As a small and open economy, Ireland would have been badly hit by the global economic downturn even if its property boom had not collapsed. As it is, the country’s economy suffered one of the sharpest setbacks in EU history. In just a few months, Europe’s pin-up boy seemed all washed-up.
The Irish themselves are still coming to terms with the scale of the country’s banking losses and the reckless lending and laxity of regulations that caused them. Over the last 18 months, the government has taken the decisions to guarantee all deposits in the banking system, nationalise one major bank and pour billions of euros into recapitalising others. Ireland’s bank bail-outs alone could cost €25bn, and a still more daring move by the government was to set up the National Asset Management Agency (NAMA) to absorb toxic property loans that have been paralysing the financial sector.
Ireland’s taxpayers and voters may just be able to stomach these measures if they help the country climb out of recession. On budget day last year, a crash in revenue caused by an 11% fall in GDP and the implosion of Ireland’s construction sector left finance minister Brian Lenihan with little cash and fewer options. He took harsh austerity measures to slash the deficit, resulting in a fiscal consolidation equivalent to 6% of GDP.
Even with these cuts, Ireland’s 2009 deficit was the largest in the EU at more than 14% of GDP, leaving the government with lots to do to get it down to the EU target of 3% by 2014. Its plan assumes optimistic annual growth rates of 4-5% from 2012 onwards. Though tax returns, employment figures and consumer surveys all show that the economy is beginning to stabilise, the European Commission as well as the international bond markets will be keeping a close eye on Ireland for some time to come.
The social costs of the crisis are as stark as the economic ones, but more difficult to quantify. Tax rises and pay cuts have put a serious strain on Ireland’s model of social partnership between employers, unions, and government. A third of young Irish men are unemployed and emigration has resumed. Interventions and cutbacks may be easing the banking and fiscal crises but Ireland’s economic prospects remain uncertain. Recovery will depend on at least three things: a properly functioning banking system, a return to being internationally competitive, and sustained economic growth in key markets like the UK, the EU as a whole and the US.
Irish people are angry at the bankers, at the government and at the property developers. But in the main they acknowledge that belt-tightening sacrifices are now a necessary part of recovery. Ireland has taken measures to sort out its banks and painful cutbacks are beginning to improve competitiveness. Despite sterling’s slump against the euro, Irish exports have held up quite well, especially when compared to the rest of Europe. The country remains an attractive place to do business, and for the most part its young and well-educated workforce continues to enjoy an enviable quality of life. Its boom years may have ended brutally but it is hopefully now taking the first steps on the road to recovery.
|