Medicine in Ireland too hard for the others

Last year during a taxi ride in Dublin, I asked my driver how things were going in Ireland.

He said that life was not so bad because, although growth had slowed, things were much better than they were before Ireland joined the euro.

That resonated with me on Monday, when the Irish government unveiled its austerity package of 6 million euros (8 billion) of cuts in social benefits, pensions and capital projects. Ireland is still going to tax Internet gambling.

But Ireland, who accepted a ransom of 85 billion euros last month, is better able to resist compression of the euro area peripheral countries like Portugal, Greece, Spain and even Italy. Ireland is a good deal richer than these countries, and has been an increase in revenue over the membership of the euro. Even after the cuts the chances of people taking to the streets in large numbers are lower than in other countries.

Irish Finance Minister Brian Lenihan, who the Financial Times recently voted the worst in the European Union is optimistic expectation that spending cuts and tax increases will not affect growth at all. The forecast now calls for gross domestic product by 0.3 percent this year, increasing to 3 percent in 2013.

The same day, in contrast to Ireland, the Republicans and Barack Obama agreed in the U.S. welcome to reduce payroll taxes and renew the Bush tax cuts for two years to stimulate growth and reduce unemployment. So we have an interesting economic experiment in our hands. My bet is that tax cuts instead of raising them is better for growth. I am with Obama.

Growth in Europe will decrease, especially in peripheral countries, which will not reassure the bond markets. International Monetary Fund Dominique Strauss-Kahn, visiting Greece this week, said "the problem is growth, growth, growth. No one would be talking about a debt crisis in Europe if there was a high growth in Europe." It is not the truth.

Little Ireland, with its 4 million inhabitants has done well from its membership of the euro. The concern is that others in the periphery do not have and have less room to cut.

As shown in the table below, between 1990 and 2010 the GDP per capita in Spain increased by 107 percent, which was faster than Greece (53 percent), Italy (14 percent), Portugal (32 percent) and Spain (38 percent). By 2010 Ireland had a higher income per capita than any other euro area peripheral countries.

The data in a Eurobarometer survey conducted by the European Commission by the Member States between August and September 2009 suggests that the Irish are considerably happier - graded on a scale where one means very dissatisfied and 10 means very satisfied - that residents of these other countries. If this continues in the future is an open question, as austerity bites.

Country GDP per capita of the population's happiness
1990 2010 (millions)
Ireland $ 38,768 $ 18.694 7.41 04.03
Greece $ 18,735 $ 28,608 6.38 11.3
Italy $ 26,307 $ 30,080 59.0 6.48
Portugal $ 17,418 $ 23,019 10.6 5.59
Spain $ 22,039 $ 30,475 44.7 6.94

Sources: European Commission, International Monetary Fund

The other peripherals are poorer and less happy than the Irish, and have not benefited greatly, especially in terms of revenue growth in membership in the euro. This may well involve greater domestic opposition to any austerity program imposed from outside. In the future, social unrest is likely to be a major problem in these countries.

The International Monetary Fund has urged the EU, even to pump more resources into its bailout program, and also to buy more government debt. Otherwise, the IMF warned that the crisis could escalate, threatening the stability of the euro.

interventions by the German Chancellor, Angela Merkel, have given the crisis some legs. Ruled out the possibility of bonds in euros to scale and largest bailout fund. This, combined with his earlier suggestion that bondholders should take haircuts larger, not aid to countries that are struggling to calm markets.

There are obvious reasons for supporting Merkel. Germans have the benefit of an exchange rate lower than they would outside the area, making their exports less expensive. Any euro bond debt costs would be raised.

German banks have invested heavily in the peripheral countries making it difficult to understand why they are being left adrift. Unless the Germans are willing to pitch in with a lot of money from the bailout, the Irish and the Greeks will have to restructure or repay its debts. The bond vigilantes have a field day.

It is difficult to see how to force an expensive loan in a most indebted country like Ireland, is supposed to contain the crisis of European debt. The maintenance of low corporate tax rate, which obviously will help. The standard of living will inevitably be hit there for years to come. My taxi driver was right. My concern is that some of these peripheral countries are not as well situated. I fear the worst is yet to come.

(David G. Blanchflower, a former member of the Bank of England Monetary Policy, is professor of economics at Dartmouth College and the University of Stirling. The opinions expressed are his own.)