The budget passed in December features an unprecedented extent of fiscal retrenchment to the Irish economy, in the order of €6 billion in cutbacks and tax increases, to run alongside the introduction of a EU/IMF bailout that will have to be repaid at a very high interest rate of 5.8 per cent. Eminent Nobel Prize-winning economists Paul Krugman and Joseph Stiglitz (who has outlined that it would be naïve to believe that front-loading cuts and raising taxes can on their own trigger economic recovery) have both indicated that harsh austerity measures without the incorporation of a stimulus are likely to prolong, rather than shorten, the crisis. Many other Western economies have adopted such a spending programme as part of their respective recovery strategies, which leaves the question: why is there no stimulus plan in train for Ireland?
Given that the Irish banking crisis precipitated a threat to the entire Eurozone, the fact that considerable pressure was brought to bear on the Government to proceed with the proposed influx of special funds was understandable. However, there is no sense of intention emanating from the Government as regards inclusion of a Keynesian investment plan as part of recovery, nor indeed does this factor seem to have been enough of a priority in discussions with EU Governments in relation to support arising from both the European Financial Stability Mechanism (ESFM) and European Financial Stability Facility (EFSF) rescue funds.
Given the interlinked nature of the financial system, it is very much in British, French and German interests, in particular, that externally-sourced funds, at a low or zero interest rate, are put at the disposal of the Irish Government to instigate an adequate stimulus plan. What is bad for Ireland in terms of the economy has a detrimental and corresponding negative ripple effect for other EU member states.
Resources are currently available within EU structural fund allocations (the budget for which amounts to €347 billion for the 2007-2013 financing period), which are being under-utilised at present as, before projects under this scheme can proceed, matching capital has to be provided from relevant local authorities, and the liquidity crisis has obviously impinged the general ability to raise such capital. The case was made in EU negotiations that the National Pension Reserve Fund (NPRF) was available as a possible resource as part of the bailout mechanism, despite the fact that this involved revoking the spirit of its initial purpose. On the same basis, the justification for the continued under-utilisation of EU structural funds, due to its long-established and largely sacrosanct role within the European project, should not hold at this time, given the valuable difference to the EU economic crisis that installing a stimulus plan would have in Ireland and other crisis-hit countries. Such an untypical usage of such funds for small and medium-sized EU economies would be justified on the basis that the rationale for structural funds to begin with is as a lever to improve the economy of each recipient country, which is in turn observed as being beneficial for the EU as a whole. A similar attitude should prevail with respect to stimulus plans given that invoking too much austerity across the EU has been predicted by many commentators to deepen, rather than ultimately, alleviate, the extent of stagnation.
Prof. Stiglitz, in his recently updated book ‘Freefall’, has claimed that there is little incentive for the introduction of a specific Irish stimulus plan, due to the benefit that can be derived from the stimulus spending of neighbouring countries given our status as a small, open economy. Yet this would mean that the policy response in this regard would essentially be exclusively determined by foreign decision making. An argument can also be made that it would be stronger to instigate a direct, targeted influx of spending instead of adopting of strategy which would only have diluted, unfocused effects on the Irish economy.
Another point to promote the case for stimulus spending is that, at this stage, it is possible for the Irish Government to review the various, differing spending programmes that have been outlined in other developed economies around the World in response to the global financial crisis. As an example, an Australian stimulus package worth AS$42 billion was initiated by the Rudd administration in February 2009. When a comparison is made with other countries, stronger than expected Australian GDP growth has since been recorded, and an assumption should be made that this is as a direct result of the stimulus applied. It is feasible to analyse and learn from the recent Australian experience when considering the possible adoption of Keynesian stimulus here.
Potential leakage arising out of any domestic spending package would be a particularly important consideration. Ireland’s status as an open economy would dictate that focus should be made on infrastructural spending, especially given the severity of the crisis in the construction sector. There should also be an onus on attempting to judge what we should be striving to achieve in terms of estimating our position within the global economic sphere ten to twenty years from now, and to invest accordingly. As a case in point, Ireland can lead the way in technological advancement in education by fully digitising its classrooms on a gradual basis, such as, for example, in promoting total immersion environments as a means of impacting language fluency, an aspect that particularly needs to be improved within the Irish education system.
Ultimately, there are two economic strategies available: a “wait-and-see” approach which would involve Ireland relying exclusively on external factors for a return to steady GDP growth, or alternatively a sense of initiative can be seized.
