I’ve recently come back from a trip to Ireland. It was my first proper visit to the country and I thoroughly enjoyed it. Ireland is like being abroad without being abroad. The Irish have funny road-signs, kilometers and different money but they also have three pin plugs, big fried breakfasts and they drive on the left. And, of course, they speak English which means you can read the Irish newspapers. Actually, you don’t even need to do that. Such is the penetration of British media that you can buy Irish editions of most of the British papers. There is even an Irish Daily Mail. And, before you ask, no I didn’t.
The first thing that struck me about the Irish financial pages was how much less hysterical they were. To compare our coverage of the ongoing financial crisis with theirs, you’d think it was the UK which was living on bailout support with debts of 110 percent of GDP. Sure, the Eurozone crisis was reported but not in the breathless OhMyGodWeAreSoooooooScrewed way that you get in the British media. While I was out there, the news that the final government losses on Anglo-Irish bank would be around €25bn was greeted with relief. It was about €10-15bn less than originally thought. That the cost of bailing out one bank alone was somewhere between 15 and 20 percent of the country’s annual GDP seemed to be cause for little more than a shrug.
Of course, it is tempting to fall into national stereotypes about how much more laid back the Irish are compared to us.
“Ah, it’s not so bad, Ted, we’ve only lost €25bn.”
“Phew, that’s a relief, Dougal. I thought for a minute there you were going to tell me it was serious.”
And there was some gallows humour in evidence. It seems that, even in small towns, in Ireland you can see some live music almost every night. I saw adverts for pub bands with names like the Defaulters and Dave and the Deficits. Perhaps the Irish realise their situation is so dire that there is no point in getting worked up and it’s best just to laugh.
Or maybe not. Could it be that things really are improving? This weekend, the Irish Independent listed 20 reasons to be (a little) more optimistic including a unexpectedly high 1.6 pecent growth rate in the last quarter. Last week, Business Insider ran a piece looking at Why Ireland Is The Miracle Of Europe, citing government austerity measures, improved competitiveness and export growth as reasons for the country’s revival. In September, the Wall Street Journal suggested that the Celtic Tiger might be purring again. Billionaire investor Wilbur Ross agrees and has invested €300bn in the Bank of Ireland. He argues that the country’s economy is fundamentally sound and cites its communications infrastructure and educated workforce as reasons for optimism:
We like Ireland very much because, unlike the Club Med countries, it doesn’t need structural reform of the economy.
All it really needs is to get through the financial crisis that was caused when its banks went berserk. But Ireland’s fundamentals are still there.
Ireland will once again become the Celtic Tiger.
Not so fast, says the Eisenhower Institute’s Sean Kay, also fresh from a trip to Ireland. An export-led recovery could well run out of steam if there is another global downturn. Domestic demand is flat and consumer confidence falling as austerity measures start to bite. Unemployment is at 14.5 percent and the country is so deeply in debt, argues Kay, that it cannot survive without further EU support.
He is right to be cautious. One quarter’s growth figures could indeed be a false dawn. But he also believes that there is strong underlying potential in the Irish economy.
Just as frustrating though, is that Ireland is well positioned over the long-term. Ireland can lead the world on a new foundation of progressive globalization and economic development. But that cannot happen if the leaders there, and if the international press, do not begin the discussion with a brutal sense of realism — the first essential step to recovery.
Despite the fiscal mess it is in, Ireland still has some strong businesses and an educated workforce. It is easy to lump the PIIGS economies together but there are fundamental differences between them. Greece and Italy (as Moody’s pointed out on Tuesday) have chronic problems. Their public debts were high well before the financial crisis. Spain’s debt is relatively low but many investors believe that its capacity for growth is weak and it still hasn’t seen the worst of its banking crisis yet. Before the financial crisis, though, Ireland’s debt-to-GDP ratio was one of the lowest in Europe. Apart from its property and banking sectors, the rest of its economy was sound. Ireland’s debt is almost all due to the collapse of these sectors, the resulting fall in tax revenues and the bailouts which followed.
Government debt as a percentage of GDP
Source: OECD Economic Outlook, May 2011
Ireland’s financial crash was, in many ways, similar to Britain’s but magnified by the relative size of its economy. Compared to its GDP, Ireland’s banks and property bubble were massive and when both imploded, they dragged the country down with them. In rescuing its banks and property companies, the Irish state added a huge amount to its national debt; an amount, relative to the country’s size, far greater than the bailout costs of most other countries.
It is misleading, therefore, to lump Ireland in with countries that have long-term debt problems. Its woes were caused by the banking crisis but the rest of its economy is still reasonably sound. Furthermore, if things get worse in the short-term, its English-speaking population and its long tradition of migration means that it can export more of its unemployed than the other debt burdened countries. There are signs that investors are starting to feel slightly more confident too. Ireland’s bond yields have been falling slowly but steadily in recent weeks.
None of this is to say that Ireland is out of danger. Clearly it is still in a precarious position. A country with such crippling debts still has plenty to worry about. All the same, there are some indications that Ireland might be turning a corner. Perhaps it isn’t quite as piiggy as some of the other PIIGS now.
Update: Shaun Richards must have been writing his post Is austerity working in Ireland or not? at the same time as I was writing this one. He points out that Ireland has low corporation tax and a large number of foreign businesses:
Regular readers will be aware that I have several criticisms of the use of GDP as a measure for economic growth and only yesterday I discussed some of them with reference to the UK. However a feature of Ireland’s economy is that she has a low corporation tax rate (12.5%) and by measures such as the tax-free financial business district in Dublin has encouraged overseas businesses to base themselves there. If you like the businesses are the corporate equivalent of what is called non-domiciled or non-dom for an individual.
So if they have come to Ireland for cheap and in some cases virtually no corporate taxes (Google) then if you try to tax them they will start to leave. It is this that GNP measures as it excludes the effect of such foreign businesses. To give you an idea of the scale real GDP in 2007 was 178 billion Euros and real GNP was 151 billion Euros so the difference is substantial and economic output is suddenly potentially some 15% lower.
The National Treasury Manegement Agency estimates that Ireland will have a Eurostat standard debt of 173 billion Euros at the end of 2011 which will be 111% of GDP and the fiscal or budget deficit will be 25 billion Euros. As it has slipped their mind to use the more important GNP ratio let me point out that it will be around 135% and remind you that as it represents what Ireland can tax it is at least as important as GDP.
There are dangers here going forwards too as Ireland’s projections show her debt rising but that economic growth will help to get it under control. Her projections were always on the optimistic side and with the current outlook are now very optimistic.
His conclusion – ”flickers of light” but a very long way to go.