Thursday, March 22, 2012

Ireland Returns to Recession: The Failure of Austerity

It is now official: Ireland has slipped back into recession with a 0.2% fall in GDP in the last quarter of 2011. In Q3 2011, GDP contracted 1.1%, so we now have two consecutive periods of contraction: the official definition of a recession.

But it gets worse. In Q4 2011, Irish GNP (probably a better measure of real national output in Ireland’s case) slumped by a shocking 2.2%.

The reason is that exports have fallen, along with the Eurozone problems. Most of the growth Ireland has had since 2010 has been based on exports.

You can see the record of Ireland’s quarterly GDP here:
From 2008 to 2009, Ireland suffered a depression, both in terms of its GDP decline (10.1%) and its GNP contraction (14.1%) (a depression is technically a fall in the value of real output exceeding 10%). Of the 16 quarters from Q1 2008 (when the global recession hit), Ireland has had but 4 quarters of positive GDP growth. A miserable performance.

Meanwhile unemployment is at 14.2%, and has been stagnating between 14.2% and 14.4% ever since the middle of 2011.

Another development (seen in other nations like Estonia and Latvia that have gone down the path of severe austerity) is that people are leaving Ireland in droves, often the young and unemployed. From 2009 to 2011, some 86,000 emigrated. In 2012, some 75,000 are predicted to leave, figures higher than the last emigration surge owing to economic problems in the late 1980s. That trend can be seen in the video below, describing Irish emigration to Australia in 2011.

Lessons here are obvious: export-led growth is highly unreliable, and it is unlikely a nation will achieve robust, long-term growth by fiscal contraction and domestic wage and price deflation (especially when other nations pursue austerity), which, in any case, guts its domestic sectors.

So much for austerity, the policy prescription of fools and madmen.


  1. OK, but what else can the Eurozone do about uncompetitive periphery countries? The periphery’s problems are dire, but they are problems that are inherent in a common currency.

    Ireland’s increased exports are at least a sign that the Eurozone’s bizarre cure for uncompetitiveness is working.

    As to better solutions, the only one I can think of is an organised devaluation of the periphery currency: i.e. have employers, government and unions agree to a substantial cut in wages AND prices. If wages and prices drop by the same amount, there is little effect on living standards: just like there was little effect on living standards in Britain in 2008 when the pound was devalued by 25% or so.

    That would take some organising, but once the sheeple get the idea, the idea would work in the case of future competitiveness disparities. It would be worthwhile for the Eurozone as a whole to fund a large publicity and propaganda effort to implement such a devaluation effort for ONE COUNTRY. Once the sheeple saw that the idea works, they’d follow like sheep - pun intended.

    1. "If wages and prices drop by the same amount, there is little effect on living standards"

      I am afraid you're wrong here: cutting wages while private debt is excessive and households are deleveraging would just gut the economy through debt deflation. You would need to restructure all private debt in the economy too.

      And what about asset prices? Houses, for example? Leaving property prices at the bubble levels would make houses unaffordable and require larger levels of debt for people to own houses.

  2. You want a solution? Here you have one: forbid any trade (or current account) surplus of 1.5% of any country vis a vis the Eurozone. If they violate this rule, they have to increase their imports by the amount of the excess, importing mainly from the country with the largest deficit. That is a better solution. Regards,

    1. That is an interesting solution, Pablo, somewhat akin to the Paul Davidson's plan for a reformed international payments system, along the lines of Keynes's bancor plan.

    2. It is akin, LK, it is in that direction. Instead of operating at the level of central banks, it goes straight to the matter. Kregel told me that he does like the idea, so I feel pretty confident saying that's a truly post-Keynesian solution for the Euro (in spite of all the other problems that still exist).

    3. I can anticipate one tiny issue.

      If the exporter region government begins government purchases from the importer region businesses or government, then there could be a multiplier to the rise in imports from that importer region.

      If the German government makes a large set of purchases of 10 million euros from the Spanish industry, then perhaps Spanish industrialists will be eager to increase their capacity. For this, they may import capital goods from Germany up to the tune 6 million euros.

      I am assuming a multiplier of 0.6 here. What is the multiplier is more than 1.0? Then such a policy may backfire.

    4. That is indeed a question to be answered. My view, is that ultimately, with a GUARANTEED demand, captive demand, in some sense, it will be profitable for the German exporter to go and install in Spain. Costs are lower, and you will have (for certainty) a higher scale. In principle, I would say there are incentives. But the rule actually goes above these issues. What you say, Prateek, is certainly a concern, but the rule only says that if Germany has an excess surplus, it must spend that surplus, in monetary terms, in the other country. I really doubt that the import propensity of any country is BIGGER than one. It may well be 0.95, but employment, at least low skilled, is not imported. And even if it is, well, then Germany would have to find other industry with a smaller import propensity, because it would still be in violation of the rule. The only thing that the rule says, is that the surplus MUST be reduced.

  3. Is falling GDP a problem to worry about? Are you saying that people should not voluntarily decide to spend less and that if they do, they should be forced to spend more? Very interesting.

    1. (1) "Is falling GDP a problem to worry about?"

      Austrians like Hayek and Lachmann thought so. But then no doubt ignorant internet fanboys of Austrians economics know better.

      (2) "Are you saying that people should not voluntarily decide to spend less and that if they do, they should be forced to spend more?"

      Being sacked from your job and losing your income (with loss of spending power) is not some *voluntary* state of affairs.

      Nor does offering jobs to those ready and willing to work or creating the private sector demand to create such jobs (freely taken up by unemployed agents) by which spending will be increased involve *forcing* people to spend.

      Nor would giving people a tax cut *force* them to spend. They will do what they like with the new income, and that will involve spending as a matter of course.

  4. Bala. People aren't voluntarily spending less. They are losing their jobs, talk about forced savings. Recessions aren't phenomenon where people electively save causing a slowing of production, thereby favoring investment over consumption. A recession is an absolute fall in production, meaning that the economy is operating below full capacity. I'm a pseudo libertarian myself, but at least understand a recession.

  5. So much for Ireland meeting it's targets...just when I was hoping that the Eurozone would survive and reform for the better! The only time austerity works, as Keynes once said, is when there's a boom. While I don't agree with austerity measures, the fact Ireland showed some signs of economic recovery in spite of all else made me hopeful for the Eurozone. I guess not...

    P.S. Lord Keynes, check your e-mail, please.