Ireland GDP Decline Adds More Tarnish to Austerity Myth

December 17th, 2011
in econ_news

Econintersect:  Ireland GDP contracted by 1.9% in the third quarter, to become the second worse Eurozone economy after Greece, another poster child for austerity.  In spite of the Leprechaunsharp downturn, Reuters says analysts predict the country will still eke out a narrowly positive GDP change for the entire year, less than a 1% gain.  Even with the third quarter decline Reuters reports expectations for GDP to deteriorate in 2012 if Ireland’s main trading partners fall into recession.  The promise of austerity was that “internal devaluation,” with reduced wages and public services, would make Ireland more competitive in export markets and propel the country into recovery.  Instead it is now feared that the exports markets may be curtailed and Ireland will just be involved in a spiral to the bottom.

Follow up:

The Dublin government's achievement in generating growth despite severe public spending cuts had been hailed by some economists as an example of a successful "expansionary fiscal contraction".  But this idea that one can cut back to create growth is now looking more like a myth.  From Reuters:

"It (GDP) is probably below the 1 percent this year," said Austin Hughes, chief economist at KBC Bank. "In terms of next year it just emphasises the difficulty we have."

The contraction in Gross Domestic Product (GDP) on a seasonally adjusted basis was far worse than forecasts of a 0.5 percent fall by seven economists polled by Reuters.

Held up as a role model for other indebted euro zone nations, deteriorating prospects for Irish growth threaten to undermine its efforts to become the first country to emerge from an EU-IMF bailout in 2013.

The following graphic from Trading Economics shows the course of Ireland’s GDP over the past five years.

Ireland GDP

Ireland experienced a decline in real GDP of 7.3% in The Great Recession and has seen a further decline of 0.9% in the nine quarters since.  By comparison, the U.S. had a similar decline of 5.2% followed by an advance of 5.3%.  This data supports austerity for growth?

Further study of the benefit of internal contraction to create growth has been outlined in a report posted this week on GEI Analysis, looking at Latvia.  Widely heralded as a success story for austerity leading to growth, the data is quite to the contrary.  And today GEI News reports about the recurring bank runs and bank failures in that country.

Sources:  Reuters, Trading Economic, GEI Analysis and GEI News

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1 comment

  1. *****

    We need more articles like this one. There's empirical evidence here in the US that when deficit spending declines as happened when the Republicans in Congress stalled over raising the debt ceiling, US GDP also declined and job gains stalled. There's also plenty of evidence that every European nation that has practiced austerity along and has also experienced a negative balance of trade has had its economy shrink. There's additional evidence that Japan, Australia, New Zealand and other nations with sovereign in their own fiat currencies show declines in growth when they cutback on Government expenditures.

    In my view a worldwide review of the evidence would show that Austerity economics has been wrong in every case where a nation doesn't have a very substantial positive trade balance with the rest of the world.

    This isn't an argument for saying that therefore a nation should see to it that it both practices austerity and has a positive trade balance, because clearly that is impossible. There will be winners and losers. There will be races to the bottom and most nations will be losers since they will have the austerity but not the positive trade balance. They will lose the competition, and jobs for their workers to those few other nations who are most efficient at exploiting their own work force.

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