
tstanding
achievements.
The
is a remarkable
degree
of fiscal With
consolidayear period,
withasno
significant
industrial
orstandpoint.
social
upheaval.
mestic
assets minus the change in domestic ownership
over
a short
of time.
Ireland
has consolidated
almost 20%
of its GDP
xit from
thespace
EU/IMF
bailout
programme,
recent quarterly
increases
of
foreign
andemand
8 year and
period,
with no significant
or social
upheaval.
Withassets.
ic
employment,
as well as industrial
the favourable
borrowing
costs
tstanding
achievements.
The first is programme,
a remarkable degreequarterly
of fiscal consolidaexit Ireland
from
the
EU/IMF
increases
dean’
above,
aims
to givebailout
the impression is onrecent
its way to resuming
Ireland’s
sectoral
balances
over
a
short
space
of
time.
Ireland
has
consolidated
almost
20% of
its GDP
and employment,
as well as the favourable borrowing
Figurecosts
2 shows how these three balances have evolved
smestic
usual demand
from a macroeconomic
standpoint.
an
8
year
period,
with
no
significant
industrial
or
social
upheaval.
With
ioned above, Ireland aims to give the impression is on its way tosince
resuming
2002.
The ‘public’ sectoral balance was in clearly
Ireland’s
sectoralbailout
balancesprogramme,
tell a slightly different stoean’ as
exitusual
fromfrom
the EU/IMF
ness
a macroeconomic
standpoint. recent quarterlyinincreases
rude health before 2007, with G < T and the private
ry. and
Figure
2 shows
threeas
sectoral
balances
for Ireland.
mestic demand
employment,
well as
the favourable
borrowing costs
land’s
sectoral
balances
sector
investing large amounts while savings remained
ioned above, Ireland aims to give the impression is on its way to resuming
relatively
low. From 2008 onwards, the deterioration
ness
as usual
from
a the
macroeconomic
standpoint.
sectoral
balances
tell
a fundamental
slightlybalances
different
story. Figure
2 shows three
Ireland’s
sectoral
Recall
macroeconomic
accounting
in
the
public
finances caused by the collapse of the asalances for Ireland.
identity equating national income (Y) to consumpnd’s
balances
tell a slightlyaccounting
different story. Figure
2 shows
threecaused the public sector to run a large and
setnabubble
the sectoral
fundamental
macroeconomic
tion, (C)
government
expenditure (G), identity
investmentequating
(I),
Ireland’s
balances
ral
balances
for sectoral
Ireland. (C) government
persistent deficit financed through borrowing, first
ome
(Y ) to consumption,
expenditure (G), investment
and net exports (X – M). It is always true that
Recall
the fundamental
accounting identity equating
et exports
(X − M ). It macroeconomic
is always true that
from thenamarkets, and then from the EU and IMF
nd’s
sectoral
balances
tell a slightly
different story.
Figure(G),
2 shows
three
l income
(Y ) to
consumption,
(C) government
expenditure
investment
once private sources of funding the state were no longral balances
for
Ireland.
(1) (X
Y =
+ X −true
M. that
(1)
and
net exports
−C
M+
). IIt+isGalways
er accessible.
Recall the fundamental macroeconomic accounting identity equating
na- The movement by the authorities towards
a
positive primary balance at the end of 2013 is
l income
(Y and
) to consumption,
(C)
government
expenditure
(G),
investment
ing
Godley
CrippsYGodley
(1983),
) fromtaxes
both(T)
sides,
and (1)
= C +and
Itaking
+
G +taxes
X
− (T
M.
Following
Cripps
(1983),
taking
clear,
with
G almost equalling T before interest payand
exports
(X − income
M ). It Y
is D,
always
true that
Y −net
T as
disposable
we have
from both sides, and redefining Y – T as disposable inollowing Godley and Cripps (1983), taking taxes (T ) from both ments
sides, are
andaccounted for.
come
YD, we have
+
X−−
fining Y − TYas
income
have
D disposable
= C +YI =
+C
(G+−I T+)YG
+D,
(Xwe
MM.
).
