FollowBy Dr. Samuel Brazys
Renowned US economist Lawrence Summers adds his voice to the European “austerity” vs. “growth” debate in a recent Financial Times piece that is correct in recognizing that the sovereign situation in Greece is different from other Euro-crisis countries. However his analysis largely ignores the household side of the equation in the other PIIGS, particularly in Ireland. Household indebtedness is the major issue here, and the surface hasn’t even been scratched. The property market is still hugely distorted by NAMA and a 2009 estimate by Ronan Lyons suggests that 1 in 5 private Irish homes is in negative equity, a ratio that has almost certainly increased over the past 3 years. As noted here, “a recent Ireland central bank report shows 70,911 mortgages are in arrears of more than 90 days. That’s up from 62,970, or 8.1 per cent, in September.” This is why the “austerity” vs. “growth” debate misses the point. Ireland cannot “save” or “spend” its way out of the crisis – there is a massive amount of household wealth that has to be wiped off the books. That most people realize this has implications for consumer confidence, spending, and ultimately, growth. The consequences of this underlying economic imbalance are currently being masked by the weak Euro, which fuels exports, but a day of reckoning awaits – through a continued short/mid-term fall in nominal prices and wages, and/or long-term inflation that will wipe out debt and wealth alike. Austerity is simply the course that brings on the former, while “growth” brings on the latter. The preference, and thus politics, depends on your net household savings.