10.31.2011 0

Ireland Versus Greece: Pay Attention, America

By Howard Rich — Ireland’s refusal to bow to Eurozone pressure on tax hikes has resulted in slow but steady economic growth on the Emerald Isle — while Greece’s insistence on tax hikes in lieu of tougher “austerity” measures has crippled its economy and threatened to plunge the Eurozone (and the world) into another recession.

What lessons should U.S. policymakers take from these divergent paths? That’s easy — if economic recovery is truly your goal, cut government instead of raising taxes.

Last January, an EU report revealed the Greek deficit was 12.7 percent of GDP — more than three times its government’s previous estimate (and more than four times the amount permitted under EU rules). Three months later, that figure was adjusted upward to 13.6 percent of GDP.

Ireland’s situation wasn’t much better. From 2008-2010 government spending climbed from 42.8 percent to 67 percent of GDP. Meanwhile, Ireland’s debt quadrupled over roughly the same period to more than 100 percent of GDP as Dublin took a page out of Washington D.C.’s “too big to fail” playbook.

Having forced Greece into adopting a host of new tax increases, Eurozone nations eager to enhance their own competitiveness tried to force Ireland into raising its 12.5 percent corporate income tax rate to a level more in line with rates in France (33 percent) Germany (30 percent), Spain (30 percent) and Great Britain (28 percent). Irish leaders wisely rejected this demand, however, recognizing that such a tax hike would eliminate a key competitive advantage and hamstring their economic recovery.

They were correct.

“Ireland was Europe’s second fastest growing economy in the second quarter of this year, expanding at an annual rate of 2.3 percent,” bond analyst Michael Hasenstab wrote recently. “The recovery in GDP growth in turn helped Ireland to meet and exceed the deficit-reduction targets set by the European Union and the International Monetary Fund.”

Hasenstab also noted that foreign direct investment climbed by 19 percent during the first six months of 2011 due to Ireland’s competitive tax climate and comparatively light regulations.

Meanwhile in Greece – which imposed higher corporate, value-added, fuel, luxury and property taxes – GDP is projected to slump by 5.5 percent this year, and another 2.5 percent next year. Meanwhile Greek debt – forecast to climb to €357 billion this year (or 162 percent of GDP) — will soar to 173 percent of GDP next year.

Clearly, Ireland will be in a much better position to weather the consequences of a possible Eurozone collapse than Greece — or for that matter Portugal, Spain or Italy.

And while European nations are doing everything within their power to plug a growing number of holes in the dam, it’s looking increasingly like “when” not “if” this collapse occurs.

Earlier this month Great Britain authorized another £75 billion worth of quantitative easing — in addition to the £200 it has previously approved. Meanwhile the European Central Bank announced it was authorizing another €40 billion in emergency loans on top of the €60 billion it already approved. A few weeks ago, Dexia — the Franco-Belgian bank that was bailed out in 2008 to the tune of €6.4 billion — received another bailout along with state guarantees of up to €90 billion to finance borrowing over the coming decade.

And of course there’s a second Greek bailout on the way that’s likely to top €110 billion.

In light of America’s deteriorating economic and financial position, when should our leaders press the panic button?

“For Greece, crisis came when its debt reached 137 percent of its economy,” U.S. Sen. Jim DeMint recently warned. “For Ireland, it was 74 percent.  For Portugal, it was 82 percent. Every country and every crisis is unique, but with the United States debt-to-GDP ratio at 102 percent, there is no question we are already well within the debt ‘red zone.’”

What’s becoming abundantly clear, though, is that once that button is pressed — the key to surviving a debt crisis is cutting government, not the economy.

The author is chairman of Americans for Limited Government.

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