In Europe, a Lesson in Contrasts

Tuesday, 07 September 2010 10:57 By Paul Krugman, Krugman & Co. | name.

In Europe, a Lesson in Contrasts
(Image: Jared Rodriguez / t r u t h o u t; Adapted: Talie, cesarastudillo)

It is strangely comforting to see that the United States is not alone as it struggles in its morass of failed fiscal policy.

P. O'Neill, a regular contributor to the online magazine A Fistful of Euros, has published some good observations on the mess that followed Ireland's 2009 plunge into harsh austerity. He writes that the debt crisis has led to Irish banks, "owning businesses they never expected to, so that they are now operating hotels that they have taken over and selling repossessed farm equipment.

"But there is a strange flip side to this situation," he writes. "There is exactly one sector of the economy that the government has declared off limits from the process of debt distress, restructuring and external management - the banking sector."

Irish cartoon depicting the road ahead for the Euro.

The author suspects the worst is not over: "Recognizing the scale of the restructuring that needs to be done, you'd think there would be a rush to get it done as quickly as possible and reduce some of the debt overhang. Not necessarily."

So what are the rewards for Ireland's fiscal toughness? There don't seem to be any.

A couple of months ago I posed a different question: Does fiscal austerity actually reassure the markets? After Ireland quickly and bravely embraced savage austerity, quite a few press reports declared that it had regained the confidence of the markets, but the actual numbers showed otherwise. I compared Ireland with Spain, which has been relatively slow and reluctant to embrace austerity, but has been treated no worse by investors.

Before the financial crisis hit, Ireland's and Spain's revenues were buoyed by immense real estate bubbles. When the bubbles burst, both governments found themselves on the hook for massive losses.

Last modified on Tuesday, 07 September 2010 14:52