(2) (1)
From an examination of gross flows into and out of
cting C from
both
defining
S−=M
Y).)Dfrom
− C both
and sides,
then and
ollowing
Godley
and
Cripps
taxes
(T
(2)
Y
Dsides,
=
C+
I(1983),
+ (G saving
−taking
T ) +as
(X
(2)
Ireland,
g
I
from
both
sides
we
have
the
sectoral
balance
identity
relating
the it is clear Ireland’s expansion was built on usfining Y − T as disposable income Y D, we have
a foreign
ubtracting
both sides,
defining
as sectoral
S = YD
− C ing
and
then surplus as deposits and equity. Post 2007,
ctor
balanceCtofrom
the public
and rest
of thesaving
world’s
balances:
Cwe
from
both
sides,
defining
saving identity
as S = relating
the
relationship
has changed, with the foreign surplus
racting I fromSubtracting
both
sides
have
the
sectoral
balance
the
Y D = C + I + (G − T ) + (X − M ).
(2)
Private
World
YD
–toCthe
andpublic
then subtracting
I from
both sides
we balances:
te sector balance
and
rest
of
the
world’s
sectoral
being
used
as
loans
and equity.
ubtracting C have
from
both
sides,
Y D − C and
sectoral
identity
(S −the
I)
= (G
−balance
T defining
) + (X
− saving
M )relating
. as Sthe=private
(3) then
Private
World
we
have
public
racting I fromsector
both balance
sides
the and
sectoral
balance
identity relating the
to the
Public
restof the
world’s secPost 2007 the expansion of saving, largely of a precaute sector balance to(Sthe
public
and
rest
of
the
world’s
sectoral balances:(3)
− I) = (G − T ) + (X − M ) .
toral balances:
tionary nature, combined with a drop in investment
Irish case in 2014, we might say
equation
3 represents the identity
of
Private
World
Public
caused by a constriction of credit, forced the private
e sector surplus equalling
plus our current
Ireland’s deficit
spending
(3)in 2014,
(S – I) relation
up, matched in this case by an expann the Irish
case
we
might
say
equation
3)represents
theprivate
identity
of
(3)
(Sfor−Ireland
I) =
(Git−is
Timportant
)+
(X − M
.
urplus.
In particular
to
note
the the
sioncurrent
private
surplus equalling
Ireland’s
deficit
plus our
plus is asector
net position,
made upPublic
of the change
in spending
foreign ownership
ofof holdings from the rest of the world (X – M) as
unt
surplus.
Ireland ownership
it is important
to note
the the
private
Ireland’s
trade balance improved. These two lines are
assets
minus In
theparticular
change infor
domestic
of foreign
assets.
nr the
Irishiscase
in position,
2014, we might
sayofequation
3 represents
the
identity of
a these
net
made up
the change
foreign
ownership
2 surplus
shows how
three balances
have evolved
sincein2002.
The
‘pub- of
private
sector
surplus
deficit
spending
plus assets.
our current
estic
assets
minus
the equalling
change
in Ireland’s
domestic
ownership
foreign
al balance
was
in clearly
in rude
health before
2007, of
with
G < T and
unt
surplus.
In
particular
for
Ireland
it
is
important
to
note
the
private
2 shows
howlarge
theseamounts
three balances
have evolved
since
2002.the
The
eigure
sector
investing
while savings
remained
relatively
low.‘pubr
surplus
is
a
net
position,
made
up
of
the
change
in
foreign
ownership
of
balance
was in clearlyininthe
rude
health
beforecaused
2007, with
G col< T and
8ectoral
onwards,
the deterioration
public
finances
by the
CESifo Forum 2/2014 (June)
estic
assets
minus
the
change
in
domestic
ownership
of
foreign
assets.
21
rivate
investing
amounts
while
remained
relatively low.
he
assetsector
bubble
caused large
the public
sector
to savings
run a large
and persistent
igure
shows how
three balances
have evolved
since
2002. by
The
manced
20082through
onwards,
thethese
deterioration
in the
finances
caused
the‘pubcolborrowing,
first from
the public
markets,
and then
from the
Focus
almost equal as of the time of writing as Figure 2
shows.
with the resultant improvement in Ireland’s trade
bal­ance.
In answer to the question posed by this volume, looking to the future using the sectoral balances, post-bailout Ireland has a choice to make. Given the Irish authorities’ commitment to drive G < T for some time to
come in order to pay down debts in particular, only
two things can happen to the relation between S – I
and X – M. Either the private sector begins to invest
more and save less, driving the ‘private’ line down
somewhat, or if this does not happen, the ‘world’ sector must agree to hold ever more in terms of Irish exports. The following section examines the dynamics of
Ireland’s trade balance to investigate whether this reliance on export-led growth is an option moving into
the future.
