South By North Strategies, Ltd.

Simon Johnson of The Baseline Scenario argues that the Irish response to the recession is one the United States should avoid, not replicate.

Ireland, until 2009, seemed like a fiscally prudent nation.  Successive governments had paid down the national debt to such an extent that total debt to GDP was only 25% at end 2008 – among industrialized countries, this was one of the lowest.
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But the Irish state was also carrying a large off-balance sheet liability, in the form of three huge banks that were seriously out of control.  When the crash came, the scale and nature of the bank bailouts meant that all this changed.  Even with their now famous public wage cuts, the government budget deficit will be an eye-popping 12.5% of GDP in 2010.
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Ireland had more prudent choices.  They could have avoided taking on private bank debts by forcing the creditors of these banks to share the burden – and this is now what some sensible voices within the main opposition party have called for.  However, a strong lobby of real estate developers, the investors who bought the bank bonds, and politicians with links to the failed developments (and their bankers), have managed to ensure that taxpayers rather than creditors will pay.  The government plan is – with good reason – highly unpopular, but the coalition of interests in its favor it strong enough to ensure that it will proceed.
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When Irish-type banks fail, you have a dramatic and unpleasant choice.  Either takeover the banks’ debts – and create a very real burden on taxpayers and a drag on growth.  Or restructure these debts – forcing creditors to take a hit.  If the banks are bigger, more powerful politically, and better connected in the corridors of power, you will find the creditors’ potential losses more fully shifted onto the shoulders of taxpayers.