Krugman predicts at least five years of suffering

IRELAND MUST “suffer” through at least five years of economic weakness before recovering to match average euro-zone growth, according Nobel Prize-winning economist Paul Krugman.

“I would hope that five to 10 years from now, the dust will settle,” Prof Krugman told a forum in Dublin yesterday.

He said that if the economy could continue to cut costs at the current rate for several years,which he described as “really terrible punishment”, it would return to equilibrium “in the long run”.

The pain involved would, he said, be in excess of problems thrown up in the rest of the euro zone, which could enter a “lost decade” of economic stagnation.

“It’s still a very nasty scenario, but . . . you can see the adjustment process is working here. It’s just that it’s an extremely painful, prolonged thing.”

Prof Krugman, who was in Dublin at the invitation of stockbroking group Merrion, caused consternation in April when he published an opinion article entitled “Erin Go Broke”.

The piece, which appeared in the New York Times, sounded fears about how the global economy could “turn Irish” and force the US into taking drastic measures to save itself.

“I guess I wasn’t really surprised but it wasn’t really about you,” said Prof Krugman when asked about the reaction to his article. “I wasn’t saying anything that anybody in this room didn’t know.”

Prof Krugman said there were “no good answers” to Irish economic woes and advised the gathering of political and business leaders to “suffer”.

“I can assure you we’re doing that very well at the moment,” responded Prof John FitzGerald of the ESRI, who also addressed the Merrion forum.

Prof Krugman offered some reassurance to the Government, saying: “Ireland appears to be politically capable of making the adjustments that would allow it to service its debt” and would thus not enter default.

He noted that it was “pretty clear that Government here was cheering on the bubble”, but added that it might be asking too much to expect governments actively to fight bubbles.

A strong advocate of bank nationalisation in certain circumstances, Prof Krugman said it should be linked to large shareholdings. “If you’re going to pump lots of public capital in, you should get ownership in return,” he said.

Prof Krugman shied away from naming Irish banks which should be nationalised, but said he would have been more aggressive with the policy in the US, nationalising Citigroup and perhaps Bank of America.

He took a benign view on Nama, the agency being instituted to take on so-called “toxic” assets from the banks. “It can be done. The real question is what the price is,” he said, observing that a “bad” bank should go hand-in-hand with a willingness to guarantee bank liabilities and a readiness to seize banks if necessary.

“You’ve got at least two of the three,” he said.