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Please read, I think the ramifications may be similar for US, if out
right wing seeks deep cuts to soon.

An Irish bail-out and a British nightmare

By Philip Stephens
Published: November 22 2010 19:45 | Last updated: November 22 2010 19:45
This is not the time to gloat. Heavily indebted Britain is borrowing
another £7bn or so to lend to catastrophically indebted Ireland. Tory
Eurosceptics are not sure whether to cheer or jeer – to savour the
eurozone crisis or to berate David Cameron’s government for
contributing to the Irish bail-out.

As it happens, Ireland’s property-boom-turned-banking-bust had little
to do with its membership of the single currency. Ireland is not
Greece. The closer parallels are with Iceland and, dare one say it,
Britain. Gordon Brown got precious few things right as prime minister,
but his bank rescue package probably saved Britain from Ireland’s fate.

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Those who imagine the euro to be responsible for Europe’s ills are
left to explain Britain’s financial mess or why, say, France has ended
up with a much smaller fiscal deficit.

As for Britain’s contribution to the Irish package, George Osborne was
suitably dismissive of his critics. The chancellor – no fan of the
euro – observed that a carping “we-told-you-so” approach scarcely
amounts to an intelligent economic policy.

The self-interest behind the British loan (those fulminating that the
money would be better spent on schools and hospitals should note it is
a loan) is self-evident. Britain is Ireland’s biggest creditor. Its
banking system is heavily exposed to Ireland’s banks. So are its
export industries: Ireland is a bigger market for British goods than
the four Bric countries put together.

This is before you get to less tangible things such as neighbourly
solidarity and sustaining the political trust required to safeguard a
fragile peace in Northern Ireland. I heard one Tory Eurosceptic
declare that Britain’s duty was to help Ireland reclaim its
sovereignty by forcing it out of the single currency. There is a
contradiction in there somewhere.

On the other hand, there is nothing like someone else’s misfortune to
make people feel good about their own troubles. Listening to the
sceptics was to imagine that Britain’s recovery is now plain sailing.
If only that were so. Britain has just about sorted out its banks,
but, as far as making inroads into the deficit is concerned, it is
about where Ireland was a year ago.

At first, the vigour with which Dublin wielded the spending axe won
plaudits from bond markets. But the deflationary impact of the cuts
has since seen the deficit widen. That is the fear haunting Britain as
its own cuts bite into Whitehall budgets.

The nervousness is apparent at the Bank of England, where the monetary
policy committee has all but suspended its inflation target. The MPC
could never admit as much, of course. But all the evidence says it has
concluded that sustaining economic recovery counts for more than
keeping prices down.

We are not talking here about letting inflation rip. Rather, the MPC
seems to have decided that it can live with rises in the consumer
prices index of 3 per cent or so – a percentage point above the
official target of 2 per cent.

On the other hand, inflation as measured by the more widely recognised
retail prices index looks firmly stuck above 4 per cent. And the
Bank’s own forecasts suggest that the pace of price rises will
accelerate in coming months. It will be 2012 before the official
target comes back into full view.

Mervyn King, the Bank governor, is one of the foremost fiscal hawks.
He has promised Mr Osborne that the MPC stands ready to pump even more
cheap money into the economy if the recovery falters as a result of
the fiscal squeeze. With the base rate already 0.5 per cent that will
be easier said than done.

That said, the MPC has made an intelligent choice. Competitive
austerity may be the current European fashion, but growth is the sine
qua non of successful repair of the public finances. Governments
cannot deflate their way back to budget balance – a proposition that
Ireland’s latest austerity package may yet test to destruction.

Rising inflation, though, carries its own costs. It cuts household
incomes and redistributes from savers to borrowers. It has
particularly harsh effects on those dependent on fixed incomes – the
more so at a time of historically low interest rates.

When British policymakers congratulate themselves for not swapping
sterling for the euro what they really mean is that keeping the pound
has given them the chance to devalue it. Sterling is now worth about
20 per cent less than it was three years ago.

What the policymakers do not say is that they have simply chosen
higher inflation over more direct ways of taking money from consumers.

Inflation can also develop a mind of its own; a little can quickly
become a lot if wages start to chase prices. A cursory glance at
Britain’s postwar history tells you that the competitive advantages
that flow from devaluation are fairly easily squandered.

Britain needs buoyant export markets – starting with Ireland. The real
nightmare for Mr Osborne is a combination of faltering growth and
rising inflation. No, there is nothing yet for Britain to gloat about.