"THE vicious cycle Ireland has found itself in may be repeated in other European countries if the lessons from the country are not incorporated into policymaking in the rest of Europe. In particular, Ireland has shown that when the country’s private sector is deleveraging, any attempt at fiscal consolidation will result in a disastrous economy with a rising, not falling fiscal deficit. Those results, in turn, bring about lower bond prices and higher CDS spreads.
The flow of funds data from Ireland shows that from 2007 to 2010, its private sector (households, non-financial and financial corporations) increased savings to the tune of 22% of GDP, the largest jump in savings as a percentage of GDP in Europe if not in the world. In other words, Irish GDP could have shrunk by 22%t just from this private sector deleveraging. Furthermore, this deleveraging was happening with the lowest interest rates in Irish history."