Wednesday, May 30, 2012

Wall Street Journal inadvertently makes case for Irish Yes vote

In the context of Ireland's referendum on the fiscal treaty tomorrow, a Wall Street Journal Europe editorial uncorks this rationale for Ireland to want to avoid the fiscal rules in the treaty:

Ireland is Europe's best case study in how a little short-term budget imbalance can go a long way if it's used to fund tax cuts and supply-side reform. The fiscal pact threatens to rob all EU countries of that flexibility. 

Such a broad statement is hard to pin down and it should be noted that some of Ireland's acclaimed corporate taxation system has been around in some form since the 1950s. But nonetheless the statement -- pinning a supply side interpretation on a past fiscal misdeed likely means one thing -- that Charlie McCreevy is still whispering in the Journal's ear as successfully as Fianna Fail did in the glory years of the mid-2000s.

A little history is in order. In late 2000 and early 2001, Charlie McCreevy was Ireland's finance minister. And in that period, he was busy sowing the seeds of Ireland's fiscal disaster: the low interest rates due to the introduction of the euro had already generated a property boom on top of what had been a foreign investment driven economy, and the tax revenue was rolling in. And the plan was to spend it all on (1) tax cuts (2) massive public sector pay increases ("benchmarking"), and (3) any and all items to help buy the next election which was due within 2 years.

Not entirely surprisingly, the still nascent budget monitoring of the European Council of Finance Ministers was unimpressed, and asked for curtailing of measures that were obviously stoking an over-heating economy. Charlie, cheered on by a boosterish and gullible media, and with the intellectual backing of economists who should have known better, told them to F*** Off (using supply-side language), and other than a few cosmetic adjustments to his budget measures, got his way. When people look back at why the European budget rules had so little teeth, they tend to focus on the later brush-offs by France and Germany, but Ireland got their first. Here's an excellent account by Frank Barry of how the 2001 decisions played into the broader political economy of the country to produce the outcomes we see now.

But Charlie, stinging from the sharply revised views of his tenure, still finds sympathy in some quarters, the giveaway being how the WSJ defence uses the same supply-side terminology that Charlie used in 2001. But if the  fiscal pact had been around then, that episode could have turned out differently.