Presentation by Franc Barry, Professor of International Business and Economic Development, Trinity College Dublin (Ireland) at the Bank of Latvia conference "Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?"

1. Expansionary Fiscal
Contraction?
An Irish Perspective
Frank Barry
Trinity College Dublin

2.  Hypothesis as originally formulated by
Giavazzi and Pagano derived from analysis of
two episodes of fiscal contraction in the
1980s:
◦ Ireland (c. 1987) and Denmark (c. 1982)

3. Also referred to as "the German
view of fiscal policy"
 Wealth and expectational effects of well-designed
consolidation programmes might very much reduce and
possibly even outweigh the traditional Keynesian
multiplier effects of fiscal policy on demand and
activity.. In addition, fiscal consolidation might improve
long-term financing conditions by way of.. lower risk
premia on government paper.
◦ ECB President Jean-Claude Trichet, Dublin, May 2004

4.  Vast majority of Irish economists were (and
are) not convinced
 Why?
◦ Concurrent "Lawson boom" in the UK
◦ Influx of FDI in lead up to the Single European
Market
◦ Successful 1986 devaluation against DM (to re-
establish previous rate against sterling)
◦ 1986/87 wage deal ("social partnership")

5.  Undoubtedly market sentiment is more
volatile today
 But market sentiment matters less if you are
in a troika programme

6. Ireland: the Celtic Tiger era
 "Good boom": 1987-2000
 "Bad boom": 2001-2007
 The problems of the latter were all property
related
◦ Banks overexposed
◦ Households overindebted
◦ Government overreliant on tax revenues from property
transactions

7. Annual sectoral GDP growth (%): 1986-2000 and 2001-2007;
Tradable (i.e. manufacturing) and Non-tradable
(i.e. construction and services) sectors

8. Parallels with Latvia over the
downturn
 Major GDP crash
 Real GDP growth rate:
 Deflation more pronounced in Irish case
 Unemployment levels similar; substantial emigration

9.  Ireland began its fiscal adjustment in 2008; earlier
than Greece (2010), Spain (2010) or Portugal (2009)
 Expenditure cuts relative to tax increases in ratio of
2 to 1
 Fiscal adjustment frontloaded
◦ 2/3 of the adjustment (equivalent to 15% of 2011 GDP)
undertaken from 2008 to end-2011, the remainder due by
2015

10.  Export sector has been highly buoyant, due
largely to the nature of the goods produced
by the MNCs that the economy hosts
 But growth has been around zero for years,
with export growth counterbalanced by weak
domestic economy

11. Domestic demand growth during 2005-2011, in % of GDP

12.  Why?
 Most ascribe it to:
◦ Massive debt overhang (households and corporates as
well as public), combined with
◦ Fiscal austerity
 This is not at all to suggest that the fiscal
retrenchment is unnecessary, or self defeating
 the primary deficit has about halved since 2009