Thomas White Global Investing
Ireland
Ireland stamp
March 8, 2013
A Postcard from Europe
Ireland: Mascot of austerity getting back on its feet

Dublin

Quietly enduring painful austerity measures, Ireland has been able to reach its deficit-reduction targets regularly and improve its competitiveness in the global marketplace, as well as witness rising employment and an expanding economy over the past two years.

There are very few countries in Europe now where the mere mention of the word “austerity” does not evoke anger. Apparently, Ireland is one of them.

Indeed, “austerity” is a bitter pill many nations in Europe have had to swallow to treat their fiscal ailments. From Britain in the north to Greece in the south and Portugal in the west to Hungary in the east, government budgets have been trimmed, pensions slashed, taxes raised, and wages cut. Not surprisingly, many Europeans are unhappy. Violent anti-austerity demonstrations have become almost routine in the region. For instance, on March 5, nearly 2,000 farmers from across Greece assembled in Athens to protest austerity cuts. And, in late February, Italians gave the thumbs down to “austerity” in their general election, voting out the incumbent pro-austerity political group and pushing their country into chaos.

But in this sea of angry dissenters across Europe, Ireland stands today like an enchanted island of calm, having successfully implemented radical austerity steps, quite remarkably without any of the protest marches or riots that have rocked the rest of the continent. What’s more, there are early signs that these measures are paying off and the Irish economy is getting back on its feet. Having slid to the edge of bankruptcy due to a ruinous banking collapse, a housing sector bust, and a large budget deficit, Ireland was forced to seek a bailout from the IMF, the European Central Bank (ECB), and the European Commission (EC) in late 2010. The Troika sanctioned emergency loans of $87.9 billion, but imposed 190 conditions, largely related to spending cuts and reforms. Since then, Ireland has met each of those requirements, and the Irish have quietly endured painful wage cuts.

With this, the country has been able to reach its deficit-reduction targets regularly and improve its competitiveness in the global marketplace, as well as witness rising employment and an expanding economy over the past two years, while a large part of the Euro-zone has contracted. But perhaps more importantly, Ireland appears to have regained the confidence of the bond markets. The nation’s sovereign bond yields, a proxy for its borrowing costs, have fallen significantly over the past one year. In fact, in the beginning of March, Irish 8-year yields stood lower than those of Spain and Italy. Even the inconclusive Italian poll results, which brought down equity prices and triggered a rise in the bond yields of troubled European nations, prompted barely a quiver in Irish bond yields. No wonder, the EC chief, Jose Manuel Barroso, recently said: “The Irish economy is turning the corner. It shows that the bailout programs can work.”

Several factors have been at play, pushing Ireland on this slow road to recovery. For one, Prime Minister Enda Kenny, having come to power in 2011 with a massive electoral mandate for his coalition group, has been able to pursue an austerity agenda without fear of political instability. The government’s 2010 Croke Park Agreement with public sector trade unions is another crucial factor. According to the deal, the government has pledged job security while the unions have promised to support major reforms. The deal has enabled the government to not just avoid strikes but also improve productivity in the public-sector workforce.

Among other supportive factors, a spurt in emigration from Ireland over the past few years has helped stabilize the unemployment rate while the country’s export prowess has helped it maintain GDP growth. Unlike the other troubled countries of Europe, especially the ones that have received bailouts, Ireland is an export powerhouse. Overseas sales account for 106% of its GDP. The comparative figures for Portugal, Spain, Italy, and Greece are 35%, 30%, 29%, and 21%, respectively. Thanks to its skilled workforce, relatively low corporate tax rates, and pro-multinational industrial policy, Ireland is a hub for the global pharmaceuticals, software, medical equipment, and financial services sectors. The multinationals have not just helped job creation but have also kept the economy humming through periodic capital investments.

Nevertheless, its moderate turnaround notwithstanding, Ireland is still not out of the woods. The IMF says there’s room for private-sector wages to fall further and export competitiveness to improve. Investments have dived to 10% of GDP, the collapsed banking sector continues to be a drag on the economy, and many analysts fear that the housing market has not bottomed out completely. Moreover, as an export-driven economy, Ireland is vulnerable to external shocks, especially from the U.S. and the Euro-zone.

Fortunately, the government remains committed to its austerity agenda. While several European governments are having second thoughts about meeting the European Union-mandated deficit target of 3% of GDP this year, Kenny has declared that Ireland is determined to stick to the austerity path and reach its deficit-cutting target for 2013.

Clearly, the Irish have realized that there is gain only after pain. Will others on the continent too begin to understand this maxim?

 

Image Credit: turbona’s photostream on Flickr under a Creative Commons License

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