The drop in Irish per capita GDP proves austerity is a failure?

Paul Krugman  doesn’t make many mistakes, but I think he’s gone wrong here in claiming that the drop in Irish per capita GDP proves that austerity in the Euro periphery is a failure.

Of course no one wants austerity, but the brute reality in a common currency area is that when a country becomes uncompetitive, it has to cut costs or (much the same thing) effect an internal devaluation. And just as when a country with its own currency devalues, that involves a loss in real living standards and a loss in per capita real output as measured in terms of the relevant common currency: the Euro in the case of Ireland. That is, output as measured in terms of some sort of physical unit (e.g. tons of steel) may stay the same, but the price of that steel has to come down for the country to compete.

So if employment levels in Ireland have risen over the last two years or so, but per capita GDP is still below pre-crises levels, that’s not at all unexpected. Put another way, if Ireland had had its own currency, that decline in per capita GDP would have been much the same, I’d guess.

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