Ireland and the Euro Crisis
Although the prospects for most of the euro zone’s periphery[ i.e so called Greece, Italy, Spain, Portugal and Ireland ]
remain dark, there is a glimmer of hope in the west. By the end of 2013
Ireland could leave its bail-out programme and stand on its own feet
again.
An Irish recovery would provide a boost for Europe and its de facto
leader, Angela Merkel, the German chancellor, as much as for Ireland. It would show that the controversial
treatment of austerity and structural reforms imposed as the price of
bail-outs can work. It would reassure the electorates of core Europe,
especially German voters who go to the polls in the autumn, that rescues
do not condemn them to a never-ending call upon their taxes, as seems
to be the case with Greece. And a sustained return by Ireland to the
bond markets would boost confidence more generally, helping other
bailed-out economies such as Portugal and Spain.
Unlike the struggling countries of southern Europe, Ireland has a good story to tell. Last year it dodged the euro zone’s wretched recession. Unit labour costs in the country have come down sharply, making the economy more competitive. That has enhanced Ireland’s allure for foreign companies, which continue to favour the country as a manufacturing and services hub for international markets, not least because of its low corporate-tax rate. These are useful advantages. If things go well in 2013, Ireland might be able to leave its programme without any further assistance.
But a happy ending is by no means assured. Ireland’s very reliance on foreign firms creates both economic and fiscal vulnerabilities. If global growth falters this year, for example, Ireland will be hit hard because its exports are bigger than the economy. Any economic setback will make it more difficult to get the deficit down, as planned in yet another austerity budget (the sixth) late last year. Even if things go to plan, public debt, which amounted to only 25% of Ireland’s GDP in 2007, will exceed 120% in 2013; and once the large slice of GDP which goes to low-taxed foreign multinationals is taken into account, it will reach almost 140%.
If things do go wrong, a debt burden of this magnitude could prove unsustainable. That is why Ireland could do with a helping hand from the rest of Europe. About a third of its public debt has been incurred bailing out its banks, an imposition which Irish taxpayers resent bitterly. The Irish government is largely to blame for that, because it issued blanket guarantees to bank creditors at the height of the financial crisis in 2008. But European leaders, scared about the repercussions of a default in the bond markets, later forced the Irish government to protect the banks’ senior bondholders.
EU could help Ireland by easing terms on some notes it had issued earlier to Irish government or the ESM taking stakes in Irish banks. That would help Ireland both by removing some of its sovereign debt and by insulating the government from any further calls on public funds as a result of more mishaps to Irish banks. It would also help the euro zone by making concrete the undertaking by European leaders last June to break the vicious circle between weak banks and weak governments that has exacerbated the debt crisis.
Helping Ireland would be rewarding it for good behaviour—for complying so well with all the conditions that it is on course to leave the bail-out programme altogether. That would stiffen the resolve of other rescued countries as they push through unpopular measures. But the most compelling reason to offer concessions is that Germany and the wider European economy would benefit, too, as investors saw there was light at the end of a rescue.
Unlike the struggling countries of southern Europe, Ireland has a good story to tell. Last year it dodged the euro zone’s wretched recession. Unit labour costs in the country have come down sharply, making the economy more competitive. That has enhanced Ireland’s allure for foreign companies, which continue to favour the country as a manufacturing and services hub for international markets, not least because of its low corporate-tax rate. These are useful advantages. If things go well in 2013, Ireland might be able to leave its programme without any further assistance.
But a happy ending is by no means assured. Ireland’s very reliance on foreign firms creates both economic and fiscal vulnerabilities. If global growth falters this year, for example, Ireland will be hit hard because its exports are bigger than the economy. Any economic setback will make it more difficult to get the deficit down, as planned in yet another austerity budget (the sixth) late last year. Even if things go to plan, public debt, which amounted to only 25% of Ireland’s GDP in 2007, will exceed 120% in 2013; and once the large slice of GDP which goes to low-taxed foreign multinationals is taken into account, it will reach almost 140%.
If things do go wrong, a debt burden of this magnitude could prove unsustainable. That is why Ireland could do with a helping hand from the rest of Europe. About a third of its public debt has been incurred bailing out its banks, an imposition which Irish taxpayers resent bitterly. The Irish government is largely to blame for that, because it issued blanket guarantees to bank creditors at the height of the financial crisis in 2008. But European leaders, scared about the repercussions of a default in the bond markets, later forced the Irish government to protect the banks’ senior bondholders.
EU could help Ireland by easing terms on some notes it had issued earlier to Irish government or the ESM taking stakes in Irish banks. That would help Ireland both by removing some of its sovereign debt and by insulating the government from any further calls on public funds as a result of more mishaps to Irish banks. It would also help the euro zone by making concrete the undertaking by European leaders last June to break the vicious circle between weak banks and weak governments that has exacerbated the debt crisis.
Helping Ireland would be rewarding it for good behaviour—for complying so well with all the conditions that it is on course to leave the bail-out programme altogether. That would stiffen the resolve of other rescued countries as they push through unpopular measures. But the most compelling reason to offer concessions is that Germany and the wider European economy would benefit, too, as investors saw there was light at the end of a rescue.
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