A means to an end
Austerity is a means to an end, not an end in itself. That is how Central Bank governor, Patrick Honohan views the pragmatic economic measures taken since 2008, and the progress made by successive governments in achieving the targets set in the bailout programme. In his article in yesterday’s Irish Times, Mr Honohan noted some historical parallels between Ireland and Britain’s present and past experience in debt management negotiations.
When the UK, which after the second World War was close to bankruptcy, pressed the US – as its largest creditor – for debt forgiveness, it was firmly rebuffed. It proved to be a vain appeal to America’s sense of justice from a wartime ally that in peacetime was left with an unsustainable debt burden. Instead, John Maynard Keynes, the economist – and Britain’s lead negotiator in the debt talks – reluctantly accepted a more modest form of debt relief: long-term low interest loans, which extended UK loan repayments over many decades. For Lord Keynes, it was the second of three options that he had outlined for dealing with the crisis. The first – to pay all the debts promptly – would have involved excessive, and unnecessary, austerity – as Keynes acknowledged.
Ireland too, after the European Central Bank had vetoed the burning of bondholders, has found itself with a middle-ground solution – similar to that accepted by Keynes. But as the Central Bank governor points out, Ireland’s access to long-term low interest loans has enabled a higher level of domestic spending than would otherwise have been possible in recent years. It reflects a pragmatic approach to the fiscal adjustment – involving to date some €28 billion in spending cuts and tax increases – that is required to bring the budget back into balance by 2015. Some, who favour less fiscal restraint, as Mr Honohan says, wrongly portray their critics as advocates of austerity. The benefits of that middle-ground solution should enable Ireland to exit the bailout programme successfully in December.