Disaster Is in the Eye of the Beholder

One thing to remember, when reading yesterday's Times article on Irish austerity, is that what an author chooses to focus on can make a big difference in how you assess the success, or failure, of its austerity plan.  The writer of that article chose to accentuate the negative--the layoffs and wage cuts, and all the hardships attendant on living through a financial crisis.  I think the article implied a rather stronger link between the austerity plans and the hardships than is warranted--many of these things would have happened anyway, and there would have been other bad things that didn't happen.  But beyond that, the article chose not to focus on the signs of hope for the Irish economy, meager as they are.

Though meager, they're real.  On the same day that the Times was presenting a dire picture of austerity budgets, the Wall Street Journal was running an article suggesting that Ireland may end up a big beneficiary of the cheaper euro:

The Emerald Isle has high unemployment and one of Europe's deepest budget deficits, and is taking some of Europe's harshest austerity medicine. Economists, however, are starting to feel less dismal about Ireland's prospects because of the unique nature of its export economy.

Exports account for more than 50% of Ireland's gross domestic product, ahead of even Germany. And while many euro-zone countries' exports go to their European neighbors, Ireland sends much of its chemicals, business services, technology and food to the U.S. and U.K. That maximizes the benefit of the falling euro, which has lost approximately 15% against the U.S. dollar and 8% against the British pound since the beginning of the year.

This morning, the FT followed up with a piece noting that while it's still frail, the Irish economy is starting to grow again:

Ireland climbed out of recession on Wednesday with the economy returning to growth in the first quarter, after suffering one of the deepest downturns of any advanced industrialised economy.

Ireland's return to growth, in spite of having undertaken a huge fiscal retrenchment over the past two years which prolonged the downturn, will provide encouragement to other European economies facing up to tackling rising public deficits.

The temptation on the right will be to automatically infer causality--Ireland cut spending, and now it's growing!  That's pretty premature; the economy contracted 15%, and as traders like to say, even a dead cat will bounce if it's dropped from a great height.  But a healthy growth rate does seem to at least call into question the notion that failing to do massive stimulus automatically dooms your economy to a tragic combination of stagnation and decay.

The point is that you could probably go to Ireland and write an article on how well austerity is working---budgets coming under control, growth returning, etc.  That wouldn't necessarily be more (or less) true than the Times piece.  It will probably take years before we even think we know what worked, and what didn't.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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