Should Greece be following Ireland down the path of austerity? Finance minister George Papaconstantinou could certainly do with a few friends in the bond market right now but is the Irish playbook really an option?
The Celtic Tiger was the first Euro zone country to enter recession at the back end of 2008. The Irish economy went from boom to gloom in what appeared to be a matter of weeks as the construction industry fell apart and the banking sector imploded. What followed was downgrades and serious talk that the bond market turn Dublin away empty handed.
Since then, however, finance minister Brian Lenihan’s budget busting response has won him applause around the world. His austerity plan delivered in December went down very well with bond traders and fellow politicians alike. For his trouble, Lenihan has seen the Irish spread over German Bunds narrow significantly. He told me last Wednesday night that this tightening will continue once details of the country’s bad-bank plan, known as NAMA, become clearer over the next few months.
However, he also admitted that his plan is not without risks. While the logic of hitting the public sector hard to bring down the long-term cost of funding is sound, it does place a lot of pressure on the private sector to provide growth. This is a tough ask, though the Irish have an huge advantage in having a small and open economy that has created a trade surplus over the last few years.
So while Lenihan may have to fight a budget deficit, what he doesn’t have to do is tackle a trade deficit at the same time. That can’t be said of Papaconstantinou, who not only faces the problem of dealing with a bloated public sector but also faces the massive question of where growth is going to come from. Greece is going to find it harder to export its way out of trouble and this could prove a critical factor. For while Lenihan has earned the grudging support of the Irish people who appear willing to swallow the economic medicine and give his plan a chance. The Greeks with their twin deficits may not afford their finance minister the same advantage.
Guy Johnson is a presenter on CNBC.