Irish economy close to a basket case says NY Times’ Paul Krugman

Nobel winner says curse of the single currency dooms Ireland

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New York Times, Paul Krugmann

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Ireland will likely be forced to default on its loans and will take decades to recover says Nobel Prize winning economist Paul Krugman, in an upcoming article in The New York Sunday Times Magazine. Krugman is probably the most influential economist in America.

 He also says the country might decide at some point to go back to its own currency and devalue heavily. Toughing it out by massive cuts , the current policy  will inevitably fail he thinks,
In a lengthy article about the future of the Euro Krugman compares Ireland to Nevada  to make his point. Nevada is the hardest hit of the U.S states in the recession but  he says Nevada will fare much better than Ireland.

Nevada’s situation is “much less desperate than Ireland’s,” he claims. “Both are small economies of a few million people highly dependent on selling goods and services to their neighbors. (Nevada’s neighbors are other U.S. states, Ireland’s other European nations, but the economic implications are much the same.) Both were boom economies for most of the past decade. Both had huge housing bubbles, which burst painfully. Both are now suffering roughly 14 percent unemployment. And both are members of larger currency unions: Ireland is part of the euro zone, Nevada part of the dollar zone, otherwise known as the United States of America.

First of all, the fiscal side of the crisis is less serious in Nevada. It’s true that budgets in both Ireland and Nevada have been hit extremely hard by the slump. But much of the spending Nevada residents depend on comes from federal, not state, programs. In particular, retirees who moved to Nevada for the sunshine don’t have to worry that the state’s reduced tax take will endanger their Social Security checks or their Medicare coverage. In Ireland, by contrast, both pensions and health spending are on the cutting block.

Also, Nevada, unlike Ireland, doesn’t have to worry about the cost of bank bailouts, not because the state has avoided large loan losses but because those losses, for the most part, aren’t Nevada’s problem.

Over all, then, even as both Ireland and Nevada have been especially hard-luck cases within their respective currency zones, Nevada’s medium-term prospects look much better.”

Krugman says the Nevada Ireland comparison in a nutshell is what is wrong with the Euro
“...when the single European currency was first proposed, an obvious question was whether it would work as well as the dollar does here in America. And the answer, clearly, was no — for exactly the reasons the Ireland-Nevada comparison illustrates.

“Europe isn’t fiscally integrated: German taxpayers don’t automatically pick up part of the tab for Greek pensions or Irish bank bailouts. And while Europeans have the legal right to move freely in search of jobs, in practice imperfect cultural integration — above all, the lack of a common language — makes workers less geographically mobile than their American counterparts.

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