Austerity was, in this balance sheet sense, made more
possible because of Ireland’s openness, and its status
as a multinational export hub. Much of the export
base can, in a sense, be considered as exogenous to the
Irish economy-proper.
Rather than collapsing imports and exports by deflating the entire economy, by only acting on one ‘side’ of
the import-export relationship, and relying on export
led growth, so long the mainstay of Irish economic
policy, the Irish authorities accomplished what few
other economies could: to engineer a deflation in
Ireland’s fiscal space, while leaving exports, and hence
revenues from exports, relatively untouched.
Ireland’s export sector has an almost unique institutional feature when compared to other EU countries:
much of its exports are from multinationals, with the
largest share, approximately half of all merchandise
exports, coming from pharmaceutical companies.
Nine of the top ten pharmaceutical companies on
Earth are located in Ireland.
Digging into trade flows
Figure 3 picks out a startling relation between exports
and imports pre- and post- the 2007 crisis. Pre-2007,
the two series move in lock step, with a correlation coefficient of 0.95. Post-2007 the series diverge dramatically, the correlation between the two series dropping
to 0.71, with both series dropping from 2007 to 2009
as a result of the deterioration caused by the worldwide Great Recession.
Sapir et al. (2014) have produced a review of all four
EU/IMF programmes within the eurozone to date:
Greece, Ireland, Portugal and Cyprus. The authors
of the report subtitle Ireland’s section of the report
‘a success with costs’. The authors show the EU and
IMFs forecasts for the increase in debt to national
output and for the gap between government spending and taxation were almost perfect, while their
forecasts for unemployment were substantially
wrong, as were their forecasts for
the effect of the fiscal consolidation on the domestic economy.
The austerity measures affected
the domestic economy much
more than the EU/IMF planned,
but they (and we) were saved by a
better than expected export performance. Ireland could take a
lot of austerity because of its
openness and flexibility.
Exports improve after 2009 almost to their pre-crisis
trend. The same improvement does not take place
for imports. The collapse in domestic demand caused
by the popping of the asset bubble, combined with
the imposition of austerity policies by the Irish authorities weakened Ireland’s propensity to import,
Figure 3
Trade balances for Ireland
Trends
50 000
billion euros
Exports
Imports
Trade surplus
40 000
30 000
20 000
10 000
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Central Bank of Ireland.
CESifo Forum 2/2014 (June)
22
2011
2012
This feature of the Irish economy
is unlikely to be present in other
economies, meaning Ireland’s use­
fulness as a poster child for austerity must still be questioned.
their forecasts for the effect of the fiscal consolidation on the
more
than the
EU/IMF
they (and
my. The austerity
measures
affected
theplanned,
domesticbut
economy
muchwe) were saved by a better than
expected
export
performance.
Ireland
could
take a lot of austerity because of
EU/IMF planned, but they (and we) were saved by a better than
its
openness
and
flexibility.
t performance. Ireland could take a lot of austerity because of
This feature of the Irish economy is unlikely to be present in other economies,
d flexibility.
meaning
Ireland’s
a poster
child for austerity must still be quesof the Irish economy is unlikely
to usefulness
be present as
in other
economies,
tioned.
d’s usefulness as a poster child for austerity must still be quesA digression for regression
Focus
and a range of other assets, and household deposit
4 A digression for regression and a range of other assets (see Table 2).
ression for
regression
I Iestimate
the the
evolution
of theofemployment
level of level of the labour force in logs
estimate
evolution
the employment
In model 1 shown in Table 2, it is clear financial corpothe
labour as
force in logs (EMP) as
(EMP)
evolution of the
employment level of the labour force in logs
rates holdings of securities altered, moving from gov-
+ α3 Time
+ 0.397)
α4 Taxes.
(4) loans and currency
ernment
loans (– towards
(4) EMP = α0 + α1 Real GDPt−1 + α2 Nominal Wages
α1 Real GDPt−1 + α2 Nominal Wages + α3 Time + α4 Taxes. (4) from the rest of the world.
