The International Monetary Fund predicted that Ireland will finally begin to emerge from its economic woes and expand by the end of the year, according to the Irish Independent. The Independent went on to state that significant problems remain for the Irish economy, including long-term unemployment, high debt-to-GDP ratios and a lack of credit for the private sector. Ireland and Europe both need austerity to end in order for the region to grow.
Austerity, which is an economic policy used to reduce budget deficits, has been implemented in Portugal, Italy, Ireland, Greece and Spain. The situation is the same in other economically troubled parts of Europe. This was necessary to fall in line with the demands of the IMF and Germany while paying back foreign debt. But fundamentally, the effort to increase taxes to pay down debt is backward, and does more damage to these nations. As Sir Winston Churchill once said, “we contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” Austerity presents exactly this problem to European nations emerging from debt. Markets are cyclical, with natural periods of growth and contraction.
If governments adopted the Keynesian economic policy, then they could attempt to balance the booms and busts and maintain a certain basic level of economic security for the entire population. Having some basic level of growth during periods of economic distress, even when coupled with income tax, allows money to circulate in economic markets and maintain a certain level of prosperity for the people. Instilling austerity measures has none of these benefits; austerity just punishes populations further during harsh economic times.
Another troubling point about austerity is that it cannot handle other general economic distress on the markets. In most situations, debt crises arise during periods of slow economic growth, as that is the only time when the markets have doubts about the ability of borrowing countries to pay back loans. Thus, austerity generally only arises during a period of some economic distress.
As the markets move back to periods of growth following contraction, markets afflicted by austerity will not have the ability to take advantage of that growth. According to economist Megan Greene, Ireland has already begun to experience a situation where stagnation in world markets prevents Irish growth, even amid economic austerity. Greene wrongly states that loosening austerity measures would do nothing to turn Irish fortunes around, because the austerity fundamentally prevents capital from entering the markets, prohibiting new growth.
Then, when further economic contraction occurs, as it is about to as a result of the U.S. debt ceiling debate, according to The New York Times, these countries are ill-equipped to handle the problem. Alternatively, as natural business cycles take their course, troubled countries miss out on periods of economic growth because of austerity and can get hit with the next economic recession, as is occurring now, according to The Economist. Furthermore, austerity requirements placed on indebted countries by groups such as the IMF require regular payments on debt, and those payments are interrupted by economic malaise.
At this point, the Irish are in a worse place economically than when their economic crisis began in 2007 after the collapse of the construction market. In 2006, Irish unemployment was near 4 percent, one of the lowest rates in the world. Now, Irish unemployment is only beginning to fall and stands at 13.3 percent, not far from its 2012 peak of 15.1 percent, according to Trading Economics. In a period when the Dow Jones Industrial Average doubled in value, Irish fortunes were at a standstill. Ireland is finally beginning to emerge from the economic crisis, but the costs are very high, writes professor Stephen Kinsella in the Foreign Affairs Journal. Kinsella goes on to note that the Irish philosophy should be taught around Europe as a lesson in avoiding economic austerity in already poor periods of growth.
Austerity measures are reactionary and damaging. The results from Ireland show that austerity, because it is applied only after a country is in severe debt-based economic crisis, cannot reverse the fortunes of a debt-ridden country while maintaining some engagement to general market trends. Reducing debt to increase investor confidence is a worthy goal, just not at a time of economic panic. Countries would be better off prioritizing growth to pay back loans and worrying about debt during periods of strong economic growth.
Dan Morgan-Russell is a sophomore majoring in international relations (global business). His column “Going Global” runs Mondays.
Follow Dan on Twitter @ginger_breaddan