As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.
Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.
“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”
Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.
Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.
Now, the Irish are being warned of more pain to come.
“The facts are that there is no easy way to cut deficits,” Prime Minister Brian Cowen said in an interview. “Those who claim there’s an easier way or a soft option — that’s not the real world.”
And now we learn of the incredible rewards:
Moody's Investor Services Inc. on Monday cut Ireland's credit rating, citing a rising debt burden, a weak growth outlook and the high cost of rebuilding a shattered banking system.
The ratings agency lowered Ireland's credit rating to Aa2 from Aa1, with a stable outlook, indicating that it isn't likely to consider a further downgrade soon.
The Irish economy was the first in the euro zone to enter a recession, from which it only emerged in the first quarter of this year. It was hit particularly hard because excessive bank lending drove a construction boom that came to an abrupt end in 2008 when the banks ran into difficulty.
There is a time and a place to but back on government spending. We're not there yet.