Will Ireland leave the euro, go back to the Irish punt.

on Tuesday, October 26, 2010

Will Ireland leave the euro, go back to the Irish punt.

AS the scale of the fiscal adjustment required in December's Budget continues to climb, the 'cure' risks killing the patient.

With the ESRI now predicting that further tax increases and spending cuts of up to €15bn will be needed to meet the Government's target of cutting the budget deficit to 3 per cent of GDP by 2014, Ireland faces the bleak choice of either quitting the euro or facing a decade or more of depression and deflation.

This week the ESRI, which normally closely reflects Government thinking on the economy, broke ranks and publicly questioned whether sticking to the target of reducing the deficit to 3 per cent of GDP by 2014 made sense. Instead the ESRI argued that we should push out the target date to 2016.

While stretching the deficit-reduction period from four to six years would, superficially at least, be less traumatic for the economy, it doesn't address the key issue. This is that, when combined with the near-€15bn of tax increases and spending reductions the Government has already imposed since the October 2008 budget, almost €30bn -- close to 25 per cent the value of our current annual output -- will have to be taken out of the economy to achieve the 3 per cent deficit target.