Serious doubts about the Merkel’s Cure

Yesterday’s numbers released by Ireland’s Central Statistics Office must not have made pleasant reading for EU fiscal hawks. Ireland, among the first countries to enter a deep fiscal crisis, mostly due to its expensive bank rescue, was held as the poster child of the ‘tough love’ economic policy that the EU imposed on countries such as Ireland, Greece, Portugal, and Spain and Italy to some extent, in return for economic and financial aid. Unlike their southern peers in Greece, the Irish people generally accepted the bitter medicine, and in 2012 it seemed like the medicine had worked, with growth resuming, banks beginning to clean up their property portfolios, and until recently, Irish bond yields continuing to decline.

Unfortunately, things seem to be more complex. The cocktail of higher taxes, lower spending and general fiscal consolidation at the time of economic contraction doesn’t seem to have cured any illness. Lower growth with higher taxes, reduces real tax receipts while at the same time increasing the tax burden, which lowers growth, etc. it’s not clear if there are other cures to the European malaise, i.e. if lower taxes and more spending coupled with temporary relaxation of the “3% rule” would do the trick. It is more likely at this point that a much deeper rethinking of the Euro adventure will need to take place.