Ireland and Greece: A Tale of Two Fiscal Adjustments

Three years into Europe’s crisis, and with worrisome output contractions ongoing in Italy, Spain and Portugal, the different experiences of Ireland and Greece offer useful lessons. A more tempered fiscal consolidation has helped Ireland succeed in restarting the growth needed to underpin debt sustainability and renew bond issuance. Few doubt, as a result, that Ireland’s official creditors will be repaid in full and on time. With a much larger initial debt and little saved from the strong growth registered before 2008, the far harsher fiscal adjustment required of Greece has had a much more negative effect on GDP. This has elevated debt ratios and reinforced doubts about creditworthiness despite fiscal adjustment and principal reductions from private creditors of unprecedented magnitudes. Applying the Irish example in Greece to help restart growth would require some additional funding. The final cost, however, would be much less than might eventually be needed if output continues to fall and doubts about debt sustainability remain entrenched.