Results are shown in Table 1 for employment and household disposable income
Clearly,and
andhousehold
unsurprisingly,
employment
depends positively on inshown in Table
1 for(HH).
employment
disposable
in- In model
2, thenegatively
effect of thetaxes
collapse on non-financial
Results
are
shownand
in Table
1 forwages.
employment
and
come,
output,
nominal
What
is
striking
is how
arly, and unsurprisingly, employment depends positively on inloans was negative, both in terms of currency outflow
household
disposable
income (HH).
Clearly, and
un- over
affect the
log isof striking
household
disposable
income
and nominal wages.
What
is how
negatively
taxes this period (-0.410, signifi(– 0.538,
significant
at have
p < 0.05)
but also in terms of a
surprisingly,
employment
depends
positively
on incant
at
p
<
0.05).
Looking
past
the
bailout,
once
the
State’s
finances
been
f household disposable income over this period (-0.410, signifimovement
towards
government
loans (0.536, signifistabilised,
tax
decreases
should
help
increase
employment
significantly.
come,
output
and
nominal
wages.
What
is
striking
is
). Looking past the bailout, once the State’s finances have been
When
these
data
are
broken
into
sub
samples,
preand
post2007,
the
cant at p < 0.05). Running these regressions in subhowhelp
negatively
taxes
affect the logsignificantly.
of household disdecreases should
increase
employment
findings
are
similar,
meaning
the
stimulative
effects
taxtwo
cuts
can’tloan
be regimes – pre 2007
oneofsees
distinct
posable
income
over
this period
significant
atthe samples,
data are broken
into
subbroadly
samples,
pre-(– 0.410,
and
post2007,
ruled
out
as
a
means
to
increase
the
economic
activity
of
post-bailout
Ireland.
p < 0.05).the
Looking
past theeffects
bailout,
the State’s
adly similar, meaning
stimulative
of once
tax cuts
can’t be and post 2007, but the overall trend is similar. Looking
Turning
to the
financialpost-bailout
side
of the economy,
wethe
estimate
relationships bemeans to increase
the
economic
Ireland. at
influence of government securities issued on
finances
have
been activity
stabilised,oftax
decreases should
tween
financial
corporate
securities
and
a
range
of
other
assets,
financial
the financial side
the economy,
wesignificantly.
estimate relationships be- non-financial loansnon
it is clear the credit contraction afhelp of
increase
employment
loans
and
a
range
of
other
assets,
and
household
deposit
and
a
range
of other
corporate securities and a range of other assets, non financial fected the economy in large
and uncertain ways, and
assets.
ge of other assets,
and household
deposit
andsamples,
a range
ofand
other the portfolio effects described by Brainard and Tobin
WhenIn
these
data
are
broken
into
sub
premodel 1, it is clear financial corporates holdings of securities altered,
(1969)
are the
clearly in evidence as
post-2007,
the findings
are broadly similar,
meaning
moving
from
government
(-0.397)
towards (1968)
loans and
and Tobin
currency
from
it is clear financial corporates
holdingsloans
of securities
altered,
households and firms switched away from government
the
stimulative
effects of tax cuts can’t be ruled out as
rest
of
the
world.
overnment loans (-0.397) towards loans and currency from the
d.
loans (– 0.397) towards loans from the rest of the
world (0.426, significant at p < 0.05).
a means to increase the economic activity of post-bailout Ireland.
6
Household deposits were relatively unaffected during
the crisis, showing us the effects on gross flows into
and out of the economy, as well as portfolio reallocations, took place in the corporate
and financial sectors.
Turning to 6
the financial side of the economy, we estimate
relationships
between financial corporate securiTable 1
ties and a range of other assets, non-financial loans
Table 1
OLS Regressions for the real economy
Lagged Real GDP
Real Wage
Time
Nominal Wages
Taxes
Constant
Dependent variable
HH Gross
Disposable Income
Employment
(1)
(2)
0.897***
(0.112)
0 .298***
(0.079)
– 0 .065***
(0.007)
0.544***
(0.029)
– 0.410**
(0.188)
– 4.842***
4,389.200***
(0.773)
(1,125.892)
46
46
0.888
0.898
0.880
0.894
Observations
R2
Adjusted R2
Residual Std.
Error
0.022 (df = 42)
F Statistic
111.496*** (df = 3; 42)
Note: *p<0.1; **p<0.05; ***p<0.01
Source: Central Statistics Office.
