It is that time of year when we snowbirds head south to Florida for the winter. We drove 1,750 miles in three days and visited the kids at their universities along the way. Once again we spotted signs for El Cheapo gas station, as well as several huge billboards advertising "no scalpel vasectomies - 15,000 served at last count". The high point was a large sign saying "We bare all - exit now". Needless to say, we didn't.
Meanwhile, the European Union and International Monetary Fund brokered a £77bn bailout package for Ireland's failing banks, a condition of which was the adoption of further austerity measures. The forthcoming emergency budget in Ireland is expected to contain severe cuts in the minimum wage, social-welfare spending and public-sector jobs, as well as a new property tax and higher income taxes.
This is consistent with the recommendations set out in a paper published by the IMF, which argued that Ireland should gradually lower unemployment benefits and cut the level of its minimum wage to boost employment. The austerity measures previously announced in Ireland did not reassure the bond markets, which turned against the Irish as economic growth slowed once again. Having experienced positive GDP growth in the first quarter of 2010, Ireland saw growth turn negative in the second quarter.
The people pay
Speculation has been growing that Ireland may have to raise its corporation tax rate from 12.5 per cent as a condition of the bailout, which would make it hard for the country to attract and keep foreign direct investment. "We don't have a position on the domestic democratic politics of Ireland, but it is essential that the budget will be adopted in time and we will be able to conclude the negotiations on the EU/IMF programme in time," said the European monetary affairs commissioner, Olli Rehn. His statement implies that they do have a position - that ordinary citizens must suffer for the profligacy of the bankers. Seems rather unfair, wouldn't you say?
It remains unclear why those who didn't cause the crisis are paying such a heavy price and why they should go along with such an awful deal. Unsurprisingly there has been unrest on the streets of Dublin, and at times the government has seemed on the brink of collapse. The Green Party, a minority partner in the Fianna Fáil-led coalition, called for an election to be held in January, while two other independent coalition supporters threatened to vote against elements of the austerity budget. There is every prospect that the prime minister, Brian Cowen, may lose a no-confidence vote filed by the opposition. Political turmoil often follows in the wake of financial crises. Default might still be a better option for the Irish.
The big fear for the EU is contagion of the crisis to other countries, hence the pressure on Ireland to accept a deal and to go away quietly and suffer alone.
There remains growing unease in the markets that a separate rescue package will be required for Portugal. Spain looks to be next in line. This is a major cause for concern because Spain is a much larger country and has experienced a huge decline in house prices. And everyone assumes that the Greeks will have no choice but to default on their debt; the only question is when.
In the Times on 23 February 2006, the then shadow chancellor, George Osborne, wrote an opinion column entitled "Look and learn from across the Irish Sea", which he must now regret. "The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed," he wrote. "In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn."
It must have been rather embarrassing for young George to tell MPs that it is in Britain's interest to take part in the Irish bailout. Ireland, apparently, is "a friend in need". A promise to cough up around £7bn, and as much as £9bn if the Irish were to default, has inevitably not gone down terribly well with the Eurosceptics in the Tory party. Being in government is rather different from being in opposition. However, to be fair to the Chancellor, he had no choice given the exposure of UK banks in Ireland. Interesting, though, that he could find money to stimulate the Irish economy, but could not do the same for the UK economy. He may yet have to reverse course.
What has happened suggests that the stress tests that were conducted on European banks a while ago were of no value, because all the Irish banks passed. It seems likely, too, that other banks are more stressed than we thought.
Loss of confidence
All of this brings us back to Britain's own austerity package, which, unlike its Irish counterpart, is supposed to raise growth and lower unemployment. The data is not pointing that way. According to the latest ICAEW/Grant Thornton UK Business Confidence Monitor, businesses have lowered expectations for 2011. The major findings for the fourth quarter of 2010 include the following: the business confidence index has fallen by nearly 10 points since the third quarter of 2010; the percentage of businesses less confident about the coming 12 months has risen from 19 per cent in the third quarter to 24 per cent; and confidence in the retail and wholesale, manufacturing and engineering and property sectors has fallen significantly.
The concern I have had for a long time is that the scale of the shock to the world financial system has been underestimated and that there are still many twists and turns of the crisis to come.
It is important, in evaluating what has happened, to ask what is the counter-factual - what, in other words, would it have been like without the swift action of the monetary and fiscal authorities? Unemployment, in my view, could well have risen to over 20 per cent in Britain and still might. That is the ever-present danger of withdrawing stimulus too soon. Plus, inflation is irrelevant right now. Central banks are still in depression and deflation-preventing mode.
The Irish certainly have much to teach us, if only we are willing to learn.
David Blanchflower is a labour economist and a professor at Dartmouth College, New Hampshire, and the University of Stirling.