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Ireland is on the way back

As we approach the annual St Patrick’s Day celebration, the story of the Irish economy in the last five years is worthy of reflection. In late 2010, the Irish Government, following in the footsteps of Greece, was forced to request a deeply humiliating emergency financial bailout from the International Monetary Fund (IMF) and the European Union (EU). Against the background of the recent controversy over the latest “Greek crisis”, what can be said about Ireland’s experience? Here are five relevant issues:

There is life after austerity.

After several years of a declining GDP, ultimately resulting in a flat GDP, the Irish economy has started to expand again at a healthy four percent or more rate of growth. Indeed, Ireland was the fastest growing economy in Europe in 2014 and looks likely to repeat that performance this year. Living standards are back around their level of the early 2000s, before the economy went on a massive property bubble-fuelled splurge. The adjustment back to reality has been very painful but Irish people are realistic and knew that this spending binge couldn’t be maintained.

Be very wary of “gloom and doom” economists.

Back in 2010 a common refrain about Ireland was that the economy would never be able to handle the crushing debt; that people would be forever under the control of foreign lenders. Well, it didn’t quite work out that way. The unavoidable process of reducing the budget deficit eventually came to an end and the government, while still servicing its debts, is able to put money back into the economy. Households and firms have, succeeded in reducing their debts to much  more manageable levels. They have recovered confidence in their financial future and have started to spend. We saw this in the United States and Ireland and indeed, we may well have seen the same process already beginning in Greece, despite the turbulence created by the new government. Many economists appear to be unable to grasp the idea of inherent tendencies for economies to turn around after they have hit bottom in a deep recession.

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Irish flag, in Ireland, by Iker Merodio | Photography. CC-BY-ND 2.0 via flickr

There are several ways to deal with a large debt problem.

Throughout the Irish crisis, many argued that we should have “forced” a write down of debt owed to private bondholders. In the end – rightly or wrongly – Ireland did not do so. This was mainly because of pressures from the IMF/EU who feared the contagion effects of such a unilateral Irish action. However, Ireland subsequently obtained financial savings on its debt burden by reaching agreements with official lenders to stretch out the grace and repayment periods and lower the interest rate on major parts of its debt. These savings are recognized as having been in excess of those we might have obtained had we insisted on “burning the bondholders”. Greek Prime Minister Tsipras, take note!

Avoid megaphone diplomacy.

The Greek experience over the last few weeks has surely highlighted the risks of negotiating in public without having laid the groundwork beforehand. The Greeks have had to climb down in a very visible way, which makes a mutually beneficial outcome more difficult to achieve. Ireland has generally conducted its negotiations behind closed doors and with broadly favorable results. The one exception – when the Irish Prime Minister, Enda Kenny, over-hastily claimed in public that he had obtained a concession from Europe on Ireland’s banking debt – proved the rule. Kenny’s interpretation was inaccurate and he has been forced to be on the defensive on the issue ever since.

Remember the past.

Ireland’s economy has righted itself, broadly speaking, and is now in a fairly sustainable situation going forward. Yet, there are some voices saying that since things have now been fixed up, one might strive to move back towards the expenditure levels we experienced at the height of the artificial  boom. This would be a serious mistake. Some Irish people seem to have short-term memories. We should not forget that the recent crisis followed on from a similar disaster in the eighties. It has been suggested that although Ireland has dug itself bigger holes than many in the past, Ireland seems more resilient and pragmatic than most in getting out of these situations. Perhaps true, but not a reason to avoid learning the right lessons this time around!

Recent Comments

  1. Rouba chbeir

    Esteemed Professor,
    Thank you, sincerely, for sharing this article with the exposure,& experience of someone as valued in the field as yourself. I find myself challenged by your views and it’s quite interesting how my current dissertation had concluded differently;
    i preferred comparing “standards of living” in IRL & 6 other European sovereigns not to hsitorical scenarios, but rather in relation to the UN’s Human Charter and the high-life standards of an “industrialized Europe” that was envied by others pre-2008 sovereign crisis. I also thought about comparing them to Norway’s or Sweden as a benchmark; I feel the current& wrong trend dominating nowadays, when a Sovereign Debt Regime hard laws are still shadowed by a conventional intervention of multilateral institutions, tends to compare socioeconomic effects to Mohammed el Arian’s “bad equilibrium” rather than a more robust, promising one.
    You also speak of “ireland [being more] resilient & pragmatic” & not falling back to the crisis’ expenditure levels, and i agree that these aggregate measures are/can be disciplined, but what about the conflicting micro-data in IRL that shows the diminishing number of hospital beds, or medical staff per person for example, which have emerged as unaceptably high for a country like IRL and within a sui generis European Union?
    I nonetheless, look forward to more of your writing because i am challenged then to explore more and read outside my own box. Thank you for understanding my eagerness to express myself and understand much more in return as well.
    Sincerely,

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