846.761 (df = 43)
189.885*** (df = 2; 43)
23
The regressions are simple, but so
is their message: portfolio allocations pre and post crisis differ
mainly on the size and composition of their holdings, and appear
to have taken place within the
corporate and financial sectors.
Conclusion: post-bailout debt
dynamics
One way to tell Ireland’s post
bailout story is to look at the
likely evolution of the stock of
debt and the flow of debt repayments, and their effects on the
real economy when growth is
sluggish. Following Godley and
Rowthorn (1994), to reinforce
the point of this short chapter,
let us assume exports are exoge-
CESifo Forum 2/2014 (June)
Focus
Table 2
Table 2
A look at the financial side of the economy
HH Loans
FC Securities
(1)
– 0.487
(0.377)
Dependent variable
NFC Loans
(2)
FC Deposits
– 0.538**
(0.264)
0.198***
(0.024)
FC Securities
FC Loans
Govt Loans
HH Deposits
(3)
0.067***
(0.007)
– 0.397
(0.401)
0.536***
(0.151)
0.254**
(0.101)
Govt Securities
ROW Deposits
1.077***
(0.099)
ROW Loans
0.426***
(0.146)
ROW Securities
0.411***
0.084***
(0.063)
(0.006)
Cons.
21,803.940
– 83,217.430***
46,793.680***
(15,024.500)
(9,716.771)
(2,217.848)
Observations
46
46
46
R2
0.974
0.892
0.994
Adjusted R2
0.970
0.879
0.993
Residual
Std.
Error
18,161.470
(df
=
39)
10,848.910
(df
=
40)
1,651.373
(df = 41)
Household deposits were relatively unaffected during the crisis, showing us
***
***
***
F
Statistic
244.063
(df
=
6;
39)
66.104
(df
=
5;
40)
1,600.900
(df
= 4; 41)
the effects on gross flows into and out of the economy, as well as portfolio
*
**
***
Note:
p<0.1;
p<0.05;
p<0.01.
reallocations, took place in the corporate and financial sectors.
FC: but
Financial
corporates;
ROW:
Rest of world;
HH: Households;
Govt: Government
The regressions are simple,
so is their
message:
portfolio
allocations
pre
Source:
Central
Bank
of
Ireland.
and post crisis differ mainly on the size and composition of their holdings, and
appear to have taken place within the corporate and financial sectors.
5
nous, andPost-bailout
the net stock of both foreign
domestic
Equation (5) simply says a small open economy’s ‘warConclusion:
debtanddynamics
bonds hold by residents is B. Imports make up a
ranted’ level of government expenditure is commensu-
One way to tell Ireland’s
story
to exchange
look at the
evolution
fixed sharepost
m ofbailout
income and
theisreal
rate likely
is
rate
with its trade performance. Whenever G > G*, and
of the stock of debt
and
the
flow
of
debt
repayments,
and
their
effects
on the
fixed. Assuming a target wealth of W, and an autorethe government
must borrow to finance itself, the govreal economy when
growthwealth
is sluggish.
Following
Godley
(1994),
gressive
accumulation
process
W =and
βWRowthorn
+
ernment
can
always
finance itself through higher taxes.
–1
to reinforce the point
short
chapter,
let us according
assume exports
are exogeɣ(G +ofX),this
where
wealth
accumulates
to a
nous, and the net stock of both foreign and domestic bonds hold by residents
country’s export profile, we can define a stability conAusterity fundamentally consists of a deflation, and,
is B. Imports make up a fixed share m of income and the real exchange rate
dition in government expenditure and changes in
crucially, in the Irish case, a reduction of m while
is fixed. Assuming a target wealth of W , and an autoregressive wealth accugovernment
debt
such
that
ΔB
=
0.
In
the
steady
according X at its highest level, because then the fismulation process W = βW−1 + γ(G + X), where wealth accumulates maintaining
state,
Godley
and
Rowthorn
(1994)
show
that
govcal
stance G ∕ θ can take higher and higher values such
to a country’s export profile, we can define a stability condition in government
ernment in
expenditures
evolve
to exports)
thatsteady
δG*∕δθ > 0.
expenditure and changes
government
debt(relative
such that
∆B = ac0. In the
to: (1994) show that government expenditures evolve
state, Godley andcording
Rowthorn
(relative to exports) according to:
Ireland’s post bailout performance in terms of debt
dynamics will hinge upon its ability to trade off its
trade performance
and tax rates. Given that the com(5)
position of Ireland’s fiscal adjustment from 2011 to
where θ is the tax rate, m is the import propensity, z is average2014
realwas
post
approximately 2/3 expenditure reduction and
tax rate of return where
on net
wealth,
and
ω
is
the
target
wealth-income
ratio.
