Krugman: Recovery will take five years

THE winner of the 2008 Nobel Prize in Economics warned it would take five years before we get back to average EU growth.

Meanwhile, Paul Krugman warned Ireland will “suffer” falling wages and prices as the Government has no other policy options to call on because of our EU membership.

Wage cuts at the level of 7% will be required for the next few years to get the economy back to a reasonable growth path, he said.

He warned the recovery process would entail a period of “long, slow, grinding deflation”.

Mr Krugman said his controversial “Erin Go Broke” article in the New York Times was meant as a “warning” that the US and the rest of the world could also fall into a situation where output would fall 10% from its peak, which technically moves the Irish economy from recession to depression.

Speaking in Dublin at a Merrion Capital conference yesterday Mr Krugman modified his comments about the outlook for Ireland.

“Ireland is not going to default on its international debt despite the ‘hysteria’ that sometimes grips investors that is demonstrated by ‘lost confidence’ in Ireland by international markets,” he said.

Mr Krugman said Britain was not in danger of defaulting either, adding the chances of developed economies failing to meet their international debt obligations were slim. However, in an EU context he said Greece may need an EU bailout.

America has “pulled back from the edge of the abyss”, but that did not mean the end of the slump in the world’s largest economy.

All it meant was “things are getting worse more slowly”, he said.

He added there was “no sign of a V-shaped recovery” taking hold and the term “green shoots of recovery” was an “unfortunate phrase” in the current global economic crisis.

The fall of 17% in world trade, a figure not seen since the “Great Depression” demonstrates just how badly the world economy has been undermined.

His major fear was that the US economy could suffer a “lost decade” as happened in Japan in the 1990s. So too could the EU and the projections for the Irish economy have to be viewed in that context, he said.

That was a period characterised by zombie banks and businesses that were effectively dead as trading entities.

At a news conference in Dublin he acknowledged Ireland was taking action and “the adjustment process was working”.

But “it’s going to be a very, very hard slog”.

He accused the Irish Government of “tiering on the bubble” and of failing to have a plan of action when the slow down came. It also failed to take “precautionary actions” to prevent the collapse, he said.

Provided we cut costs at the rate of 7% for several years the Irish economy can get back on its feet but it “will be an extremely painful process”.

“In the long run the Irish economy will actually restore equilibrium, but as my favourite economist says in the long run we are all dead,” he said.