New research released by the Institute of Economic Affairs today shows that Portugal and Ireland are both failing to enact the reforms needed to restore growth to their economies.
Their adoption of the euro, and the loose monetary policy that it entailed, led to a vast expansion of the state, an abundance of ‘rent-seeking’ behaviour and gross fiscal irresponsibility. Today’s research demonstrates that these bad practices have yet to be reformed.
Portugal
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Portuguese accession to the EU was greatly motivated by ‘rent-seeking’ motives – i.e. being part of the EU ‘paid out’
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While Portugal enacted limited but important liberalisation and privatisation reforms in the early days of EU membership, the influx of EU funds allowed for a steady growth in public expenditure and fostered a substantial expansion of public and private debt levels
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The later adoption of the euro brought with it inappropriately low interest rates and thus even more cheap money
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This money was co-opted by the most effective ‘rent-seekers’, causing huge imbalances in the economy and undermining any political will for fiscal discipline and the introduction of pro-growth reforms. In fact, many pro-growth reforms previously enacted were subsequently removed
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For Portugal to avoid the possibility of default it must embrace labour market liberalisation, introduce pro-growth reforms and demonstrate fiscal responsibility; something it is not doing thus far
Ireland
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Ireland’s brief period with an independent currency (1979-1999) saw unprecedented growth
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Between 1987-1997, it created 23% more jobs compared with 17% in the USA, 5% in the UK and 3% in the then 15 EU member states
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As with Portugal, adoption of the euro brought low interest rates – this time to an already booming economy – and with it a tide of cheap money
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This was co-opted by the best ‘rent-seekers’ – those in banking and construction. Public and private debt levels soared
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These vested interests were shown to wield huge power over the Irish political class when the hugely expensive and misguided bank guarantee was enacted
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The IMF/EU reform measures are necessary but not sufficient for the refo