Nobel Prize winning Economist and New York Times columnist Paul Krugman has commented a few times on the Irish situation. I am a great fan of Krugman, he is a bone-fide genius, a great lecturer and a very clear writer (unlike most economists!). He has a great ability to simplify and demystify complicated economic theories.
Krugman’s message for Irealand was a little pessimistic. He fears that Ireland — and indeed the rest of the world — may be heading for a 10 year long recession like Japan in the 1990s. He acknowledges that world governments are reacting to the shock much better than the Japanese government. But he fears it may not be enough. In the specific case of Ireland, he predicted up to five years of pain as domestic costs adjust. He pointed out that the ideal solution of a devaluation was not available to us because of our membership of the euro. In fact, our currency has appreciated against sterling (until recently)— precisely the opposite of what we need.
Krugman is correct, of course. But I think he is too pessimistic on the time frame for our costs to adjust. In the absence of a devaluations, the only way for our exports to become cheaper is for wages (and other costs) to fall. Normally, this would take years to happen. Hence Krugman’s assessment of five years of pain. What is surprising about the Irish case is that and adjustments seems to have happened within months. Public sector salaries have fallen by 10% via the “pension contribution”. This occurred with only the minimum of whining. Anecdotal evidence suggest that similar cuts have happened throughout the private sector. Could any body imagine the same happening in France? There would be riots in the street.
