We’ve been among those pointing out that the ongoing troubles in Ireland and Greece should cast doubt on the wisdom of austerity, and we’ve predicted that the failure of European austerity is going to be one of the big stories of the fall.
Megan McArdle argues that this criticism misses the point. As she puts it, Ireland and Greece really haven’t had a choice. It’s irrelevant that austerity is pushing the country into a further recession, because they would have gone broke already (perhaps) without it.
So then it follows from her logic that you can’t criticise American austerity on the grounds that it’s failing in Ireland — we may not have a choice either.
But here’s the problem: the US is nothing like Ireland. We’re using a totally different system of money.
While the euro itself is a fiat currency, each country is actually on something akin to a gold standard. None of the individual states have the ability to expand or contract their individual money supplies as warranted. Ireland isn’t an analogy for the US, it’s analogous to California, which truly doesn’t have any other choice but to cut spending drastically.
But that’s not the case with the US. The US can weaken its dollar as warranted. It has a Fed that can monetise part of the debt, and just in general by virtue of it controlling its own central bank and Treasury it’s fundamentally in a different spot that both Ireland and Greece and Portugal and the rest.
What’s damning about the situation in Ireland and Greece isn’t that austerity has failed to produce an economic revival — it was always going to be painful in the short and medium term. What’s damning is that austerity hasn’t even done much to improve either countries sovereign balance sheets.
When looking for lessons for the US, let’s ignore Ireland and Greece. Instead let’s see how things play out in the UK, which, because it has its own, flexible currency is much more like the US. Then we’ll know what to expect, and what is required here.