by Naya Koulocheri
Between mid-90s and 2002 Ireland’s economic growth was considered a miracle. Banks predicted a continuing growth; liquidity in real economy caused a construction boom, making housing market the main driving force for the growth in GDP. However, in 2008, when the US crisis broke out, the Irish economy got affected in two ways: many investment projects lost their market value and since global demand decreased, the Irish exports started shrinking. The economic downturn caused a fiscal imbalance, increasing the public deficit- in less than two years- from 3% to 12%. In 2010, Ireland adopted a bailout package from EU, IMF and the European Commission. In 2012, it achieved partial access to bonds market and it is expected to make a full return at the end of 2013. But, does the future of Ireland look that bright as it seems?
The bailout package in Ireland included tax rises, wage cuts for public sector, banking sector reforms, government spending cuts and structural reforms. The first results of this policy were encouraging. That is why after Irish Prime Minster Enda Kenny’s visit in Athens, his Greek counterpart Antonis Samaras made clear that Ireland is a successful example of austerity policy applied in euro area. There are plans to raise 10 billion Euros by issuing bonds in 2013, giving the possibility for the Irish government to fund its needs for the 2014. Along with the partial access to bonds market, Irish economy has grown by 0.4% in 2012. Numbers speak differently when we compare this with Greece, where, according to OECD, the five-year recession will continue for the 2014, as well with other southern countries: Spain, Italy and Portugal. The supporters of the “Irish example” see in today’s upturn that Ireland has restored its competitiveness and that the corporate tax rate of 12.5% has facilitated the attraction of Foreign Direct Investments, most of them coming from the US. But, there is, also a point of balance because the boost of the GDP is based on two things: FDI projects and the amount of exports, which exceeds the total value of GDP.
Even if we admit the success of the Irish rescue plan, there are reasons to believe that it is difficult to imitate. The total share of exports in Irish output is reaching 67%, but, the most important figure is that 22% of the Irish exports go to America, an economy that seems to have limited the impact of the recent crisis and started to recover. At the same time, Ireland remains one of the biggest exporters of pharmaceuticals in the world (28% of total exports). On the other hand, Spanish exports represent only 23% of GDP and the largest export market is France that- like almost all European states- is trying to gain financial stability. The problem emerges by the fact that the target of EU member-states exports is the internal market, which, at the time, is fighting against the same danger: deep economic recession.
There are, also, those who refuse to recognize the success of the “Irish model” for several reasons. The first reason is that the domestic demand is still weak. The measure used for the Irish progress is GDP, but because of the significant amount of transfers of foreign capital to other countries, the most appropriate measure would be the GNP, the income the goes to residents. The GNP is lower than GDP, something which means that the financial upturn is not reflected in real economy and that there will be, at some point, some fiscal imbalance, since –due to low corporate taxes- the only way to limit the damage in public finance will be through further taxation on residents. The second reason is that Irish economy is still susceptible to world trade changes given the fact that exports contribute significantly to its economic growth. The third reason is that Ireland’s rhythm of increase in exports has slowed down, since 2010. Last one, Ireland is vulnerable to shocks affecting specific sectors, for example pharmaceuticals (28% of total exports) or organic chemicals (21%).
Apparently, Ireland has made progress towards economic growth, fiscal consolidation and structural reforms. If this success is going to be sustainable and its benefits are going to have long-term, positive results for the Irish people, the time will show.