More austerity may cripple Irish economy, ex-IMF official warns

Professor Ashoka Mody says Ireland needs new jolt of growth

Wed, Sep 25, 2013, 11:14

The former head of the IMF mission to Ireland has again warned that further austerity may cripple the Irish economy for years to come.

Professor Ashoka Mody said Ireland needed a “new jolt of growth”.

An outspoken critic of austerity, Prof Mody said growth in Ireland over the last 12 months had been very disappointing, “notwithstanding some ups and downs of an episodic nature.”

He warned there was now a danger that Ireland may fall into a long-term ‘’hysteresis process’’ from which it will not emerge from easily.

Economists use the term hysteresis to refer to the phenomenon whereby a sustained period high unemployment tends to increase the rate of unemployment below which inflation begins to accelerate.

“I’m afraid we are already five years into the crisis and with households continuing to try to catch up with their lost wealth, they are not spending ... if the Government and households are both not spending, it’s not a surprise that the economy is not growing,” he told RTÉ’s Prime Time programme.

The alternative has to be “some respite” from austerity, he said.

While this policy may be risky, he said, Ireland had bought a lot of credibility on the back a “sustained austerity drive” over the last several years.

“It’s not clear to me what more needs to be proved at this point.”

Professor Mody said credibility was seen in two ways; in terms of reducing deficit and debt, but also in terms of GDP growth.

“Ultimately the lender wants to know if you have the income to repay, and unless the income to repay grows at some point, the fact that you are sticking to your savings is not going to be a source of comfort even to a sensible lender.”

“I think we’ll see GDP growth now as a more credible way to repaying Ireland’s debt than a continued period of austerity.”

He said unless Ireland grows it will not able to abide by the agreed terms of the its international loans.