Lachman, Desmond 150 Desmond Lachman Resident Fellow

Sir, Given the truly parlous state of Ireland's public finances, Michael O'Sullivan is certainly correct in proposing that the country's economic debate should focus more on how to end its insolvency rather than on how to fund its budget deficit ("Only a new republic can stop Irish serfdom", Comment, February 22). However, Mr O'Sullivan fails to make the basic point that, whatever form an Irish public debt restructuring might take, it would at best be only a partial solution to the country's public finance problem.

The essence of Ireland's public finance problem is that its budget deficit is mainly primary in nature. According to International Monetary Fund estimates, less than 4 percentage points of Ireland's 12 per cent of gross domestic product budget deficit (excluding the cost of the bank bail-out) in 2010 constituted interest payments. As such, even were Ireland to succeed in obtaining a major restructuring of its public debt, the country would still be left with a budget deficit of close to 10 per cent of GDP.

A restructuring of Ireland's public debt, while helpful, will not save the country from having to effect a major reduction in its budget deficit over the next few years along the lines presently being dictated by the IMF. It is difficult to see how such a major fiscal adjustment can be done within the straitjacket of continued euro membership without precipitating a further meaningful deepening in Ireland's economic recession, which has already seen its GDP contract by more than 12 per cent over the past two years.

The real debate in Ireland should not be confined to the relative merits of a debt restructuring. Rather it should focus on whether the costs of Ireland's staying in the euro outweigh those of leaving it.

Desmond Lachman is a resident fellow at AEI.