Austerity and Ireland - Time to Go Back to Basics

20 Pages Posted: 20 Jun 2014

Date Written: June 18, 2014

Abstract

Ireland suffered a crisis of four dimensions – a property market crisis which led to a banking crisis and a fiscal crisis which caused a financial crisis. By 2008 the massively overvalued property bubble had collapsed which led to the banking crisis. The increasing strain on the national budget and the need to recapitalise the banks, precipitated the financial crisis in 2010. By this stage it had become apparent that Ireland needed a bailout from the EU, the ECB and the IMF.

A period of austerity ensued. Austerity policies include tax increases, spending cuts or a combination of the two. This paper argues that austerity has a role to play in managing economies but that the timing of austerity needs to be altered. It also examines the application of the Austrian Approach to Business Cycles, in relation to Ireland. When austerity is used at the top of the business cycle it is a useful credible policy that prevents economies from overheating. When it is used at the bottom of the business cycle it restricts economic growth and places an unnecessary constraint on economic activity and business activity. Ireland could have benefited from austerity but only if it had been implemented at the correct stage of the business cycle. If austerity measures had been used in 2007 or prior to this, it is unlikely that Ireland would have found itself in the deep recession of 2008-2013.

Keywords: Austerity, Ireland, Financial Crisis, Fiscal Crisis, Business Cycle, Financial Regulation

JEL Classification: E32, E37, E50, E58, H63

Suggested Citation

McGrath, Patricia, Austerity and Ireland - Time to Go Back to Basics (June 18, 2014). Available at SSRN: https://ssrn.com/abstract=2456429 or http://dx.doi.org/10.2139/ssrn.2456429

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