is a failure of austerity as a means of combating deficits and bond market anxiety. What could go wrong? Everything. When a country slashes spending and raises taxes at a time of already-weak growth, it tends to reduce domestic demand. Austerity programs are prodding Greek, Irish and Spanish citizens to spend and invest less. That leads to fewer tax collections and more problem loans. Worse, the austerity-enacting European countries lack the ability to reduce the value of their common currency. The upshot: foreign demand for Greek, Irish and Spanish goods and services won't rise sharply because the Euro hasn't weakened significantly. (Greece didn't get any cheaper for U.S. tourists last
summer because the Euro remained buoyant against the dollar). Austerity
without a flexible currency and a stimulative monetary policy is a recipe for contraction.
This is not a trick question: Ireland and Greece's policy of huge wage cuts, public layoffs and tax increases will make it: (a) more likely that Irish and Greek mortgage holders will stay current; or (b) less likely that Irish and Greek mortgage holders will stay current? The answer, of course, is (b). And when defaults rise, lenders start to freak out, interest rates rise and the powers that be call for another
round of austerity. Wash, rinse, repeat. Which is why Ireland on Wednesday unveiled another austerity plan and an expensive bailout -- just months after stress tests gave many large Irish banks a clean bill of health.
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