Chart of the Day: This Just In... Austerity Works
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- Published on Friday, 06 July 2012 14:32
- Written by Adam English, Associate Editor, Inside Investing Daily
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Critics of austerity programs in Europe need to take a close look at Ireland. The country's economy isn't pretty, but it works and it is getting better. Exports are up and Ireland's books are stable.
The country is proof austerity works in Europe. Just take a look at Irish 10-year bond rates (via Bloomberg).
As a result of the infamous bailout, Ireland was effectively locked out of the public bond market.
But that changed on Thursday. The National Treasury Management Agency (NTMA) sold 500 million euros ($630 million) of treasury bills.
The NTMA is hoping the sale will lay the foundation for a full return to public bond auctions in late 2012 or early 2013. Strong demand and competitive rates look promising for the formerly prodigal nation.
Critics of austerity are undoubtedly thinking about high unemployment figures. They have stubbornly remained above 14% while the unemployment rate for the 17 nations that use the euro is around 11%.
In reality, there was no alternative. Ireland backed itself into a corner and had to choose the lesser of two evils.
The first option was to default because investors couldn't tolerate Keynesian policies that pushed debt far beyond manageable levels.
The second was to use self-imposed austerity to create wiggle room in the terms and conditions.
Ireland had no chance of standing on its own when 10-year bonds spiked to a 14.13% yield. Once Ireland fulfilled all of the IMF's requirements, the bond yields quickly dropped.
The yields for bonds maturing in October 2020 are now around 6.1%. That isn't cheap for Ireland, but it is something it can manage.
More importantly, Irish GDP growth is around 1% while it is completely flat for the entire euro area. How many of the other countries that needed bailouts can claim that?
Ireland made it through the gauntlet. Without austerity, it never would have happened.