Battleground Ireland : The proxy war

US neo-Keynesians and the ‘Austerians‘ are slugging it out over the Irish approach to managing the crisis. At stake, the future of US and perhaps global economic policy. First up the Keynesian New York Times :-

In Ireland, a Picture of the High Cost of Austerity

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

Now, the Irish are being warned of more pain to come.

Unemployment was 12.9% in Q1 having fallen 0.4% from the previous quarter, the fall in GNP (probably a better measure of the Irish economy) was much greater last year however.

Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.

Hmmm.. Ireland had a much larger credit bubble and much worse banking crisis than any of these countries. That we’ve been spared Greece’s fate must count for something. There is a hefty logical jump there too. Irish bond yields have improved more significantly than Spanish or German yields since they peaked during the banking crisis of 2008. It’s one thing to argue that the evidence that bond markets are rewarding Ireland is minimal, quite another to argue that they are punishing Ireland. Absence of evidence is not the same thing as evidence of absence. The whole tone of this article? America should not turn Irish.

The Austerian Wall Street Journal responded the next day with an article singing Ireland’s praises, and it’s up beat assesment of our prospects contrasted vividly with the depressed, all is lost, tone of the New York Times piece.

Weaker Euro Set to Spur Irish Turnaround

The Emerald Isle has high unemployment and one of Europe’s deepest budget deficits, and is taking some of Europe’s harshest austerity medicine. Economists, however, are starting to feel less dismal about Ireland’s prospects because of the unique nature of its export economy.

Exports account for more than 50% of Ireland’s gross domestic product, ahead of even Germany. And while many euro-zone countries’ exports go to their European neighbors, Ireland sends much of its chemicals, business services, technology and food to the U.S. and U.K. That maximizes the benefit of the falling euro, which has lost approximately 15% against the U.S. dollar and 8% against the British pound since the beginning of the year.

Which contrasts with the more sanguine NYT article which noted the difficulty in converting exports into jobs.

Ireland, which is set to announce its first-quarter GDP on Wednesday, is expected to announce that its economy grew at the beginning of the year from the last quarter in 2009, technically pulling it out of a recession. Economists now believe Ireland could grow 0.5% or 0.6% this year, reversing earlier forecasts that called for a full-year contraction.

Recession over? Again? We had a Schrödinger’s cat moment last year, but it turned out the cat was just dead. No ambiguity there, when GDP growth figures were later revised downards last year.

Ireland’s experience seems to suggest economies can recover even while slashing spending, though the path of the export-driven economy is one that may be harder for its euro-zone neighbors to follow.

Ah yes, there it is – austerity works. That’s the reason this article was written.

And.. things are looking up.

Also, key manufacturing and services sectors have started to expand, while retail sales have held up reasonably well. Ireland’s trade surplus—the value of goods exported compared with those imported— has continued to grow throughout the downturn, hitting about €39 billion ($48 billion) in 2009 from €29 billion a year earlier even as the economy shrank 7%, according to the Central Statistics Office.

The export picture looks encouraging, with demand rising in the U.S. and China. Prices and wages in Ireland, meanwhile, are falling, making Irish companies more competitive and encouraging foreign direct investment./

But surely the invisible bond market vigilantes have not noticed?

Traders in derivatives agree. While the cost to insure Ireland’s government bonds using credit-default swaps has risen about 68% this year, similar costs for Portugal and Spain have leaped by 251% and 135%, respectively, according to data provider Markit.

There it is again, the relative comparison. Can’t wait to see one on Paul Krugman’s blog. The Keynesians tend to look at the absolute numbers as they support their case, the Austerians, the relative position as it tends to support their case. In the meantime both oversimplify the Irish problem in a manner that fits seemlessly with their own internal narratives. Or as Philip Lane put it on Irish Economy

A more accurate and comprehensive headline [for the New York Times article – Mack] might have been: “Ireland paying a high price for boom-bust cycle in property sector and attendant banking crisis, amplified and abetted by procyclical fiscal policy and now requiring a sustained fiscal correction” – but that is probably too long!

Perhaps, the first causality of war is the natural verbosity of the economist!

No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .

Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm