Monday, September 27, 2010

Ireland's choice: prolonged depression or immediate euro-exit

Desmond Lachman in today’s FT:

The Irish government is hoping that Ireland will somehow grow its way out of its public finance problem. However, such hopes would seem to be fanciful in the light of both the substantial amount of budget deficit-cutting that lies ahead as well as of the large effective monetary policy tightening being forced on Ireland by the financial markets. The IMF estimates that Ireland needs further fiscal tightening of at least 6½ percentage points of GDP over the next two years.

In the absence of debt restructuring and of a euro exit, IMF-imposed austerity runs the real risk of plunging Ireland deeper into depression and deflation.

If it is indeed inevitable that, in the end, Ireland will be forced to renege on its government’s debt obligations and to exit the euro, from an Irish perspective it is better that it be done quickly without pointlessly prolonging pain and saddling the country with a mountain of official debt. For at least that route might offer Ireland some prospect of recovering from its present economic depression.

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