1
θ is the tax rate, m is the import propensity, z is
/3 taxation increase, it may be that Alesina and
Equation 5 simply
says
a
small
open
economy’s
‘warranted’
level
of govaverage real post tax rate of return on net wealth, and
Ardagna (2013) have a point regarding taxation
ernment expenditure is commensurate with its trade performance. Whenever
ω is the target wealth-income ratio.
measures.
∗
m(1 − ωz) − (1 − θ)(1 − ωθ)
(5) G =
X,
m(1 − ωz) − (1 − θ)ωθ
∗
G > G , and the government must borrow to finance itself, the government can
always finance itself through higher taxes.
Austerity fundamentally consists of a deflation, and, crucially, in the Irish
case, a reduction of m while maintaining X at its highest level, because then
the fiscal
G/θ(June)
can take higher and higher values such that δG∗ /δθ > 0.
CESifo stance
Forum 2/2014
24
Ireland’s post bailout performance in terms of debt dynamics will hinge
upon its ability to trade off its trade performance and tax rates. Given that the
Focus
Ireland’s openness is the reason austerity was able to
succeed. Other countries without Ireland’s institutional peculiarities, such as Spain, Portugal, Greece, and
Italy, will not be able to, in a sense, play the same trick.
Kinsella, S. (2012), “Is Ireland Really the Role Model for Austerity?”,
Cambridge Journal of Economics 36, 223–235.
Lee, J.J. (1989), Ireland 1912–1985: Politics and Society, Cambridge:
Cambridge University Press.
Sapir, A., G.B. Wolff, C. de Sousa and A. Terzi (2014), The Troika and
Financial Assistance in the Euro Area: Successes and Failures, Policy
Note PE 497.764, European Parliament’s Economic and Monetary
Affairs Committee.
The portfolio switching observed in the regressions
shown in Table 2 above also point to a degree of financial openness these economies do not share with
Ireland, making the kind of macro-financial reversal
Ireland has experienced also unique in both its scale
and speed of adjustment.
Tobin, J. (1969), “A General Equilibrium Approach to Monetary
Theory”, Journal of Money, Credit and Banking 1, 15–29.
All of the above should not be taken to mean Irish exports are all simply multinational transfers. However,
given the austerity-induced reduction in wages it
would be interesting to estimate how much of a terms
of trade improvement this has given Ireland and how
much of the rise in exports is therefore ‘non-multinational’ throughput. That would give us a better handle
on the supply side of possible export growth, and is
the focus of future work. The demand side is still constrained by the considerable risk of Europe (and in
particular the eurozone, which accounts for 40 percent
of Ireland’s exports) experiencing a stagnation episode over the medium term.
Ireland is still not the poster child for austerity, but,
against the odds, as it were, a lucky child. Given the
simple fact that as a nation Ireland has been bankrupted three times in 50 years, Ireland’s peaceful exit
from its bailout programme is all the more remarkable. The post-bailout landscape is fraught with risks
to the nascent recovery, but stable debt dynamics and
the openness of the economy should be enough to
keep Ireland from requiring another bailout in the
medium term.
References
Alesina, A. and S. Ardagna (2013), “The Design of Fiscal
Adjustments”, in: NBER, Tax Policy and the Economy 27, Chicago:
University of Chicago Press, 19–67.
Blyth, M. (2013), “Austerity as Ideology”, Comparative European
Politics 11, 737–751.
Brainard, W.C. and J. Tobin (1968), “Pitfalls in Financial Model
Building”, American Economic Review 58, 99–122.
Godley, W. and F. Cripps (1983), Macroeconomics, Oxford: Oxford
University Press.
Godley, W. and B. Rowthorn (1994), “The Dynamics of Public Sector
Deficits and Debt”, in: Michie, J. and J.G. Smith (eds.), Unemployment
in Europe, London: Academic Press, 199–209.
Honohan, P. and B.M. Walsh (2002), “Catching Up with the Leaders:
The Irish Hare”, Brookings Papers on Economic Activity 2002-1, 1–57.
25
CESifo Forum 2/2014 (June)