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What's the view from Dublin?

By Brendan Keenan

This begins to look worryingly familiar. The Irish economy is powering ahead, with a recovery which has tracked the most optimistic scenarios of past forecasts. But doubts are growing about the eurozone's prospects, as trouble in emerging economies threatens to derail the German export locomotive.

Surely we could not face again so soon the prospect of policies in Europe being too stimulating for a booming Irish economy? We have only emerged from the opposite, where they were too restrictive for a collapsing Irish economy. It is a bit too soon to say.

At the very least, the prospect of an interest rate rise at the European Central Bank seems as far away as ever. It has receded in the US and UK.

For the eurozone, and especially its more indebted members, the concern is that the faults in the monetary union architecture, so painfully revealed during the crisis, have not been eliminated. The cracks could appear again in any significant downturn.

A cold eye is cast on eurozone policy since 2010 in a research paper by Kieran McQuinn, associate research professor at the Economic and Social Research Institute.

He concentrates on fiscal policy, arguing that it has been decidedly pro-cyclical, exacerbating the recession and thereby worsening already high debt/GDP observed in many European countries.

It does not help that most euro countries behaved unwisely during the boom.

They emerged from that with underlying budget deficits of around 4% of GDP.

The European Commission calculated France's deficit at 6%, with even higher figures for the southern states plus Ireland.

All did indeed tighten their budgets even as their economies contracted. The euro area's structural deficit - the estimated figure if the economy were growing exactly at its capacity - fell from 4% of GDP to 0.5% from 2010 to 2014.

Within that, France did a great deal of tightening, from 6% to 2%. That is not far off Ireland's fabled correction from 8% to 2% of GDP. And all of this in a severe recession. Even highly solvent Germany tightened its structural deficit moving from 2% to a surplus of 1% of GDP.

It is essentially a political question as to whether it could have been otherwise. The IMF maintains that most eurozone countries had enough "fiscal space" to increase their deficit and debt levels, although the worst cases - including Ireland - did not.

Belfast Telegraph


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