The Staggers

The New Statesman’s rolling politics blog

Why the Irish bailout may not work

Ireland needs debt relief if it is to avoid economic collapse.

By George Eaton Published 24 November 2010 10:32

Ahead of the final details of the likely €85bn (£72bn) bailout, Ireland's government is due to present a four-year austerity package made up of €15bn of spending cuts and tax rises.

The rationale behind the austerity measures is clear: Ireland has a budget deficit of 32 per cent and its national debt has gone from 25 per cent of GDP in 2007 to almost 100 per cent. But here's the rub: if and when it becomes clear that the austerity package will reduce economic growth, the market will quickly lose confidence and the cost of borrowing for the government will rise yet again. As the cost of borrowing rises it becomes even harder for the government to meet its commitments, which leads to still higher borrowing costs. It's an unvirtuous circle.

The bailout is designed to resolve this Catch 22, but will it work? The US economist and Nobel laureate Paul Krugman suggests not. He points out that rather than an agreement to absorb Irish banks' losses, the bailout is simply a commitment to lend Ireland funds at more or less safe market rates. As a result, he argues that European policymakers have mistaken a crisis of insolvency for one of illiquidity. He writes:

...the bailout will only work if the vicious circle is at the heart of the story -- as opposed to being a symptom of the fundamental unsustainability of the austerity-and-full-repayment strategy. That is, it will work only if Ireland is the fundamentally sound victim of a self-fulfilling panic. And that's a hard claim to make.

The alternative? Debt relief. Without this, he warns, Ireland still faces a "an enormous debt load, made worse by deflation and stagnation". Judging by this, it's time for everyone to get round the table again.

Tags: Ireland

More from George Eaton

15 comments

Wed, 2010-11-24 18:34 — Mac (not verified)

What a carry on, the country has nothing of value to offer other than being a tax haven for the wealthy and corporations. The locals were priced out of homes long ago or burdened with a lifetime of debt for a whitewashed shoebox and now the silly ones that are staying are going to be forced to take less than minimum wage and pay higher taxes to clean up all the mess. So Ireland as a nation was never booming, it was all debt fuelled like the rest of us. If you want real growth you have to innovate and invest in real infrastructure, science and technology, not blocks of flats.

Fri, 2010-11-26 04:06 — bbei18

welcome to :
===== http://doiop.com/afl412 ======
U-GG Nightfall Boots
U-GG Coquette Slipper
U-GG Sundance Limited Edition
U-GG Classic Argyle Knit
U-GG Bailey Button Boots
U-GG Classic Cardy Boots
U-GG Classic Tall Boots
U-GG Classic Short Boots
U-GG Ultra Tall Boots
U-GG Classic Tall Metallic
U-GG Sundance II Boots
U-GG Ultra Short Boots
U-GG Classic Mini Boots
===== http://doiop.com/afl412 =====
+++ http://doiop.com/afl412 +++

Wed, 2010-11-24 23:27 — Hans Castorp (not verified)

George Eaton reads and recycles Krugman (again).

I mean really George, just post the link - or hire an actual economist with their own, qualified, view, leave off with the shop-second stuff on a subject about which you know little, and get back to your home turf of UK politics (where your writing is excellent).

Wed, 2010-11-24 10:50 — writeoff (not verified)

Nah. Drop out of the Euro and default. Instant debt relief. It's going to happen anyway, and it'll save the UK £7bn, which they may as well give straight to RBS.

Wed, 2010-11-24 11:22 — Dave C (not verified)

Good article from occasional NS contributor Alex Brummer "Let's be frank. Our £7bn is bailing out a bunch of liars, crooks and bunglers"

http://www.dailymail.co.uk/debate/article-1331076/Ireland-bailout-Lets-f...

Wed, 2010-11-24 12:43 — lindede

====== http://www.tinyurl.com/23wkoeq ====

Mon, 2010-12-13 05:06 — lcal

======= http://clothesmall.org =========

Best regards for you all,

Looking forward to your visiting.

========= http://clothesmall.org =========

Wed, 2010-11-24 13:02 — michaelpetek

It's not Ireland that's in debt. It's the bankers the Irish government had to bail out with borrowed money.

So that makes 90 billion Euros the bankers should be made to pay off.

Since the only job they're fit for involves standing behind a counter flipping burgers, they should be able to pay their debts in about a million years' time or so.

Thu, 2010-11-25 12:23 — Reginald-Fah-fah

It not about the money, Paddy call the eletion!!!!!

Bloody Eurozone! Funny Money I say!!!

Fri, 2010-12-10 10:57 — Corcaighrebel

You don't save a country by layering debt on debt.

Structured default is the only way out of this mess. Question of time.

Wed, 2010-11-24 13:35 — David Vinter (not verified)

Simple fact is the population was living beyond their current and future means! Just because you are wealthy today, does not mean you will be tomorrow.

Wed, 2010-11-24 13:42 — Bill Fraser (not verified)

David Vinter
"Simple fact is the population was living beyond their current and future means!."

Just like the UK when Blu Labour was in office.

Eire another country almost ruined by weak regulation of the Banks.

Wed, 2010-11-24 14:02 — Sue Davies (not verified)

@ David Vinter

Another simple fact... the structural deficit is the difference between expenditure and tax revenue. Cutting expenditure also reduces tax revenue. Hence reducing expenditure (too much) increases the structural deficit.

The only way out of the deficit is to create jobs, which means investment in the green economy, and I mean investment, not the derisory spin that the coalition is posturing about.

Thu, 2010-11-25 13:10 — wallace (not verified)

These political NWO freaks have conned the entire European countries into believing in 'Safety in numbers' is the way to go, fooling all into thinking their all safe if they all band in unison, pouring billions in hard-earned cash into the EU coffers, enabling them to milk them and get them in debt upto their necks where they have to borroow billions from EU coffers trapping them in helplessness; then we hear of billions disapearing? Hits mme as a big underhanded rip-off and I say Britain should dump them before we spend much more sucking up to these conmen!