Ireland and the Austerity Debate

People on both sides of the austerity debate are trying to position Ireland as the poster child for their case. Though neither side can claim victory, this tug-of-war illustrates the complex range of arguments in play – and highlights why conclusive economic policy making is proving so elusive.

DUBLIN – Both sides of the austerity debate that is now gripping economists and policymakers cite Ireland’s experience as evidence for their case. And, however much they try to position the country as a poster-child, neither side is able to convince the other. Yet this tug-of-war is important, because it illustrates the complex range of arguments that are in play. It also demonstrates why more conclusive economic policy making is proving so elusive.

Here is a quick reminder of Ireland’s sad recent economic history. Lulled into complacency and excess by ample supplies of artificially cheap financing, Irish banks went on a lending binge. Irresponsible risk-taking and excessive greed outpaced prudential regulation and supervision. The banking system ended up fueling massive speculation, including a huge run-up in real-estate prices, only to be brought to its knees when the bubbles popped.

Unlike the many Irish households that lost jobs and part of their wealth, the banks were deemed to be “too big to fail,” so Ireland’s political elites intervened with state funding. But, by under-estimating both the domestic and international aspects of the problem, the authorities transformed a banking problem into a national tragedy.

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