Why Ireland’s economy only looks good from a distance
By Sean Kay
The Eurozone is back in the news this week with what, on the face of it, is a good story: Ireland is leaving the European Union/International Monetary Fund bailout mechanism and regaining economic sovereignty.
Five years after becoming the first European country to enter a post-financial crisis recession, Ireland is being held up as a model of how austerity can get a nation back on its feet. There is no doubt 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 be there for a very long time. Irish Prime Minister Enda Kenny may have been right when he said abandoning the bailout sends a “powerful signal internationally, that Ireland is fighting back, that the spirit of our people is stronger stronger than ever.” But the government has not prepared the public – or potential outside investors – for the dangers that continue to lurk in the Irish economy or for the hard choices that lie ahead.
The roots of Ireland’s economic crisis are relatively simple: the country’s estimated 4.5 million people needed a $117 billion bailout in 2010 because the major banks had no money. , the country had embarked on a spending and credit binge, and the government could not finance its borrowing to finance its public sector without external capital injections.
Necessary as it was, the bailout hit the Irish psyche deeply as it meant the country had lost its economic freedoms to policymakers in Brussels after being praised for so long as the ‘Celtic Tiger’. To maintain its bailout commitments as a member of the eurozone,
Ireland has embarked on a program of deep economic austerity – widely hailed in financial capitals – which has cost each Irish citizen around $13,700, on average, although the end cost is far higher.
Ireland then experienced soaring unemployment, a deep economic recession and painful budget cuts combined with rising taxes and fees. But the economy has since started to stabilize.
Today unemployment is down to a still staggering 12.8% (although it would be much higher if Ireland didn’t export so much of its talented workforce to help build the economies other countries.) The country’s borrowing rates on 10-year bonds also fell significantly – to 3.47% – from a eurozone high of 14.2% in 2011.
There have also been improvements in the housing market, at least around Dublin. Yet in the third quarter of this year an unsustainable 18.5% of Irish homeowners had missed a payment on their mortgage, and three-quarters of those in arrears of more than 90 days had not yet been restructured. In this precarious context, insisting on a return to economic sovereignty could very well jeopardize Ireland’s modest gains.
The Irish government recently rejected the option of maintaining an EU credit line as a backstop, should internal or external surprises make it impossible to self-finance borrowing to support the economy.
Indeed, he bet that a strong declaration of confidence would be popular in his country 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 discourage the same international investment.
Either way, outward investment in Ireland has done little to boost its economy since 2001 – when an unregulated housing frenzy began fueling high levels of growth – and is not the solution to the persistent economic crisis in the country. Foreign direct investment has helped to maintain existing levels of employment in this sector, but due to Ireland’s low corporate tax rates it has had only a marginal effect on the deeper economic problems of the country.
Ireland earns bragging rights for hosting the headquarters of the major European business operations of Google and Facebook. But these companies do not employ a large number of Irish people and inject little money back into the Irish economy.
In fact, Ireland’s tax policies, long criticized in Europe, have raised questions among some of the country’s closest allies in the United States. Earlier this year, Senator John McCain and Senator Carl Levin called Ireland a “tax haven” and alleged that it was improperly protecting US companies like Apple, which they said held $44 billion in offshore accounts, taking advantage in part of Irish tax rules, tax obligations at home.
Ireland has since indicated that it will close loopholes in its tax laws that allowed companies like Apple to pay an effective tax rate of 2%. Yet US senators remain skeptical, saying in October: “Hopefully the responses will demonstrate that Ireland is prepared to close the door to these egregious corporate tax abuses enabling tax avoidance by multinational corporations.
Ireland’s central challenge is a persistent lack of local economic growth, due in large part to banks’ reluctance 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. Irish public sector wages remain among the highest in Europe.
A failure to address this issue means even deeper budget cuts are likely, as are higher taxes for 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%; both are unsustainably high.
The 2014 Irish budget cuts around $3.4 billion from national public spending. But if Ireland is to maintain its self-financing in open markets, these cuts may in fact be woefully insufficient. Deeper cuts, however, could rattle the existing government coalition, which includes a sizable Labor minority that draws its political support from constituencies hardest hit by the budget cuts.
Whatever the final figure for continued austerity, the country faces a serious dilemma because the same cuts that are needed to make self-financing possible will also further deflate the national economy, inhibit domestic spending and limit the economic growth.