Will EU Extensions and More Pro-Cyclical Policies Prolong the Recession?
In a couple of excellent recent posts on Progressive Economy Michael Burke and Michael Taft look separately at two pieces of analysis of the current economic situation for Ireland by the European Commission and find that all is not as we are often led to believe.
How Unique is Ireland’s Economic Crisis?
In Michael Burke’s post he suggests that there is little that is unique in Ireland’s economic crisis when compared to other economic crises in the Euro Area, and it certainly doesn’t justify implementing the pro-cyclical fiscal policies that we are seeing now. Looking at The European Commission’s latest biannual economic forecast for the European Union he finds that in comparison to other EU countries Ireland’s problems do not look so uniquely bad, with two notable exceptions.
Full details and comments are in the post, but in summary he says that:
- We do not have a bloated public sector: Prior to the recession government spending on the public sector was the lowest of any economy in the Euro Area
- There is still room to increase taxation: Between 2002-2006 Ireland’s tax take was the lowest of any Euro Area economy
- We are not over indebted: “Even if GNP is used, Ireland’s debt ratio is still the second lowest in the Euro Area”
- There is huge potential for a financial stimulus: “Ireland’s output gap relative to potential GDP is expected to be up to 8.5% of GDP in 2009 and will still be as high as 5.4% of GDP in 2011″
- Our economy is not “uncompetitive”: The Irish economy remains highly competitive as our growth of per capita labour productivity was an annual average 2.2% compared to just 1.2% for the Euro Area, and 1.6% for Britain and 2.1% for the US.
However, Ireland’s economic collapse does have two unique qualities: the depth of the recession itself - ‘a forecast decline of 13% in GDP more than double the average decline in the Euro Area’ - and the bank bailout, ‘which at 232% of GDP is greater in Ireland than the next worst 4 Euro Area economies put together’.
This is sucking the lifeblood from the economy. So what is to be done? As Michael forcefully concludes:
The scope of the economic decline would require uniquely dramatic stimulus measures to revive it, while a rapid exit strategy from the policy of bailouts for bank bond and shareholders is also urgently needed.
EU Commission Extension Extending the Recession Itself
And this is where Michael Taft steps in to talk about the EU Commissions announcement that it has provided the Irish Government with a 1 year extension to get the deficit down and make it Maastricht compliant. During his press conference yesterday EU Commissioner Joaquin Almunia tried to put a positive gloss on something that was simply cold maths. As Michael argues:
“The bottom-line in all this is not that the Government is being given extra breathing space. Rather, it is that the Government will have to continue its deflationary fiscal strategy - the planned average annual 2 percent contraction up to 2013 - for another year. The economy has not been given a respite - its deflationary sentence has just been lengthened.”
So this is not to provide a remedy, it is in effect to continue the deflationary policies which will have a continuing negative effect on the economy’s potential to recover for even longer than planned, thereby extending the recession itself.
“How will this play out in the medium term? Despite media reports that the Government is more optimistic about the economic numbers this year (this is in line with all other forecasters), the issue is what are the growth numbers going forward? In April, the Government projected a growth rate of over 10 percent between 2010 and 2013. Some forecasters disagree. IBEC is projecting 6 percent while NIB is slightly more optimistic at 8 percent. Only Ernst & Young, so far, believe growth rates to 2013 will be as strong as the Government projections.
However, extending the deflationary period will only dampen economic growth longer.”
Michael cites a more pessimistic outlook for the economy. One provided by Jonathan Stenning of Cambridge Econometrics at a recent economic forum organised by Dublin City Council. His forecast is for the Irish economy to grow very slowly, ‘at an average rate of 1 per cent per annum between now and 2013′. This means lower tax revenue and low job growth for new entrants and those currently unemployed. Will the result of that, if Stenning is correct, mean that the EU Commission will return with further encouragement to keep up the good work, while also providing another extension - to 2015?
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