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Ireland, Greece Sink Further Into Debt After Austerity Measures

Over the weekend, it looked like the EU was prepared to provide a large rescue to Ireland, a bailout that could reach as high as $77 billion dollars, to help them tackle their growing debt burden. The Irish government repeatedly denied that they were seeking such assistance from the EU, and by Monday, the urgency of the situation dissipated somewhat.

Pressure eased slightly Monday on Ireland ahead of meetings in Brussels this week to consider whether a bailout is needed to prevent market turbulence from spreading to other European countries.

The Irish government continued to insist that it did not need financial aid, arguing that it could present a credible austerity budget next month that would satisfy investors, and that it had enough money to finance its operations through spring of next year.

In a statement late Sunday, the Finance Ministry reiterated that “ongoing contacts continue at official level with international colleagues in light of current market conditions,” but stressed that “Ireland has made no application for external support.”

Investors want an implicit guarantee fro the EU that they would step in with funding, to complement the Irish government plan.

All of this should be read among the backdrop that the Irish plan simply isn’t working. They have been way out in front of other European nations in instituting painful austerity packages to compensate for the dramatic loss in revenue as unemployment skyrocketed and the housing bubble popped. But the austerity has only made things worse by eliminating the one area where demand could be generated. Unemployment has steadily worsened in Ireland, and scores of homes sit empty, far more than can ever be filled. And the budget deficit has only grown.

This is true in Greece as well – their 2009 budget deficit has been shown to be worse than previously reported, and their target for 2010 is subsequently higher. Greece’s debts were at 126.8% of GDP last year; this year, they are expected to soar to 144%.

Simply put, austerity doesn’t work. It reduces demand and causes higher unemployment. The subsequent collapse in government revenues only exacerbates the deficit problem. This doesn’t mean that spending cuts never reduce the deficit, but in a recession where the government is the spender of last resort, that’s clearly what happens. And Ireland and Greece can be seen as examples of this.

Meawhile, in Japan, fiscal stimulus has increased growth:

The Japanese economy gained momentum in the third quarter, growing at an annualized pace of 3.9 percent, data released Monday showed, as the end of a government stimulus plan gave private consumption a last-minute lift.

Still, economists warned of an imminent slowdown as a strong yen, faltering exports and the end of generous government incentives for fuel-efficient cars pinched company earnings.

Deflation, or a decline in prices, has also weighed on the Japanese recovery as it has tried to pull out of its worst recession since World War II.

“The growth rate itself beat our expectations,” said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting. “But that growth was helped by a spike in spending by consumers racing to benefit from the last of the government incentives. We can expect the economy to slow in the coming months. After that, recovery will depend on how the global economy holds up.”

In other words, the stimulus helped in the short term, but the greatest threat facing the Japanese economy was a premature pullout from those measures.

There are proofs of Keynesianism virtually all over the map. And yet the world has largely taken the wrong lessons.

UPDATE: Incidentally, this review of Fintan O’Toole’s “Ship of Fools,” about the Irish crisis, gave me the best insight into the situation there. I visited Ireland at the height of the Celtic Tiger boom, and I remember talking to an old-timer at a pub who told me it was all about to turn to shit. He was right.

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David Dayen

David Dayen