Piling on more austerity would only backfire

Austerity is a word which has entered the lexicon of normal phraseology over the past couple of years and describes the policy a government might adopt of deficit-cutting, lower spending and a reduction in the amount of benefits and public services provided at a time when it is necessary to reduce debt. Given Ireland's huge banking debt burden added to its sovereign debt in 2008, the drive for austerity has been well underway in this country for the past three years and we are still far from out of the woods. Now, a number of other bigger European economies are finding out what the word means as interbank money markets dry up across Europe and talk of default by Greece becomes ever more strident. At a time when the eurozone is straining at the seams and tensions are being ratcheted up, even Italy, one of the EU's largest economies, is coming under pressure as a result of the utter inability of Europe's politicians to tackle the continent's dire debt crisis. This country has suffered harsh government cutbacks and tax increases that have taken chunks out of people's take-home pay, all unpalatable and painful medicine that has been necessary to avoid bankrupting the nation. People have had to make sacrifices to adjust their lifestyles to the new realities, but they have got on with it. In other European countries with financial troubles, widespread striking and rioting has greeted the mere suggestion that cutbacks are required as a response to the debt crisis engulfing the continent. For such a mature attitude, the government and its people have earned plaudits from our European paymasters that we are doing what is necessary and getting our debts under control. However, it was suggested by the departing chief economist of the European Central Bank Jurgen Stark last week that Ireland should intensify even more its austerity drive, increasing pressure on the government to go very much further than the €3.6 billion in cuts planned in December's budget. The government quite correctly told Herr Stark where to go. Stark in particular called on the government to be more ambitious in cutting the public deficit ratio and complained that the wages for civil servants in Ireland were significantly higher than in many countries providing financial support to Ireland. He said Irish and Greek workers were still better paid than their counterparts across Europe despite both countries being forced into emergency bailouts. This country already has an agreement with the EU, IMF and ECB 'troika' and it seems to be working, though it has clearly inflicted pain at many levels of Irish society. "We have an agreement and we're implementing it and we're going to continue to do that," Tanaiste and Foreign Affairs Minister Eamon Gilmore said in response to the comments. "We haven't been asked by the troika to go beyond it and we don't intend to go beyond it." Intensifying austerity at this point would be the worst thing we could do as it would further retard our already anaemic growth prospects. Ireland is already suffering under a heavy yoke and the weakening of the US, British and Eurozone economies, our major export markets, may well make an already fragile situation worse. The government's focus needs to be on jobs and growth, which is the key to any recovery, and not on distractions being thrown about by senior figures in the ECB. Action at this stage should be on reducing costs and prices rather than cutting wages, something that would help to boost economic growth by improving competitiveness. Some commentators have pointed to the fact that severe austerity has worked in other countries, but it is extremely painful. Latvia now has a strong and growing economy after undergoing some fierce austerity measures which saw one-third of its teachers laid off and the rest enduring savage salary cuts of up to 40 per cent, pension entitlements decimated, hospitals closed and other services severely curtailed. Do we really want to see that happening in Ireland? Other economists argue the decision to keep cutting back is a mistake because it removes the stimulus of government spending from the economy, deepening and prolonging the economic slowdown. This, in turn, reduces tax revenue further. Greater austerity is not the way to go. If we stick to the plan, our business-friendly economy could rebound ahead of other financially troubled eurozone members that have higher costs and more red tape. The country's strong export sector, attractive corporate tax rate and record of industrial peace could just prove to be the right medicine once the global economic picture improves.