Thursday, April 9

Ireland's "Cheapest Bailout" turning costly

Ireland's bank bailout was supposed to be the "cheapest bailout", according to Finance Minister Brian Lenihan. Obviously events since then have shown that the claim was premature and plain wrong. Things have continued to spiral downwards.

Given that past experience, Minister's claim "we don't need any bailout here" from EU for Irish economy is completely inexplicable.

As economists (Kevin O'Rourke & Barry Eichengreen) suggest there are essentially three ways out. 1.)Devaluation, 2.) Fiscal Stimulus and/or 3.) External bailout

1. Devaluation: It is not so much that Ireland should not devalue, rather that it cannot. As Kevin O'Rourke explains "devaluation [should be] unilaterally decided upon and announced under cover of darkness."... BUT "the technical and legal problems associated with switching from one currency to another are immense -- just think of all the planning that accompanied the introduction of the euro in the first place. Laws would have to be passed. Notes and coins would have to be produced. Somebody would notice."

2. Substantial Fiscal Stimulus: Peer pressure from EU membership and need to maintain euro membership means government cannot cut taxes or increase expenditure. Rather it has been forced to commit to cutting to deficits back to 3% as required by EU commission.

3. Bailout: That leaves the only option being fiscal transfers from abroad, equivalent of California getting federal stimulus. Parallels have been drawn between California given the property bubble and lack of control over its currency.

So it is strange to hear Brian Lenihan claiming no need for EU bailout. Rather he should be "shaming" EU into extending substantial support and shoulder the cost Irish population is paying to keep Euro afloat.

Kevin O'Rourke suggests stimulating a devaluation by cutting wages across the economy. Unless there is a mechanism to get free agents to act against their perceived interests or act in unison, this is equivalent of leaving the recovery to labour markets to correct, i.e. do nothing!!.

I guess it would be instructive to re-read Paul Krugman's article on Spain as it is very relevant here in Ireland.

1 comment:

abhinav said...

your stuff makes sense and i agree what you have said here. i think we all are sitting on a big titanic and it is just a matter of time to see who goes down first as in this scenario i am sure no one is gonna have a last laugh. besides that political views are mostly myopic and so it is nothing new or strange if we see some thing like this coming from lenihan.