"One measure of market confidence is the difference, or spread, between the yield on Irish government bonds and German bunds. Today that widened to a record level.
The reason for this is simple: the budget cuts have impaired the economy's ability to grow. The Irish government wants to slash the country's budget deficit from 12% to less than 3% by 2014, which would be eye-wateringly tough even if the economy were growing robustly. But when the economy is shrinking, it means the government is in effect running to stand still, hence the calls for even greater austerity to mollify the markets. That would, of course, simply weaken growth prospects still further.
Ireland, in other words, is perilously close to locking itself into permanent depression and deflation, from which the only way out may be a default that would further damage consumer and business confidence. There is indeed a lesson for the UK from Ireland: how not to do it."
The reason for this is simple: the budget cuts have impaired the economy's ability to grow. The Irish government wants to slash the country's budget deficit from 12% to less than 3% by 2014, which would be eye-wateringly tough even if the economy were growing robustly. But when the economy is shrinking, it means the government is in effect running to stand still, hence the calls for even greater austerity to mollify the markets. That would, of course, simply weaken growth prospects still further.
Ireland, in other words, is perilously close to locking itself into permanent depression and deflation, from which the only way out may be a default that would further damage consumer and business confidence. There is indeed a lesson for the UK from Ireland: how not to do it."
Larry Elliott, Economics editor (the Guardian)
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