Ireland was the EU and IMF’s poster boy during the Euro crisis bailouts, but five years on, the Emerald Isle has not been rewarded for good economic behavior.
When I moved to Ireland in September 2009, I expected to see the Celtic Tiger that had brought prosperity to the island in the early 1990s. Instead, I found city streets lined with ‘To Let’ signs on vacant properties. Allied Irish Bank was about to be nationalized after becoming overwhelmed with toxic mortgages. The massive property boom that helped fuel the Celtic Tiger burst just as it did in the US, but it dealt Ireland a larger blow because of the bubble’s size compared to the rest of the economy.
Five years later, after the announcement of quantitative easing by the European Central Bank, Ireland is still struggling to regain its status as the Celtic Tiger – although it is in a better position than its bailout-receiving peers.
As the Euro crisis ratcheted up, protests sprung up across the several countries whose governments accepted bailouts from the European Troika. But while protests led to anti-establishment parties and a hung Parliament in Greece, Ireland was relatively quiet. Fianna Fáil lost power to Fine Gael, which was likely to occur even without the crisis given Taoiseach Brian Cowen’s unpopularity; there were strikes by public workers squeezed by austerity, but they were short and intermittent. Ireland became the poster boy for how to take the Troika’s bailout prescriptions.
Still at the bottom of the pack
Ireland, despite its cooperation with the IMF and ECB budget rules, has fared much worse than its European neighbors. Even though Ireland was one of the Eurozone’s fastest growing economies before the housing bubble burst, it has grown at a below average pace since, compared to Europe’s largest economies and the PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries. In real terms, Irish GDP remains 15% lower than it was in 2008. Only Germany’s economy has grown since 2008.
Source: World Bank
The employment situation never became as dire as it did in Greece or Spain, but it is far from healthy. Unemployment remains over 11%, down from 15% at the beginning of 2012. Youth unemployment stands at 15.4%, which indicates Ireland may not be on the path towards a lost generation like Spain.
What it does show is a return to the mass youth emigration that characterized Ireland before the Celtic Tiger years. Half of Ireland’s 18-24 year-olds have at least considered leaving the country.
Markets losing fear of Irish debt
Ironically, Ireland’s fiscal house was in order before the crisis. Debt-to-GDP ratios in the early 2000s were less than 33%, compared to about 60% in the US during the same time frame. Now, thanks to the load of high unemployment, shrinking economic activity, and the EU bailout, Ireland’s debt burden is 124% of its economy.
To further reduce its debt burden away, especially now that Ireland has fully repaid the Troika, Finance Minister Michael Noonan has presented four budgets that have been tough to swallow for many Irish people. After cuts in aid to pensioners and youth unemployment benefits, among many other areas, Ireland’s deficit is €971 million ahead of its target. Noonan is pushing forward with further cuts in the budget to be presented next month, despite major losses in by-elections by both parties in the government coalition.
Interest rate spreads on Irish two-year bonds, which give the best indicator of credit risk associated with Irish debt, are now negative. This same indicator reached nearly 25% during the height of the Euro crisis. Noonan touts this as an endorsement by markets of his budgets, although this claim is dubious. Short-term rates across Europe are now negative, driven by the Ukraine crisis and expectations of quantitative easing by the ECB.
Source: Bloomberg
“Longest way round is the shortest way home”
James Joyce’s Ulysses may seem a useful guide for Ireland’s wandering, so-far-unfulfilled recovery up until now. But despite the last five years, Ireland appears to have the foundation for growth over the next 15 that its peers in Southern Europe do not have.
For one, Ireland continues to try to attract foreign corporations. It has been successful in doing this, especially because it offers an English-speaking workforce in the Euro area and its 12.5% corporate income tax is among the developed world’s lowest and most lenient. While the low rates have attracted the European headquarters and manufacturing facilities of many American companies, they may not bring much benefit: while corporations like Google, and in the near future Medtronic, are domiciled in Ireland, they have relatively small operations there.
Noting those drawbacks, Ireland looks to be the model for the type of reforms that ECB President Mario Draghi suggested as part of a “three arrows” approach in his Jackson Hole speech in August. The labor market is relatively unencumbered by the red tape Continental Europe is known for, business taxes are low and welfare programs are, if anything, not generous.
The Irish economy remains in ruin after its mortgage crisis and the Troika’s punishing bailout conditions. Unemployment is slowly dropping, unlike other bailout countries. And yet GDP growth since 2008 lags behind all but Greece. If Ireland can overcome the challenges of large-scale emigration robbing its educated workforce, however, the country’s prospects are much brighter than those of its peers in the medium to long-term.
