eirmoney | Ireland vs. US - Budget Deficit, Unequal Rules

Ireland vs. US - Budget Deficit, Unequal Rules

Posted by Carl R. Olsen | 10 September 2009

European Union rules regarding member countries debt to GDP ratios could save Ireland

The US and Ireland do not play by the same rules, although to the detriment of Ireland they closely align themselves with one another as seen in this latest fiscal meltdown. Just as Ireland was courting Silicon Valley in the United States for its technology sector to relocate, it also adopted US banking standards or the lack thereof. The result was that both the US and Irish markets collapsed at the same time for much the same reasons and both will take the slow road back to recovery. Ireland may have the last laugh, however.

The European Union has rules regarding member countries debt to GDP ratios with a ceiling set at 3% before sanctions set in. In light of recent economic developments the EU wisely decided to give extensions to five member countries; the UK, Ireland, Greece, Spain and France, all with deficits now above the EU ceiling. Last year Ireland’s deficit was 2.5% but this is expected to quickly rise to about 11% by the end of 2009 and 13% in 2010.

At the same time look at the United States, a big instigator in this current crisis. It went into the year with a deficit of 4.8%, much higher than Irelands (the US would not have been allowed into the European Union if it could have sought such membership). At the same time the US Congressional Budget Office – an office in the government that is supposed to be independently keeping track of such things – estimates that this year the US deficit to GDP will grow to 11.2%, up from 3.2% earlier in 2008. Once recovery starts it is expected that this will shrink to somewhere around the lower 3% mark, but then rise again due to increases in spending and entitlement programs plus the aging economy. By the year 2035 the estimated deficit to GDP will hover at about 17%.

All things being equal with no significant changes in either Irelands or the United States’ tax codes, spending, etc., once the recovery is in place Ireland will be in a much better fiscal position. The reason: it is held accountable for its actions by the European Union, the United States is not.

There is a growing fear in the United States that if these estimates come true it could translate into real problems, while Ireland will not only once again be a Celtic Tiger but one that is laughing at its bigger US cousin. What is the problem? The answer lies in the US debt and who holds that debt. China has a growing interest in the debt of the United States. If the US deficit continues to grow which results in slow economic growth China may drop out of the US government backed market. Already there are US economists advising China to do so. At the same time if the deficit in the US reaches these levels many fear the credit rating will be lowered making it more expensive for the US to get credit and more expensive to maintain credit.

Now take a glimpse into the future for Ireland during this same time. Because of EU rules, Ireland has to get its debt down to at or below 3% of GDP and maintain it there, and you can bet that it will not risk the same mistakes of the past. This will translate into a faster recovery, higher employment and smaller payments to service government debt due to not only a smaller percent of GDP being eaten away, but a possibly higher credit rating than the United States can get. While Ireland may currently be in the same financial situation as the United States, it may well come out of it in a much better position, rules or no rules.