Ireland's Unexpected Recovery, as Balanced with Europe's Problems
John Bruton , (Former) Irish Prime Minister and EU Ambassador to the United States
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John Bruton, Former Irish Prime Minister and EU Ambassador to the United States, discusses:
- Ireland's economic recovery:
- In reducing its ‘country-specific’ bond risk premium;
- Strong export growth;
- Goldman Sachs' identifying four key positive developments such as,
> The EU Council granting Ireland a sharp reduction in the interest rate on the bailout funds, cutting the interest bill by 0.6%-0.7% of GDP from 2012 onwards;
> The interest rate on the bailout package being cut dramatically (Ireland was seeking a reduction of around 1ppt on the original 5.8% interest rate but it has received a reduction of close to 3ppt);
> Attitude of the European authorities towards Ireland shifting nearly imperceptibly, to the extent that Ireland is now presented as a country that has successfully implemented tough policy choices.
He also discusses his recent presence in Malaysia at a breakfast seminar where he discussed:
: The future of the Eurozone and Ireland’s Economic Recovery;
- The Irish International Financial Services Centre - Islamic funds domiciled outside the Middle East;
He then discusses:
- The perceived disconnect between what the rest of the world believes about the Irish economic recovery and what is actually happening in Ireland;
- Reports that retailers remain downbeat - still mired in recession;
- Impact of steep cuts in public spending (as mandated under the EU and IMF bail-out programme) resulting in high unemployment and high levels of personal debt as stifling demand;
- His views of forecasts by the Irish central bank, which expects real personal consumption to fall 2.6 per cent this year and a further 0.8 per cent in 2012, with the new austerity measures that were unveiled in the budget;
- The perception of Ireland as a 'Jekyll and Hyde economy', where exports are strong, in contrast with weak domestic demand;
He also talks about:
- The chances of Ireland exiting its debt obligations on time, and meaningfully re-enter the market by 2013;
- Whether Ireland needs further help from the European authorities to deal with its debt, since almost half of it is related to the cost of rescuing bank creditors following its banking guarantee in 2008;
- Which of Goldman's six factors could be replicated in other European states;
- His view on the breadth and extent of Europe's problems on the rest of the world;
- His view on why Europe is under pressure when its total debt is still lower than that of the United States;
- His recent writings of the need to outline a comprehensive solution, with a timetable for its implementation, at the level of each of the 17 euro zone member states and at Eurozone level;
- The fact that the crisis in Europe is as much a crisis of belief, as it is a crisis of finance.
Goldman Sachs' 6 reasons for Ireland's recovery:
- Ireland’s fiscal adjustment has focused on expenditure cuts rather than tax increases: growth has tended to fare better in fiscal corrections driven by reductions in current spending than in those driven by higher taxes or by cuts in investment. As part of Ireland’s expenditure-focused austerity programme, public sector pay has been reduced by around 15%, a development that has also contributed to an improvement in Ireland’s competitiveness.
- Ireland’s labour market is relatively flexible: The flexibility of Ireland’s labour market, together with the sharp reduction in public sector pay, resulted in Irish wages adjusting relatively rapidly once the crisis struck. Competitiveness appears to have been largely regained, with rising export shares and a move into current account surplus.
- Ireland has past experience of successfully implementing a major fiscal correction: Between 1986 and 1989, Ireland reduced its general government deficit from 11% of GDP to 3% of GDP. The establishment of fiscal credibility at that stage played an instrumental role in launching the 20-year ‘Celtic Tiger’ period (1987-2007). While the circumstances of the fiscal adjustment being implemented today are very different from those that existed in the late 1980s, the experience of having successfully accomplished a major fiscal correction in the past has reduced popular resistance to the austerity measures this time around.
- Ireland’s main opposition parties have behaved ‘responsibly’: While the mainstream opposition parties (Fine Gael and Labour) were critical of government for its economic management, neither party questioned the need for a far-reaching austerity programme.
In contrast with some other periphery states, the opposition parties did not offer the electorate any ‘quick fixes’ or easy solutions to the problems.
Now that Fine Gael and Labour have been elected to power, the new administration has been able to continue with the austerity programme that began under the previous government and, nevertheless, maintain widespread popular support.
- Widespread public confidence in the tax collection system: Although regulatory failings in Ireland’s banking sector prior to the crisis are well-known, there is widespread public confidence in the administrative competence and integrity of Ireland’s civil service. In particular, the tax collection system operates relatively well and tax avoidance is generally perceived to be reasonably low. With most groups in society being seen to be ‘playing their part’, Ireland has not experienced the widespread tax avoidance witnessed in some other periphery states.
- Ireland’s second set of bank stress tests put a credible upper limit on the cost of Ireland’s banking crisis: When Ireland’s 2010 bank stress tests were found to lack credibility so soon after they were published, it caused the Irish authorities considerable embarrassment.
As a result, in carrying out the second set of bank stress tests earlier this year, the Irish authorities used highly conservative assumptions and appear to have credibly drawn a line under the issue. The likelihood of further potential liabilities for the government from the banking sector now appear low.