Ireland's pain: Multiply by 10
In these days of financial crisis, we're bombarded by bad news with a lot of zeroes attached. Sometimes it's difficult to keep track of what it means for ordinary people - and the economy of which they are a part.
Ireland's crisis is a case in point. Now we know it's in line for an 85bn euros rescue package - conditioned, in part, on a 15bn euros programme of further budget cuts by the Irish government which we'll be hearing more about this afternoon.
If you live in Britain, you will understandably be wondering what these numbers actually mean. But here's a good place to start: take every number you hear later today from the Irish finance minister and multiply it by 10.
This year Ireland's national output, or GDP, will be around 160bn euros. As it happens, Britain's GDP will be about 1,600bn euros so that 15bn euros in cuts would be more like 150bn euros - or £126bn - if it was happening in the UK.
Put it another way: today's 15bn euros in cuts represents a tightening of just over 9% of Ireland's national output over four years. For reference, the UK government is planning to reduce structural borrowing by around 8% of GDP over five years from 2010.
So, you might say, this is not so different from Britain's own austerity. But remember, Britain is just starting its fiscal tightening. Ireland's "era of austerity" started more than two years ago.
The government here has already cut spending or raised taxes by 15bn euros in the past two years. In the teeth of the steepest recession in Europe (see chart below), it has already done more tightening in the past two years than the British government is planning to do in the next five. And now it is promising to do the same again, by 2014.
In fact, it's even worse than that. In discussing Ireland, most economists - and certainly all international organisations like the IMF - tend to emphasis GNP, not GDP, because the earnings of foreign multinationals account for such a large share of Ireland's national output. So, whereas GDP this year will be around 160bn euros, GNP will be closer to 130bn euros. So that 15bn euros in cuts will feel more like 11% of national income than 9%.
It was a global curiosity when Brian Lenihan unveiled a major austerity budget in the spring of 2008, just as pretty much every other country in the world was lurching toward fiscal stimulus (remember the London G20?) The feeling was that Ireland's enormous banking woes had left it no choice.
But optimistic souls talked about the possibility of an "expansionary fiscal tightening" - the idea that budget cuts would do so improve Ireland's standing in global financial markets and the confidence of the private sector that they might actually support growth, and hasten the end of Ireland's recession. (Incidentally, George Osborne used to talk about it as well.)
You don't hear much of that talk today. The government is forecasting average growth of 2.75% a year between 2011 and 2014, but in their summer staff report, the IMF thought even that could be optimistic - and their forecasts back then did not take into account additional bank bailout costs in 2010 of 20% of GDP.
In that same report, the IMF suggested that of all the 30-odd countries it monitors closely, Ireland was most at risk of suffering from outright deflation (see chart below). That risk, too, must surely have intensified as a result of the events of the past few weeks.
People here still believe in the euro. Certainly, being in the single currency area - with a "one-size-doesn't-really-fit-any" monetary policy - helped magnify Ireland's boom. As has been written many times here, it also made it easier for the rest of Europe to lend the Irish private sector an extraordinary amount (see chart at end of this post).
Now the euro is magnifying Ireland's bust, because to make an export-led recovery remotely plausible, prices and wages have to fall instead of the currency. Unemployment in Ireland has risen from 4% to more than 13%. The IMF don't expect it to fall much below 10% between now and 2015.
In today's FT, Martin Wolf argues [registration required] that Ireland's experience shows the "German" approach to monetary union is fundamentally misconceived. That is for others to judge. But it has certainly not been a recipe for "no more boom and bust". The currency has been stable - but very little else.
Having ridden the roller-coaster up, now Ireland has to ride it down. The official IMF assessment is that Ireland is embarked on a prolonged period of "internal devaluation" to rebuild competitiveness within a single currency. The clever economists at the Fund may be able to tell the difference between that and a Japan-style scenario of stagnant real incomes, high unemployment and deflation. I doubt that many Irish voters will.
Update, 12:30: I see the ratings agency Standard and Poor's has similar fears for Ireland's economy, which partly explains their decision to downgrade Ireland's sovereign debt, yet again. Here's a few nuggets from today's press release:
"As a consequence of the high overhang of private debt, fiscal austerity, and the uneven outlook for external demand in Europe, Standard & Poor's now expects close to zero nominal GDP growth for 2011 and 2012. We do not envisage GDP exceeding 2% a year in real terms before 2013."
"While export performance is forecast to remain firm over the medium term, we are of the further view that domestic demand will most probably stagnate, thwarting any immediate recovery in tax revenues.
"In our view, downside risks of deflation remain. These depend partly on the external environment and the speed with which the financial sector can recover sufficiently to contribute to the economy again. Meanwhile, uncertainties surrounding the timing and extent of imposed burden sharing by EU institutions have raised refinancing costs. In our opinion, these refinancing costs are likely to remain high until investors perceive the forecasts for primary fiscal balances as much improved."
Of course, the value of the assets sitting on the banks' balance sheets will be affected by the state of the property market and the overall economy. So will the state of the budget. It's a simple point but an absolutely crucial one. If the economy doesn't get better, then neither will the banks or the national budget. Right now, international markets don't seem to have much confidence in any of them.