Ireland : Real Devaluation or Keynesian Stimulus?

David Begg, leader of the Irish Congress of Trade Unions (board member of the Irish Central Bank, Aer Lingus and member of the Irish Times Trust) has kicked of a debate on the fundamental direction of Ireland’s response to the fiscal crises, in todays Irish Times. He argues against the current deflationary policies, in particular spending cuts – although tax rises are also deflationary, perhaps even to a greater degree.

The point is that we know that pro-cyclical deflationary policies will drive down the domestic demand side of the economy and increase unemployment but there is no evidence to suggest any immediate boost to exports which would counterbalance this.

The alternative is for the government to borrow extra money and pump it into the economy, perhaps as David Begg argues by expanding the public sector, or as the Americans are doing by investing in large scale capital projects. Over at Notes On The Front, chief-economist, at Union Unite, Michael Taft has been arguing that Ireland has had no problem in selling government debt to date.

Professor of Macro Economics at Trinity College Dublin, Phillip Lane, responded to David Begg’s challenge at

David Begg argues that there is little evidence that deflation facilitates recovery. However, there is a strong body of evidence that real devaluation is helpful. Just taking Irish economic history, the devaluations of 1986 and 1993 were contributory factors to economic growth.

And the issue as to whether Ireland can afford to borrow to stimulate on top of borrowing to close the fiscal gap and bail out the banks –

The real question is whether there is a credible alternative. If Ireland had run a counter-cyclical fiscal policy during the good years, there may have been room to do more in terms of counter-cyclical fiscal expansion now. However, the scale of the fiscal deficits and the fragile state of international bond markets mean that significant fiscal expansion cannot be entertained.

Either we find a way to borrow to invest, or we duke it out over how to divy up the pain via tax rises and pay / spending cuts.