By Sean Kay
The eurozone is back in the news this week with what at the surface level is a good story — Ireland is leaving the European Union/International Monetary Fund bailout mechanism and regaining its economic sovereignty.
Five years after it became the first European country to enter a post-financial crisis recession, Ireland is being heralded as a model for how austerity can put a nation back on its feet. There is no question that the country’s temporary sacrifice of economic freedom halted what was one of the steepest declines in relative wealth in modern history.
However, the reality is that Ireland has yet to hit rock bottom, and when it does, it will likely remain there for a very long time. Irish Prime Minister Enda Kenny may have been right when he said that leaving the bailout sends a “powerful signal internationally, that Ireland is fighting back, that the spirit of our people is as strong as ever.” But the government has not prepared the public — or potential outside investors — for dangers that continue to lurk in the Irish economy or the stark choices that lie ahead.
The roots of Ireland’s economic crisis are relatively straightforward: The country’s roughly 4.5 million people needed a $117bn bailout in 2010 because key banks had no money, the nation had gone on a spending and credit binge, and the government could not finance its borrowing to fund its public sector without an outside infusion of capital.
Necessary as it was, the bailout struck deep in the Irish psyche because it meant the country had lost its economic freedoms to decision-makers in Brussels after being praised for so long as the “Celtic Tiger.” To sustain its bailout commitments as a member of the eurozone,
Ireland embarked on a deep economic austerity programme — widely praised in financial capitals — that cost each Irish citizen roughly $13,700, on average, though the final cost will be far higher.
Ireland subsequently witnessed skyrocketing unemployment, deep economic recession and painful budget cuts combined with rising taxes and fees. But the economy has since started to stabilise.
Unemployment today is down to a still staggering 12.8 percent (although it would be much higher if Ireland didn’t export so much of its talented labour force to help build other nations’ economies.) The country’s borrowing rates on 10-year bonds have also dropped considerably — to 3.47 percent — down from a eurozone high of 14.2 percent in 2011.
There have also been improvements in the housing market, at least around Dublin. Yet through the third quarter of this year, an unsustainably high 18.5 percent of Irish homeowners had missed a payment on their mortgage, and three quarters of those in arrears more than 90 days had yet to be restructured. Against this precarious backdrop, insisting on a return to economic sovereignty could very well put Ireland’s modest gains at risk.
Ireland’s government recently rejected the option of sustaining an EU credit line as a backstop, should internal or external surprises make self-financing of borrowing to sustain the economy impossible.
In effect, it gambled that a strong statement of confidence will be popular at home and attract investment from abroad. But the opposite is just as likely to happen — that questions about the sustainability of Ireland’s economic stability will deter the same international investment.
Either way, external investment in Ireland has done little to advance its economy since 2001 — when an unregulated property binge began to fuel high levels of growth — and is not the solution to the country’s continued economic crisis. Foreign direct investment has helped sustain existing employment levels in that sector, but because of Ireland’s low corporate tax rates it has had only a marginal effect on the country’s deeper economic problems.
Ireland wins bragging rights for hosting the headquarters of major European business operations for Google and Facebook. But these companies don’t employ large numbers of Irish people and they put little money back into the Irish economy.
In fact, Ireland’s tax policies, long criticised in Europe, have raised questions among some of the country’s closest allies in the United States. Earlier this year, Sen John McCain and Sen Carl Levin referred to Ireland as a “tax haven” and alleged that it was inappropriately shielding American companies like Apple, which they said was holding $44bn in off-shore accounts, in part taking advantage of Irish tax rules, from tax liabilities at home.
Ireland has since indicated it will close loopholes in its tax laws which allowed companies like Apple to pay an actual tax rate of 2 percent. Still, the US senators remain sceptical, saying in October: “Hopefully, the answers will demonstrate that Ireland is ready to close the door on these egregious corporate tax abuses enabling multinational tax avoidance.”
Ireland’s central challenge is a sustained lack of indigenous economic growth, due in large part to the unwillingness of banks to support risk taking and lend money to small and medium-sized businesses. Meanwhile, rents and operating costs are high, making it difficult for many businesses to survive, let alone grow. Ireland’s public sector wages remain among the highest in Europe.
A failure to address this problem means that even deeper budget cuts are likely, as are heftier taxes on an already heavily burdened public. Meanwhile, Ireland has the third highest deficit in Europe and its debt to gross domestic product (GDP) ratio is 117.4 percent; both are unsustainably high.
Ireland’s 2014 budget cuts about $3.4bn more from domestic government spending. But if Ireland is to sustain self-financing on the open markets, these cuts may actually be woefully insufficient. Deeper cuts, however, might rattle the existing governing coalition, which includes a sizeable Labour Party minority that draws its political backing from constituencies most harshly impacted by budget cuts.
Whatever the final number for continued austerity, the country faces a serious dilemma because the same cuts that are necessary to make self-financing possible will also further deflate the domestic economy, inhibit domestic spending and constrain economic growth.
WP-Bloomberg
