Irish Times columnist Fintan O'Toole writes today
on the Eurozone Fiscal Compact treaty and the Irish referendum.
He says banning Keynesianism after the great crash of 2007 is like reacting to a mass shooting by banning body armour. Ireland is a case in point. "Keynes’s idea was that governments should operate counter-cyclical policies, running deficits to boost flagging economies and cutting spending to cool over-heating economies."
A small economy that is dependent on American firms for 90% of its tradeable exports and having joined the euro system is without the dubious panacea of the Central Bank printing money, and has limited options.
Japan has public debt of 230% of GDP – almost four times the euro zone limit. The markets, whose judgment we are all supposed to treat as gospel, don’t seem too bothered: Japanese 10-year bond yields are below 1%.
It is true that the 3% of GDP annual budget limit and the 60% debt ceilings are arbitrary limits but what's important is the plan to give attention to other indicators. For example during the Irish bubble, there were many other indicators besides the two official ones that were flashing red including annual credit growth of up to 30%.
The EU isn't a dictatorship and a country that is prudently run is not going to be crucified during a recession period. The evidence of stimulus measures from 2008 in several countries shows that.
As for Japan, its net debt after offsetting public pension funds is 139% and the gross ratio has risen almost every year since 1991.
The low yield of 1% does not imply market confidence in an economy hit by persistent inflation. Last January, the yield on British 10-year gilts fell to the lowest since 1703 but that doesn't mean the UK economy is in good health.
The US also has a low yield and as with Japan, it has been helped by central bank purchases (when the value of a bond with a fixed interest rate rises, its yield falls).
A key aspect of Japan's debt is that 95% is held locally; in the case of Ireland, Greece and Portugal, more than 70% of public debt was held by foreigners when they each got international support.
As regards the left-right issue, France last had an annual budget surplus in 1974 and whether left or right every year in almost four decades, the debt rose.
The debt ratio rose from 22% in 1975 to 82% in 2010 and is expected to be close to 90% in 2012 - - the net debt ratio will be 84%.
An economy eventually ends up with a high interest rate burden and when it needs to spend in a recession period, it has to pay a high rate for borrowings or the investors go on strike.
Finland like Ireland has been in the euro system from the start. Instead of SSIA bonanzas, it set aside a lot of funds for the rainy day. Twenty years after its collapse in the aftermath of the breakup of the Soviet Union, it has no net debt.
This year it will have surplus funds of 57% of GDP. It doesn't have to blame the euro.