ANN CAHILL: Irish economy to ‘stagnate for 10 years’

THE Irish economy will stagnate for 10 years but that is a much better prospect than if it were not a member of the eurozone, according to a leading European economist.

Director of the Centre for European Policy Studies Daniel Gros said the eurozone countries must create a monetary fund and prepare for the insolvency of a euro country.

Ireland, together with Spain, is one of big losers from the current crisis because 20% of its GDP came from the construction sector, which has now collapsed. “Losing what is effectively 20% of your economy is not good. Ireland will have a very tough time ahead,” he said.

He warned 10 years of little or no real growth may be optimistic given the experience of Japan, which is still in the doldrums more than 20 years after its construction boom ended.

However, he said the Irish are flexible enough to adjust, as a large part of the country’s GDP comes from exports compared to other countries, such as Greece, and wages have fallen. “The cut in private sector wages is important – much more so than a drop in public sector pay,” he said.

Mr Gros and Sonja Sagmeister in their book Post-Crisis Era conclude that the Polish economy will overtake Germany over the next 20 years since it has been out-performing Germany by an average of three percentage points a year.

The big winner from the current crisis will be China, their book argues. The EU has 20% of world trade but in 10 years it will have 10%, the US slightly more and China 20%.

Six million people a year, 30% of the China’s young population, are graduating from university. And it is only a question of time until the yen becomes a world currency. While China holds US$2,500 billion of US debt, their growth will not depend on the dollar but on domestic demand.

He warned that if eurozone leaders agree to bail out Greece they will end up doing so repeatedly as the country will fail to adjust. This will depress growth and keep the currency weak. He advocates a European monetary fund to prepare for the insolvency of a euro area member country. “If you prepare for it, it may not happen; if you do not, you will have serial bail-outs,” he said.

He believes Germany may agree to a bail-out for Greece and when they come back for more, as he believes they will if they are not forced to adjust their spending, then Germany may be prepared to create an EU treasury.


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